Q3 2025 Earnings Call Contradictions: Shifting Acquisition Strategy, Mixed Leasing Trends, and Dividend Comfort Amid Capital Expenditures

Date of Call: October 29, 2025

Financials Results

• EPS: $0.12 per share (net income $12.9M)

Guidance:

• 2025 FFO outlook updated to $3.41 to $3.45 per share (midpoint +$0.02 vs. initial outlook).
• Year-end 2025 occupancy range added (midpoint implies ~70 bps occupancy growth in final 3 months).
• Potential for up to $500M of acquisitions and dispositions over the next few quarters (portfolio recycling).
• 2026 formal outlook to be provided in February; interest on 23Springs and Midtown East to be expensed beginning Q1 2026.
• Signed-but-not-yet-commenced leases projected to start by end of Q3 2026; elevated leasing CapEx expected through 2026–27.

Business Commentary:

• Leasing Activity and NOI Growth:
• Highwoods Properties reported strong leasing volumes for the eighth consecutive quarter, signing over 1 million square feet of second-gen volume, including 326,000 square feet of new leases.
• The company has secured over 50% of the $25 million in stabilized NOI upside potential across its Core 4 operating properties and stabilized development properties.

• This growth is driven by increased pricing power in office leasing, with net effective rents reaching a high watermark and an average trailing 4-quarter growth of 18% compared to the 2019 average.

• Investment and Asset Management Strategy:

• Highwoods acquired the Legacy Union parking garage in Charlotte for $111.5 million and sold a noncore property in Richmond for $16 million.
• The company plans for up to $500 million of acquisitions and dispositions over the next few quarters.

• The strategy aims to strengthen portfolio quality and growth, focusing on higher-quality, better-located assets, and recycling out of noncore assets that are more CapEx-intensive.

• Financial Performance and Guidance:

• Highwoods reported FFO of $0.86 per share for Q3, raising the FFO outlook for 2025 with the midpoint now $0.08 higher than the initial outlook.
• The company extended its consolidated debt maturity, providing flexibility for future investments.

• The guidance reflects anticipated embedded NOI growth from signed leases and improved leasing momentum, supported by limited new supply and dwindling high-quality office space.

• Market Conditions and Leasing Demand:

• The company's Dallas market is experiencing significant growth, with over 10 major office requirements in discussion, driven by population growth and diverse economic factors.
• Nashville and Charlotte are also seeing strong demand, with Nashville's unemployment rate at 2.9% and Charlotte showing a 77% increase in leasing activity year-over-year.
• These trends are supported by limited supply, strong inbound inquiries, and favorable local economies, leading to increased occupancy and stabilized portfolio growth.

Sentiment Analysis:

Overall Tone: Positive

• Management raised the FFO midpoint for a third consecutive quarter, reported "net effective rents the highest in our history," highlighted strong leasing (1M sq ft second‑gen; 326k sq ft new leases) and said the balance sheet is "in great shape," and expects embedded NOI growth and occupancy gains into 2026.

Q&A:

• Question from Seth Bergey (Citigroup Inc., Research Division): I guess just in kind of the outlook items, you noted the potential for increased acquisitions or dispositions, would those kind of take you into any new markets? Or where would you like to kind of increase your concentration into? Or would those reduce your exposure to any of your markets that you're currently in?
  Response: Acquisitions would be in existing markets only; dispositions are trimming noncore assets (assets on market in all markets except Charlotte and Dallas) as part of ongoing portfolio rotation.

• Question from Seth Bergey (Citigroup Inc., Research Division): Great. And then just on financing assets, any potential acquisitions, would you look to do more on the ATM? Or would you primarily fund those through other dispositions?
  Response: Plan A is to fund with disposition proceeds; ATM equity is available and was used for the Charlotte garage but is less competitive given current share price.

• Question from Blaine Heck (Wells Fargo Securities, LLC, Research Division): It seems as though during the pandemic, we saw Atlanta benefit a lot from tenant migration from other markets. But in your prepared remarks, it struck me like maybe Dallas was leading in that trend at this point. So I was hoping you could just give us an update on which markets are benefiting most from migration from other markets and whether the level of that activity has changed significantly in any of your specific markets?
  Response: Dallas is the strongest market now, followed by Charlotte and Nashville, with demand broadly accelerating across the footprint and inbound tenants from California, the Midwest, Northeast and some international entrants.

