Highwoods ((HIW)) has held its Q4 earnings call. Read on for the main highlights of the call.
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Highwoods Properties recently held their earnings call, which painted a balanced picture of the company’s current state and future prospects. On the one hand, the call highlighted robust leasing activities and significant progress in development projects, indicating strong operational momentum. On the other hand, temporary declines in net operating income (NOI) and occupancy, alongside challenges from recent asset sales and impairment charges, present some hurdles in the short term.
Strong Leasing Activity
Highwoods demonstrated impressive leasing performance by signing 1.3 million square feet of second-generation space in the fourth quarter of 2024 alone, including 370,000 square feet in new leases. Over the entire year, the company achieved 1.6 million square feet in new leasing volume, marking the highest level in a decade. This strong leasing activity underscores Highwoods’ ability to attract and retain tenants effectively.
Development Pipeline Progress
The development projects at GlenLake Three in Raleigh and Granite Park Six in Dallas experienced robust leasing activity, with 142,000 square feet signed in the last quarter. These projects are projected to contribute nearly $10 million in annual NOI once stabilized, reflecting the potential financial impact of Highwoods’ growing development pipeline.
Record-Setting Lease Revenue
In 2024, Highwoods achieved a record $1 billion in cash rent from second-generation leases, complemented by an additional $140 million from first-generation deals. This record-setting revenue underscores the company’s strong operational performance and its ability to generate substantial lease revenue.
Strategic Dispositions
Highwoods strategically sold $166 million worth of non-core properties in Tampa and Raleigh, achieving a cash cap rate of 7.8% on expected 2025 NOI. These strategic dispositions are part of the company’s ongoing efforts to optimize its portfolio and focus on core assets.
Optimistic Long-Term Outlook
Despite some short-term challenges, Highwoods maintains an optimistic long-term outlook. The company projects significant upside potential from its core operating portfolio, development pipeline, and future investments, with attractive acquisition opportunities anticipated in 2025.
Temporary NOI and Occupancy Decline
Highwoods expects a temporary decline in occupancy and NOI due to anticipated large customer move-outs in the first half of 2025. This decline is expected to result in a temporary trough in same-property cash NOI growth.
Impairment Charge in Pittsburgh
The company recorded a $24.6 million impairment charge for a property in Pittsburgh, highlighting the challenges of selling non-core assets in secondary markets.
Dilutive Impact from Asset Sales
Recent asset sales, including the acquisition of the Century Center ground lease and equity issuances, are projected to have an approximate $0.10 dilutive impact on 2025 funds from operations (FFO).
Elevated Capital Expenditures
Highwoods anticipates elevated capital expenditures due to strong leasing activity, which may impact free cash flow and dividend coverage in the short term.
Guidance
During the earnings call, Highwoods provided optimistic guidance for the coming years, highlighting significant growth potential. The company anticipates $25 million in stabilized annual NOI from key buildings and nearly $30 million from the development pipeline. With $215 million raised through non-core dispositions and equity, they foresee compelling acquisition opportunities in 2025. Highwoods forecasts FFO of $3.26 to $3.44 per share for 2025, factoring in short-term dilution. Despite projected short-term challenges, including a negative 2% to 4% same property cash NOI growth, the company remains confident in its long-term trajectory.
In conclusion, Highwoods’ earnings call reflects a balanced sentiment with strong leasing and development activities juxtaposed against short-term financial challenges. The company is poised for future growth, driven by strategic investments and a robust development pipeline, while navigating near-term hurdles associated with asset sales and occupancy declines.
