Executive Summary / Key Takeaways

• Strategic Transformation Driving Growth: Highwoods Properties is executing a clear strategy of portfolio enhancement, focusing on high-quality, "commute-worthy" office assets in prime Sunbelt Best Business Districts (BBDs). This involves continuous asset recycling, divesting older, capital-intensive properties to fund acquisitions and developments that promise higher long-term growth and cash flow.
• Embedded NOI and Occupancy Upside: The company has significant embedded Net Operating Income (NOI) growth potential from both its "Core 4" operating properties with elevated vacancy and its development pipeline. Over 70% of the $30 million stabilized annual future NOI from completed but not yet stabilized developments is already leased, signaling a clear pathway to rising occupancy and earnings.
• Robust Leasing Momentum and Pricing Power: Highwoods has demonstrated strong leasing volumes for eight consecutive quarters, with net effective rents reaching historical highs—18% above 2019 levels over the trailing 12 months. This indicates improving pricing power in a market with dwindling supply of high-quality space.
• Strong Balance Sheet and Capital Allocation: With no consolidated debt maturities until 2027 and ample liquidity, Highwoods is well-positioned to fund its development pipeline and pursue opportunistic acquisitions. The company aims to acquire over $500 million in high-quality assets in its core markets over the next six months, funded by disposition proceeds.
• Temporary Trough, Clear Recovery Path: While 2025 is projected as a temporary trough for occupancy and same-property cash NOI due to anticipated move-outs, management anticipates a strong recovery and consistent growth trajectory starting in late 2025 and extending into 2026 and 2027, driven by signed leases commencing and strategic investments.

The Sunbelt Advantage: Highwoods' Strategic Foundation

Highwoods Properties, Inc. ($HIW) operates as a fully integrated office real estate investment trust (REIT), strategically focused on owning, developing, acquiring, leasing, and managing properties within the vibrant Best Business Districts (BBDs) of key Sunbelt markets. These include Atlanta, Charlotte, Dallas, Nashville, Orlando, Raleigh, Richmond, and Tampa. The company's overarching vision is to lead the evolution of commercial real estate, creating environments and experiences that inspire both its team and its customers. This "work-placemaking" mission is central to its investment thesis: generating attractive and sustainable long-term returns by curating a portfolio of high-quality, differentiated office buildings in these dynamic BBDs.

The company's history since 2019 underscores this strategic focus. Highwoods initiated a substantial asset recycling program, divesting over $1.5 billion in non-core properties while reinvesting in $1.8 billion of higher-quality, "commute-worthy" office buildings. This period also marked strategic market entries into Charlotte in 2019 and Dallas in 2021, alongside exits from three other markets. This continuous portfolio improvement is a cornerstone of Highwoods' strategy, ensuring its assets remain competitive and aligned with evolving tenant demands.

Differentiated Approach: "Highwood-tizing" and Work-Placemaking

Highwoods' competitive edge is not rooted in a traditional technological product but in its proprietary operational and strategic methodology, which it terms "Highwood-tizing" and its "work-placemaking" mission. This approach involves significant redevelopment and strategic positioning of properties to create exceptional, "commute-worthy" environments and experiences designed to attract and retain talent. This strategy allows Highwoods to effectively compete with new construction by upgrading existing assets, often at a more favorable cost basis.

The tangible benefits of this approach are evident in the company's performance. The "Highwood-tizing" strategy is "yielding attractive returns" and driving "substantial relet of those buildings." For instance, the planned "Highwood-tizing" of Symphony Place in downtown Nashville is expected to feature "a collection of curated and talent-supportive amenities unmatched in the market." This strategic investment directly contributes to Highwoods' ability to command premium rents and achieve favorable leasing economics. Net effective rents, a key indicator of underlying rent economics, reached a new quarterly high in Q3 2025, demonstrating an 18% increase over the trailing four quarters compared to the 2019 average. Similarly, GAAP rents showed an 18% increase compared to expiring rents, reaching a record of over $40 per square foot in Q3 2025. The company's payback period also improved by 240 basis points relative to its five-quarter average, reaching 15.9% in Q3 2025.

Looking ahead, the Ovation mixed-use development in Franklin, Nashville, exemplifies Highwoods' forward-thinking approach. This project aims to create a "vibrant mixed-use place" integrating office, retail, multifamily, and a potential hotel, leveraging additional residential density. This initiative is projected to generate "sizable value for Highwoods shareholders" and contribute to "rent growth in the market for mixed-use office generating about a 20% premium." With utility and site work planned for 2026 and the first phase opening in fall 2028, Ovation represents a strategic expansion into diversified, high-demand asset classes, further enhancing Highwoods' long-term growth trajectory and competitive moat.