• Question from Blaine Heck (Wells Fargo Securities, LLC, Research Division): Great. Second question, Brendan, you guys are clearly going through a period of elevated leasing activity. And with that comes elevated CapEx, which you touched on in your remarks. I guess how long should we kind of expect these elevated capital expenditures to impact AFFO or FAD or cash flow? And related to that, anything you can say just to touch on your or the Board's comfort with the dividend level here would be helpful.
  Response: Leasing CapEx likely remains elevated through 2026 and into 2027 (roughly $40M above normalized YTD), but NOI from signed leases should drive improving cash flow; no change to dividend posture indicated.

• Question from Robert Stevenson (Janney Montgomery Scott LLC, Research Division): Brendan, what drives the $0.04 gap in the fourth quarter earnings guidance? What swings to the high and low ends variable-wise?
  Response: The primary swing is discretionary expense timing and variability, with smaller impacts possible from bad-debt assumptions or other unusual items.

• Question from Robert Stevenson (Janney Montgomery Scott LLC, Research Division): And then the commentary that you made looking out to next year with the Core 4 leasing, does the occupancy there hit relatively ratably? Or there are certain quarters where there's a couple of big leases that hit that will really spike occupancy as we start thinking about the volatility of the occupancy number going forward?
  Response: Occupancy build is expected to be reasonably ratable from Q2 through Q4 (with a typical Q1 seasonal dip and some downtime on large expirations, then backfill mostly in Q2–Q3).

• Question from Robert Stevenson (Janney Montgomery Scott LLC, Research Division): Okay. That's very helpful. And then lastly, Ted, given the positive market comments around the portfolio that both you and Brian made earlier, can you talk about the Pittsburgh market and how close you may be getting there to the right time to exit some or all of those assets?
  Response: Pittsburgh is not ready for sale yet, but improving leasing velocity and capital markets mean a decision point could arrive within a few quarters.

• Question from Nicholas Thillman (Robert W. Baird & Co. Incorporated, Research Division): Brendan, you have been messaging sort of this ramp-up in occupancy 100 to 200 basis points throughout '26. Just wanted to double check on your comfort level there. And then the underpinning assumptions, is that similar leasing volume of this 300,000 square feet of new deals plus 50% retention, and that's how we get there. Is that the math? Just kind of -- just walk us through sort of that setup there.
  Response: Management is comfortable with 100–200 bps growth from year‑end '25 to year‑end '26 based on continued ~300k SF new deals per quarter and roughly 45–50% retention, targeting ~87–88% occupancy by year‑end '26.

• Question from Nicholas Thillman (Robert W. Baird & Co. Incorporated, Research Division): That's helpful. And then, Ted, with the leasing volume remaining healthy here, on the acquisitions, what's the appetite for lease-up risk on sort of the pool of assets you're looking at? And along those lines, as we think about the earnings impact of selling versus buying, are you -- is this FFO dilutive, neutral? How should we think about that?
  Response: They will take lease‑up risk when underwriting supports it; executed on a leverage‑neutral basis acquisitions should be roughly FFO‑neutral over time while increasing cash flow and portfolio quality.

• Question from Dylan Burzinski (Green Street Advisors, LLC, Research Division): Ted, I think you mentioned that the capital markets environment continues to improve as we progress throughout 2025. But can you kind of just talk about sort of where for assets that you have sold, where pricing expectations have come in relative to your initial expectations? And maybe if you can follow that up with just any sort of color or detail around bidding tense. Are we starting to see more institutional capital come back? Or is it still, for the large part, mostly high net worth family office type money looking at the office space today?
  Response: Disposition pricing is varied but generally meeting or exceeding initial expectations; bidder pools are deeper with more institutional buyers returning and improving debt markets increasing liquidity.

