Executive Summary / Key Takeaways

• Portfolio Transformation Complete: Highwoods has executed a $1.8 billion capital recycling program since 2019, rotating out of older, capital-intensive assets into higher-growth "Best Business District" (BBD) properties in Raleigh, Charlotte, Dallas, and Nashville, fundamentally improving long-term cash flow quality and reducing capital intensity.

• Occupancy Trough Behind Us: Management believes the portfolio has reached its occupancy nadir at 85-86%, with 100-200 basis points of growth expected by year-end 2026 driven by 1.6 million square feet of second-generation leasing (the highest volume in 10 years) and record rent spreads of 18% on new leases.

• Visible NOI Growth Pipeline: Over 70% of the $30 million stabilized annual NOI potential from four recently completed developments is already signed, with another $25 million of NOI upside concentrated in four core operating properties, creating a clear earnings trajectory for 2026-2027.

• Fortress Balance Sheet: With no debt maturities until 2027, $625 million of available liquidity, and a debt-to-EBITDAre ratio of 6.4x that will improve by 0.5x as signed leases commence, Highwoods has the financial firepower to fund its $500 million acquisition pipeline through accretive dispositions.

• Key Risk Variables: The thesis hinges on execution of lease-up in core vacancies and development stabilization, while work-from-home trends remain a long-term demand headwind that the BBD strategy must continue to outpace.

Setting the Scene: The BBD-Focused Office REIT

Highwoods Properties is a fully integrated office REIT that has spent the past six years executing a strategic transformation toward owning, developing, and managing high-quality workplaces exclusively in "Best Business Districts" across the Sunbelt. This strategic pivot began in earnest in 2019 and has defined its investment proposition ever since. The business model is straightforward: acquire and develop trophy office assets in supply-constrained submarkets where job growth, in-migration, and corporate expansion create durable tenant demand, then lease this space to creditworthy tenants at premium rents that grow over time.

The company operates through geographic segments, with each market responsible for its own operations, acquisitions, and development. This decentralized structure allows local teams to cultivate deep relationships with tenants and brokers while maintaining the agility to capitalize on emerging opportunities. Net operating income (NOI) serves as the primary property-level performance metric, reflecting the REIT's focus on cash generation over accounting metrics.

Highwoods sits in a fragmented office REIT landscape where national market share remains below 5% for even the largest players. This fragmentation creates opportunity for disciplined capital allocators to create value through selective acquisitions and developments. The company's competitive moat rests on three pillars: concentration in BBDs where land scarcity limits new supply, a fully integrated platform that captures development profits and controls property management, and long-term tenant relationships that reduce churn and drive renewal spreads. These advantages manifest in pricing power—Q3 2025 GAAP rents on new leases reached $40.13 per square foot, 18.3% higher than previous leases in the same spaces.

The Sunbelt focus is not accidental. Markets like Raleigh, Charlotte, Dallas, and Nashville are experiencing population and job growth that outpaces the national average, driven by corporate relocations and a favorable business climate. This demographic tailwind supports office demand even as work-from-home arrangements persist as a structural headwind. The BBD strategy specifically targets submarkets where executives want to be—walkable, amenity-rich environments that attract talent and justify commute times. It positions Highwoods to capture the highest-quality tenants who view office space as a strategic asset rather than a commodity cost.

Strategic Differentiation: The Capital Recycling Engine

Highwoods' core strategic advantage lies in its proven ability to recycle capital from non-core assets into higher-growth BBD properties. Since 2019, the company has sold over $1.5 billion of older, capital-intensive properties in non-BBD locations while acquiring $1.8 billion of "commute-worthy" assets by Q2 2025. This systematically upgrades the portfolio's quality, reduces future capital expenditure requirements, and improves cash flow resiliency. The strategy is not merely about buying and selling; it's about rotating the entire portfolio composition toward assets that can generate superior returns with less ongoing investment.

The execution of this strategy has been methodical. In December 2024, Highwoods acquired the fee simple title to land beneath its Century Center assets in Atlanta, consolidating ownership and unlocking value from existing office space and undeveloped parcels. In Q1 2025, the company sold three non-core Tampa buildings and Pittsburgh land for $146.3 million, using proceeds to fund the $137.9 million acquisition of Advance Auto Parts Tower in Raleigh—a prime example of upgrading both location and asset quality. These transactions demonstrate management's discipline in waiting for the right assets rather than chasing growth for growth's sake.

The development pipeline serves as another differentiation vector. Highwoods delivered 2827 Peachtree in Atlanta (94% leased), 23Springs in Dallas (67% leased with rents above underwriting), and Midtown East in Tampa (53,000 square feet of first-generation leases) all on time and on budget. Development spreads—typically 150-200 basis points above acquisition cap rates—create immediate value accretion. The company's 50% joint venture structure on many developments mitigates risk while maintaining control over quality and leasing.