Competitive Landscape and Market Dynamics

Highwoods operates within a competitive office REIT sector, but its focused Sunbelt BBD strategy provides distinct advantages. The broader office market is currently characterized by limited new supply and a scarcity of well-capitalized owners, creating a favorable environment for companies like Highwoods. The "return-to-office" movement is gaining momentum, with office employment reaching an all-time high and corporate conviction behind in-office work solidifying. This trend, coupled with declining vacancy rates and strong net absorption nationally, signals a tightening market.

Highwoods' Sunbelt markets are outperforming national trends, benefiting from robust population gains, lower unemployment rates, and strong in-migration. For example, the Dallas metro population is projected to grow nearly 50% over the next 25 years, with approximately 400 new residents moving in daily. Nashville boasts an unemployment rate of just 2.9%, the lowest among Highwoods' markets, and its downtown inventory is shrinking due to conversions to other uses. Charlotte's office-using employment grew 3.4% year-over-year, and Raleigh was named the number one best-performing large city in the U.S. by the Milken Institute. These strong demographics and economic tailwinds provide a fertile ground for Highwoods' growth strategy.

Compared to larger, more diversified competitors like Boston Properties (BXP) or urban-centric players like SL Green Realty (SLG) and Vornado Realty Trust (VNO), Highwoods' strength lies in its deep regional expertise and integrated property management within its chosen BBDs. While BXP and SLG might offer greater scale in gateway markets, Highwoods' localized market knowledge and tenant-focused services, particularly through its "Highwood-tizing" strategy, allow it to provide more tailored leasing experiences and potentially achieve faster execution in regional deals. Highwoods' operational efficiency within its targeted regions, coupled with lower overhead compared to high-density urban markets, could translate into stronger cash flow generation. Kilroy Realty Corporation (KRC), with its tech-heavy market focus, presents a different competitive dynamic, but Highwoods' diversified Sunbelt exposure offers a degree of resilience against sector-specific risks.

The market is experiencing an "accelerating bifurcation," where high-quality assets in strong markets are outperforming as obsolete buildings face decline or conversion. Highwoods' commitment to "work-placemaking" and continuous reinvestment positions it to capture market share against less differentiated or undercapitalized properties. The company's competitive capital advantage, both in lease economics and the ability to reinvest and redevelop its BBD portfolio, is a key differentiator.

Financial Performance and Operational Strength

For the full year 2024, the company's Funds From Operations (FFO) reached $3.61 per share, nearly 2% higher than its initial outlook, despite headwinds from non-core property sales and higher interest rates. This demonstrates the resilience of its operations.
In the first nine months of 2025, the company reported total rental and other revenues of $602.76 million, down from $620.34 million in the same period of 2024. Net income for the nine months ended September 30, 2025, was $132.93 million, a significant increase from $107.45 million in the prior year, largely driven by higher gains on disposition of property. However, consolidated same property Net Operating Income (NOI) was $3.6 million, or 2.7%, lower in Q3 2025 compared to Q3 2024, primarily due to decreased same property revenues and increased expenses. Overall NOI for Q3 2025 was $2.8 million, or 2%, lower year-over-year, impacted by property dispositions and lower same property NOI, partially offset by contributions from recent acquisitions.

Despite these near-term fluctuations, Highwoods' operational metrics highlight underlying strength. The company has achieved robust leasing volumes for eight consecutive quarters, signing over 1 million square feet of second-generation leases in Q3 2025, including 326,000 square feet of new leases. This strong activity has driven the leased rate 340 basis points higher than the occupancy rate at quarter-end, signaling future occupancy gains. Net effective rents reached a new quarterly high in Q3 2025, with GAAP rents increasing 18% compared to expiring leases, reaching over $40 per square foot. Expansions outpaced contractions by 4:1 in Q3 2025, with year-to-date net expansions of approximately 70,000 square feet, the highest since before the pandemic.

The company's development pipeline is a significant driver of future NOI. As of Q3 2025, 72% of the $30 million stabilized annual future NOI potential from four completed but not yet stabilized development properties is already secured through signed leases. This includes projects like 23Springs in Dallas (67% leased) and Granite Park Six (69% leased). The "Core 4" operating properties, which had elevated vacancy, have over $25 million of stabilized annual NOI upside above the 2025 outlook, with over 50% of this upside already locked in.