• Question from Dylan Burzinski (Green Street Advisors, LLC, Research Division): And then maybe one more, if I could. Just -- I know you guys are constantly turning the portfolio and selling noncore assets and reallocating that capital. But I guess as you look at the portfolio today, I mean, is there some percentage of it that you would sort of deem as noncore or that you have interest in disposing of over time?
  Response: There is no fixed noncore percentage; the portfolio is continuously reevaluated and assets are rotated as markets and relative asset economics change.

• Question from Ronald Kamdem (Morgan Stanley, Research Division): Just 2 quick ones. Clearly, the capital recycling is pretty imminent, says in the next sort of 6 months. Just curious in terms of just markets, are these all sort of existing markets? Any new markets in there? And just remind us what markets you like to lean into, whether it's Dallas, Atlanta, just what stands out?
  Response: Capital recycling and potential acquisitions are focused on the existing footprint—seeking to upgrade the portfolio across current core markets such as Dallas, Charlotte, Nashville, Tampa and others.

• Question from Ronald Kamdem (Morgan Stanley, Research Division): Great. And then my second question is just on an update on Ovation. I know you guys are not looking to do any sort of M&A development and so forth. But just current thinking there, sort of excitement, could that be at '26, '27? Just what the timing could be on that and what the thoughts are?
  Response: Ovation is fully controlled and re‑entitled; utility/site work slated for 2026, vertical construction in 2027, with first phase openings expected in fall 2028 and mixed‑use underwriting assuming ~20% office rent premium.

Contradiction Point 1

Acquisition Strategy and Market Focus

It involves the company's strategic approach to acquisitions and the markets in which it plans to operate, which could impact future growth and investor expectations.

Regarding the outlook, with potential increased acquisitions or dispositions, would these enter new markets, increase your focus in existing ones, or reduce exposure in any current markets? - Seth Bergey(Citigroup Inc., Research Division)

2025Q3: No new markets are being considered for acquisitions, which will focus on existing holdings in current markets. Dispositions are aimed at trimming noncore assets across the portfolio, with no plans to enter new markets. - Theodore Klinck(CEO)

What are the current acquisition opportunities and return potential, and has activity increased since liberation announcements? - Peter Abramowitz(Jefferies)

2025Q2: Capital markets are improving, with more high-quality assets coming to market. Debt is more available, and sellers are eager to transact. Acquisitions will be based on risk-adjusted yields. There are wishlist assets, core, and core-plus opportunities. We're actively evaluating all options. - Theodore Klinck(CEO)

Contradiction Point 2

Leasing and Occupancy Trends

It involves expectations for leasing trends and occupancy levels, which are crucial for understanding the company's financial health and revenue prospects.

How long will high CAPEX affect AFFO, FAD, or cash flow, and what is the comfort level with the dividend? - Blaine Heck(Wells Fargo Securities, LLC, Research Division)

2025Q3: Elevated capital expenditures are expected to continue through 2026, driven by signed but not yet commenced leases. Leasing volume is expected to normalize, leading to improved cash flow as NOI grows. - Brendan Maiorana(CFO)

Can you provide guidance on concessions and TIs for Q2 leasing? - Seth Bergeny(Citi)

2025Q2: Leasing activity remains strong with tour activity high, driven by quality and location preferences. Concessions have generally peaked, and market rents are rising. We're seeing better submarket-specific concessions, supporting net effective rent growth. - Theodore Klinck(CEO)

Contradiction Point 3

Dividend Comfort and Earnings Guidance

It involves the company's expressed confidence in their dividend payout and earnings guidance, which are crucial for investor expectations.

How long will elevated capex impact AFFO/FAD/cash flow, and what is the confidence in the dividend? - Blaine Heck(Wells Fargo Securities, LLC, Research Division)

2025Q3: Elevated capital expenditures are expected to continue through 2026, driven by signed but not yet commenced leases. Leasing volume is expected to normalize, leading to improved cash flow as NOI grows. The dividend level is comfortable given the leasing pipeline strength and NOI growth projections. - Brendan Maiorana(CFO)

Are tenants reluctant to engage early on 2026 expirations due to a preference to wait and see? - Robert Stevenson(company)

2025Q1: I want to be clear. I think the dividend's very comfortable. We view a 25 cent dividend, that's very -- that level and sustainable and very appropriate for the operating model we sit in today. - Brendan Maiorana(CFO)