Financial Performance: Segment Evidence of Strategy Working

Third quarter 2025 results reveal a portfolio in transition, with performance varying dramatically by market based on BBD positioning and lease expiration timing. Raleigh led with 6.36% revenue growth and 8.61% NOI growth, validating the BBD acquisition strategy. Charlotte delivered 6.05% revenue growth and 6.25% NOI growth, driven by strong leasing momentum and the Legacy Union parking garage acquisition. These markets represent the future of the portfolio—high-growth, supply-constrained BBDs where Highwoods is gaining scale.

Conversely, Nashville and Tampa showed declines, but the "why" reveals these are temporary, not structural. Nashville's 5.32% revenue decline and 9.59% NOI drop stem from a known 110,000-square-foot lease cancellation in the former Tivity building that accelerated depreciation in 2024. However, management describes Nashville as "one of the most compelling and resilient markets" with an emerging landlord-favorable environment due to dwindling supply and increased inquiries. Tampa's 8.34% revenue decline reflects the disposition of three non-core buildings as part of the capital recycling program, not weakening fundamentals. In fact, Midtown East's lease percentage doubled to 53,000 square feet, showing accelerating momentum.

Atlanta, the company's largest market, posted flat revenue (0.52% growth) and a slight NOI decline (-1.68%), but this masks important progress. The company recorded an $8.8 million impairment on two non-core Century Center assets, cleaning up the portfolio for future value creation. Meanwhile, 2827 Peachtree delivered 94% leased, and the Symphony Place and Park West properties are 70% and 80% leased or out for lease, respectively. This bifurcation shows Highwoods is actively managing its Atlanta holdings—monetizing non-core assets while stabilizing core BBD properties.

The consolidated same-property NOI decline of 2.7% in Q3 stems from a $2.3 million revenue decrease due to lower occupancy and cost recoveries, along with $1.3 million in higher expenses from repairs and maintenance. The occupancy decline was telegraphed—large customer move-outs in late 2024 and early 2025 that management has been actively backfilling. The expense increase reflects proactive investment in properties to position them for higher rents, not operational inefficiency.

Outlook and Guidance: The Path to 2026-2027 NOI Growth

Management's guidance frames 2025 as a "temporary trough" year before meaningful growth resumes. The company expects occupancy to range from 85% to 86% for the remainder of 2025, implying 70 basis points of growth in the final three months. More importantly, they project 100 to 200 basis points of occupancy growth between year-end 2025 and year-end 2026. Each 100 basis points of occupancy equates to approximately $6-8 million of additional NOI based on the company's $650 million annual NOI run rate, creating visible earnings leverage.

The development pipeline provides the most concrete evidence of future growth. Four completed but not yet stabilized properties—GlenLake Three, Granite Park Six, 23Springs, and Midtown East—represent over $30 million of stabilized annual NOI potential, and more than 70% is already signed. These leases will commence throughout 2026, creating a stair-step NOI trajectory. Additionally, the "Core 4" operating properties (Alliance Center in Atlanta, Symphony Place, Park West, and Westwood South in Nashville) contain approximately $25 million of stabilized NOI upside above the 2025 outlook, with over 50% locked in by signed leases.

Capital allocation plans reinforce the growth trajectory. Management expects to sell between $50 million and $500 million of assets while acquiring over $500 million of high-quality BBD properties over the next six months. The preferred funding source is disposition proceeds, which would be leverage-neutral and immediately accretive. This demonstrates discipline—using equity currency only when competitive, and avoiding dilutive issuance. The company has already raised $215 million through non-core dispositions and ATM equity to create dry powder, showing proactive capital management.

The 2025 FFO outlook midpoint of $3.41-$3.45 per share represents an $0.08 increase from the initial February guidance, despite headwinds from dispositions and interest expense. This raise shows the underlying business is performing better than expected, with accretive acquisitions and stronger leasing offsetting temporary occupancy drag. The same-property cash NOI outlook was also raised by 50 basis points, signaling management's confidence in the lease-up trajectory.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to the investment case is execution failure on the lease-up of core vacancies and development stabilization. While management has signed leases for over 70% of development NOI and 50% of Core 4 upside, the remaining 30% and 50% respectively must be leased at projected rents to achieve the $55-60 million of total NOI growth potential. If leasing velocity slows or tenants demand greater concessions, the 2026-2027 earnings trajectory could flatten. This risk is heightened by macroeconomic uncertainty that may delay tenant decision-making.

Work-from-home arrangements represent a structural demand headwind that the BBD strategy must continuously outrun. Management acknowledges this risk, noting that "the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements could materially and negatively impact the future demand for office space." However, they argue that equilibrium has been reached and BBDs are winning the battle for talent. If remote work accelerates again, Highwoods' 85% occupancy could prove to be a ceiling rather than a floor, compressing NOI and FFO growth.