Liquidity and Capital Allocation

Highwoods maintains a conservative and flexible balance sheet, providing ample liquidity for its operations and growth initiatives. As of October 21, 2025, the company had approximately $35 million in cash and $211 million drawn on its $750 million revolving credit facility, leaving $538.9 million in unused capacity. Critically, Highwoods has no consolidated debt maturities until 2027, providing significant financial flexibility. The company proactively extended its $200 million unsecured bank term loan from May 2026 to January 2029, with options to extend to 2031, further de-risking its debt profile.

The company's leverage ratio, as measured by mortgages and notes payable and outstanding preferred stock to the undepreciated book value of assets, was 42.8% as of September 30, 2025. The debt-to-EBITDAre ratio stood at 6.4x at quarter-end, with management expecting a 0.5x improvement as signed leases commence and contribute to higher NOI and EBITDA. Highwoods has $625 million of available liquidity and only $96 million remaining to fund its development pipeline.

Strategic asset recycling remains a core capital allocation strategy. Since 2019, Highwoods has sold over $1.5 billion of non-core properties and acquired $1.8 billion of higher-quality assets. These dispositions, on average, carried a nominal exit cap rate approximately 50 basis points higher than the year-one acquisition cap rates, demonstrating accretive capital rotation. The acquisition of the Legacy Union parking garage in Charlotte for $110.2 million in Q3 2025 and the Advance Auto Parts (AAP) Tower in Raleigh for $137.9 million in Q1 2025 were both funded on a leverage-neutral basis, utilizing disposition proceeds and ATM equity issuances. Over the next six months, Highwoods expects to sell between $50 million and $500 million of assets and acquire in excess of $500 million of high-quality office buildings in its core markets, primarily funded by disposition proceeds.

Outlook and Risks

Highwoods' management projects 2025 as a "temporary trough" for occupancy and same-property cash NOI, with an FFO outlook of $3.41 to $3.45 per share, a $0.02 increase at the midpoint from the prior quarter. Average occupancy is expected to range from 85% to 86% for the remainder of 2025, with a projected 70 basis points of occupancy growth in Q4 2025. This anticipated dip is largely due to well-telegraphed large customer move-outs in late 2024 and early 2025. However, the company expects a strong recovery and consistent growth trajectory starting in late 2025 and extending into 2026 and 2027. All signed leases are projected to commence by the end of Q3 2026, creating a positive NOI and earnings trajectory.

Key assumptions underpinning this optimistic outlook include the continued "return-to-office" trend, a favorable economic backdrop in Sunbelt markets, and a limited new construction pipeline. Management believes that the "dwindling supply of high-quality space" will drive meaningful rent growth. While the company does not anticipate announcing new development projects in 2025 due to high construction costs and elevated vacancy levels, it is pursuing build-to-suit prospects.

Despite the positive outlook, several risks warrant investor attention. A deterioration in the financial condition of customers, while mitigated by a diverse and creditworthy tenant base (only Bank of America (BAC) and Asurion exceed 3% of annualized GAAP revenues), could impact rental revenues. The inability to lease or re-lease space quickly or on favorable terms, or to complete development and acquisition projects as anticipated, remains a concern. Increases in interest rates could elevate debt service costs, although the company's recent term loan extension provides some insulation. Elevated capital expenditures for leasing are expected through 2026 and potentially into 2027, impacting near-term cash flow, though this is seen as an investment for future occupancy build. Furthermore, the potential impact of tariffs on construction costs, as noted by management, could affect future development economics.

Conclusion

Highwoods Properties stands at a pivotal juncture, poised for significant growth following a strategically managed period of portfolio repositioning and anticipated occupancy adjustments. The company's unwavering commitment to its "work-placemaking" mission and "Highwood-tizing" strategy in the thriving Sunbelt BBDs provides a robust competitive advantage, translating into strong leasing economics and a clear pathway to enhanced asset quality and cash flows. With a healthy pipeline of signed leases set to commence, substantial embedded NOI growth from both its operating portfolio and development projects, and a flexible balance sheet, Highwoods is well-equipped to capitalize on the tightening office market.

While 2025 may represent a temporary dip in certain financial metrics, the underlying operational momentum and strategic initiatives point to a compelling recovery and sustained long-term value creation. The company's disciplined capital allocation, marked by accretive asset recycling and leverage-neutral acquisitions, further strengthens its financial resilience. For discerning investors, Highwoods Properties offers a compelling investment thesis grounded in a proven strategy, strong market fundamentals, and a clear trajectory for earnings and cash flow expansion, underpinned by its operational leadership in creating desirable workplace environments.