Highwoods Properties Bets on Leasing-Driven Earnings Ramp

Highwoods Properties ((HIW)) has held its Q1 earnings call. Read on for the main highlights of the call.

Highwoods Properties’ latest earnings call struck a cautiously upbeat tone, with management leaning on strong leasing momentum, robust rent growth and sizable embedded NOI from recently leased developments. Timing issues around occupancy, dispositions and expenses remain a drag near term, but executives argued that portfolio quality and balance‑sheet flexibility outweigh these transitory headwinds.

Leasing Momentum Pushes Portfolio Leased Rates Higher

Highwoods underscored a strong leasing quarter, signing 958,000 square feet of second‑generation leases, including more than 300,000 square feet of new deals that lengthened average lease terms. The leased rate on the in‑service portfolio rose 50 basis points, while leased rates on developments jumped 800 basis points, with a 7.5‑year average lease term that meaningfully exceeds recent norms.

Rent Growth and Net Effective Rents Near Record Levels

Pricing power remained evident as the company posted GAAP rent growth of 19.4% and cash rent growth of 4.8% on second‑generation leasing. Net effective rents were the second‑highest in Highwoods’ history and ran about 9% above the average of the past five quarters, reinforcing management’s confidence in the earnings power of its best‑located assets.

FFO Performance Solid as Full‑Year Outlook Reaffirmed

For the quarter, funds from operations came in at $94.0 million, or $0.84 per share, alongside net income of $31.3 million, or $0.29 per share. Management chose to reaffirm its full‑year FFO guidance range of $3.40 to $3.68 per share, signaling confidence that leasing wins and development contributions can offset short‑term noise.

Development Leasing and Stabilizations Seed Future NOI

Highwoods placed more than $200 million of development into service at 87% leased, including GlenLake III at 94% leased and Granite Park 6 at 80% leased. Across placed‑in‑service projects and the remaining pipeline, properties are 86% leased but just 48% occupied, setting up substantial NOI, cash flow and FFO growth as tenants move in and rent commencements catch up.

Capital Recycling into Commute‑Worthy BBD Assets

The company continued to upgrade its portfolio, buying $108 million of joint‑venture interests in “commute‑worthy” business district assets in Dallas and Raleigh, while selling $42 million of non‑core Richmond properties. Management expects roughly $200 million of additional non‑core sales by midyear and is weighing up to $250 million in share repurchases, aiming to recycle capital into higher‑growth, higher‑quality opportunities.

Liquidity and Leverage Positioned for Flexibility

Highwoods ended the quarter with more than $650 million of available liquidity, helped by a new $100 million secured mortgage on Granite Park 6 that repatriated over $50 million of capital. Assuming $200 million of planned asset sales, management expects year‑end debt to EBITDA to land in the low‑ to mid‑6 times range, with further leverage improvement as development‑driven NOI ramps.

Sunbelt Markets and Flight‑to‑Quality Support Demand

Management highlighted healthy fundamentals in core Sunbelt business districts, notably Dallas–Fort Worth, Charlotte, Raleigh and Nashville, which are benefiting from job growth and corporate relocations. Limited high‑quality new supply and a clear “flight‑to‑quality” trend are helping Highwoods maintain pricing power even as broader office markets remain choppy.

Localized Rent Spreads Showcase Mark‑to‑Market Upside

The call featured eye‑catching rent spread examples that illustrate embedded mark‑to‑market potential in the portfolio, especially in Dallas and Nashville. At McKinney & Olive and The Terraces in Dallas, GAAP rent spreads ran near 27%, while in Nashville cash and GAAP spreads reached 9.4% and 26.5%, respectively, underscoring upside as below‑market leases roll.

Occupancy Progress and Leasing Pipeline Visibility

Portfolio leased rates improved to 89.7%, up from 89.2% last quarter, and management reiterated its year‑end occupancy goal of 86.5% to 88.5%. To get there, Highwoods expects to convert a large pool of leased but vacant space into occupancy and needs an additional 300,000 to 400,000 square feet of new leasing, or roughly 100,000 square feet per month, which it views as operationally achievable.