Interest rate risk is mitigated but not eliminated. While the company has no debt maturities until 2027 and 96% of debt is fixed-rate, rising rates still impact acquisition cap rates and tenant cost of capital. Management notes that cap rates for trophy core assets are around 7% with IRRs in the high single-digit to low double-digit range. If rates rise further, these returns may become less attractive relative to risk-free alternatives, slowing the capital recycling program and reducing acquisition accretion.

Geographic concentration in the Sunbelt, while a strength during the region's growth phase, becomes a vulnerability if economic growth slows or corporate relocations reverse. Nashville's temporary NOI decline shows how quickly performance can turn when a major tenant vacates. With four markets representing the bulk of value creation, a regional economic downturn could disproportionately impact results compared to more diversified peers like Cousins Properties or Piedmont Office .

The capital recycling strategy itself contains execution risk. Management's plan to sell $50-500 million of assets while acquiring over $500 million requires favorable capital markets and pricing discipline. The $24.6 million impairment on 625 Liberty Avenue in Pittsburgh demonstrates that dispositions don't always go as planned. If buyers demand higher cap rates or the company cannot find suitable BBD acquisitions, the portfolio upgrade could stall, leaving capital underutilized and diluting near-term FFO.

Valuation Context: Positioning for the Inflection

At $27.15 per share, Highwoods trades at 8.4 times operating cash flow and 8.4 times free cash flow, metrics that appear reasonable for a REIT with visible NOI growth. The 7.32% dividend yield exceeds the sector average, though the 173.91% payout ratio signals the dividend is not currently covered by earnings—a temporary condition management attributes to elevated leasing capital expenditures. This creates a "show me" story: investors must believe in the 2026-2027 NOI inflection to justify the current valuation.

Relative to peers, Highwoods' valuation reflects its transitional state. Cousins Properties (CUZ) trades at 10.3 times operating cash flow with a 5.0% yield but benefits from higher occupancy (90% vs. 85-86%) and stronger revenue growth (18.7% vs. -1.2%). Piedmont Office (PDM) trades at 6.9 times operating cash flow with a 5.79% yield but suffers from negative profit margins (-12.44%) and weaker FFO per share ($0.35 vs. HIW's $0.86). Brandywine (BDN) trades at just 4.0 times operating cash flow but carries a 15.92% yield that reflects its distressed state and -46.10% profit margins. COPT Defense (CDP) trades at 10.6 times operating cash flow with a 4.03% yield, commanding a premium for its 95.7% occupancy and government-backed stability.

Highwoods' enterprise value of $6.42 billion represents 7.94 times revenue, in line with CUZ's 7.94x but above PDM's 5.76x and BDN's 5.76x. The debt-to-equity ratio of 1.39 is higher than CUZ's 0.71 but lower than BDN's 2.71, reflecting a balanced capital structure that supports growth while maintaining financial flexibility. The 13.77x enterprise-to-EBITDA multiple is reasonable for a REIT with a development pipeline that will drive EBITDA growth in 2026-2027.

The key valuation variable is whether Highwoods can achieve the 100-200 basis points of occupancy growth and $55-60 million of NOI upside management has outlined. If successful, FFO per share could grow from the current $3.41-$3.45 guidance to $3.80-$4.00 by 2027, making the current 7.9x FFO multiple appear attractive. If leasing stalls, the multiple compresses and the dividend may be at risk, creating meaningful downside asymmetry.

Conclusion: The Capital Recycling Payoff Approaches

Highwoods Properties has reached an inflection point where six years of strategic portfolio transformation are poised to deliver accelerating earnings growth. The $1.8 billion capital recycling program has upgraded portfolio quality, the development pipeline has locked in $30 million of NOI growth, and the Core 4 assets offer another $25 million of visible upside. Management's confidence is evident in raised FFO guidance and proactive capital raising, yet the stock price reflects skepticism about execution.

The central thesis hinges on two variables: lease-up velocity in the remaining core vacancies and stabilization of the development pipeline. The 1.6 million square feet of second-generation leasing in 2025 demonstrates demand exists, but the 85-86% occupancy trough must be decisively exited for the story to work. Work-from-home trends remain the existential risk, though the BBD strategy and record rent growth suggest Highwoods is winning the battle for talent-driven office demand.

Financially, the fortress balance sheet provides a margin of safety that peers lack, while the valuation multiple offers upside if the NOI inflection materializes as projected. Competitors like Cousins and COPT may have higher occupancy today, but Highwoods' integrated development platform and concentrated BBD focus create a more compelling growth trajectory. For investors, the question is whether management can deliver on its 2026-2027 targets. Success means a higher-quality, higher-growth REIT deserving of a premium multiple; failure means a stalled turnaround with a stretched dividend. The evidence from leasing activity, rent growth, and capital allocation suggests the former is more likely, but execution in the next four quarters will decide the outcome.