Embedded NOI from Near‑Term Lease Commencements

Only about $40 million of remaining capital is needed to complete Highwoods’ share of its development pipeline, which, together with recently placed‑in‑service projects, is set to generate more than $20 million of incremental annual NOI versus the Q1 2026 run rate. That embedded growth gives the REIT a degree of earnings visibility as signed leases commence and occupancy levels move closer to leased percentages.

Occupancy Lag Highlights Timing Gap in Cash Flows

Despite an 86% leased rate across in‑service and pipeline developments, these properties are only 48% occupied today, leaving a significant timing gap before full cash flows are realized. Company‑wide, the spread between leased and occupied stands at 470 basis points, roughly three times the historical level, making the ramp in occupancy a key catalyst for future earnings.

Near‑Term FFO Dip Expected on Dispositions and Cash Build

Management cautioned that second‑quarter FFO is likely to be slightly lower than the first quarter due to the timing impact of asset sales, debt paydowns and cash held ahead of a 2027 bond maturity. Certain gains recorded in Q1 are non‑recurring, so investors should expect a modest air pocket in near‑term results before contributions from new leases and developments accelerate.

Development and Capitalization Costs Create Headwinds

Highwoods acknowledged that development is more expensive and harder to finance in today’s higher‑rate environment, tightening returns in the near term. With capitalization of interest ceasing at major projects like 23 Springs and Midtown East, reported interest expense will rise, creating some accounting‑driven drag that should ease as projects fully stabilize.

Lower Term Fees and Other Income vs. Last Year

The company guided to $0.06 to $0.07 per share of term fees and other income for the full year, roughly $0.05 lower than in 2025. That drop in miscellaneous income means core property performance, rather than one‑off items, will need to do more of the heavy lifting to keep FFO within the targeted range.

Short‑Term Expense Variability from Weather and Utilities

Same‑store results were pressured in the quarter, with same‑store NOI down about 60 basis points, largely due to unusually cold weather and elevated utility costs in February. Management still expects roughly flat same‑store cash performance for the full year, framing Q1 as a temporary setback rather than a structural change in the expense profile.

Leasing Still Required to Lock in Occupancy Targets

While the leasing pipeline is healthy, Highwoods still needs approximately 300,000 to 400,000 square feet of new leases that commence by 2026 to hit its occupancy objectives. The company is targeting about 100,000 square feet of new leasing per month through midyear, a pace it believes is attainable but not yet secured, leaving execution risk that investors will be tracking closely.

Sublease Inventory Remains a Competitive Overhang

Roughly 500,000 square feet of sublease space remains in the portfolio, down about 6% to 7% from last quarter but still a meaningful source of secondary supply. That inventory could weigh on direct leasing in select submarkets, potentially forcing some concessions or longer deal cycles, even as Highwoods leans on asset quality to differentiate itself.

Dispositions Bring Short‑Term Dilution but Long‑Term Upside

Planned non‑core dispositions of around $200 million will be used to reduce debt and hold liquidity for a 2027 bond repayment, which management admits will be near‑term dilutive to FFO. Over time, the strategy is to redeploy proceeds on a leverage‑neutral basis into higher‑return uses, including potential share repurchases, supporting stronger per‑share cash flows.

Guidance and Outlook: Timing Headwinds, Embedded Growth

Highwoods reaffirmed its 2026 FFO guidance of $3.40 to $3.68 per share and a year‑end occupancy range of 86.5% to 88.5%, with FFO expected to ramp in the second half as roughly 1.2 million square feet of signed leases commence. Supported by more than $650 million of liquidity, limited remaining development capex and over $20 million of anticipated incremental NOI from recent projects, management argues that the current timing‑driven softness masks an improving underlying earnings trajectory.

Highwoods’ earnings call painted the picture of a Sunbelt office landlord leaning into quality assets, strong rent spreads and a deep pipeline of lease commencements to drive medium‑term growth. While near‑term FFO may dip as dispositions close and occupancy lags leased levels, investors focused on balance‑sheet strength and embedded NOI may view the current period as a staging ground rather than a peak in performance.