10-Q: Highwoods Properties Reports Mixed Q2 Results Amidst Strategic Dispositions and Declining Occupancy

Highwoods Properties experienced a decline in second-quarter net income and FFO per share, driven by lower occupancy and the absence of significant property disposition gains, despite strong leasing spreads and a healthy liquidity position.

Summary

• Net income for the three months ended June 30, 2025, was $19.2 million, a significant decrease from $64.8 million in the same period of 2024, primarily due to the absence of property disposition gains.
• For the six months ended June 30, 2025, net income increased to $119.2 million from $92.0 million in 2024, largely driven by $82.2 million in gains from property dispositions in the first quarter of 2025.
• Rental and other revenues decreased by 2.0% to $200.6 million for the three months and by 3.6% to $401.0 million for the six months ended June 30, 2025, compared to the prior year periods.
• Office portfolio occupancy declined from 87.1% as of December 31, 2024, to 85.6% as of June 30, 2025.
• Same property Net Operating Income (NOI) decreased by 2.1% for both the three and six months ended June 30, 2025, compared to the prior year periods.
• Funds From Operations (FFO) available for common stockholders per share decreased to $0.89 for the three months and $1.72 for the six months ended June 30, 2025, down from $0.98 and $1.87, respectively, in the prior year periods.
• New and renewal leases signed in the second quarter of 2025 covered 919,675 rentable square feet, with annual combined GAAP rents 17.6% higher than previous leases in the same spaces.
• Acquired Advance Auto Parts Tower in Raleigh for $137.9 million and sold three buildings in Tampa and land in Pittsburgh for an aggregate of $146.3 million, realizing $82.2 million in net gains, all during the first quarter of 2025.
• Maintained a leverage ratio of 42.5% as of June 30, 2025, and had $602.9 million in unused capacity on the $750.0 million revolving credit facility.
• Declared a cash dividend of $0.50 per share of Common Stock, payable on September 9, 2025.

Sentiment

Score: 4

Explanation: While the company maintains a strong balance sheet and achieved high leasing spreads, core operational metrics like rental revenue, occupancy, and same-property NOI are declining. The increase in 6-month net income and EPS is largely due to non-recurring disposition gains, masking underlying operational challenges in the current office market. The outlook for the remainder of 2025 also anticipates continued declines in key operating metrics.

Positives

• Achieved strong leasing spreads with annual combined GAAP rents for new and renewal leases signed in Q2 2025 being 17.6% higher than previous leases in the same office spaces.
• Successfully executed capital recycling initiatives, acquiring a 346,000 square foot office building for $137.9 million and disposing of non-core assets for $146.3 million, generating $82.2 million in net gains.
• Maintained a conservative and flexible balance sheet with a leverage ratio of 42.5% and substantial liquidity, including $602.9 million in unused revolving credit facility capacity as of June 30, 2025.
• Increased net income and diluted earnings per common share for the six months ended June 30, 2025, compared to the prior year, primarily due to significant gains on property dispositions.

Negatives

• Net income for the three months ended June 30, 2025, significantly decreased to $19.2 million from $64.8 million in the prior year, largely due to the absence of property disposition gains in the current quarter.
• Rental and other revenues declined by 2.0% for the three months and 3.6% for the six months ended June 30, 2025, compared to the same periods in 2024.
• Office portfolio occupancy decreased from 87.1% at December 31, 2024, to 85.6% at June 30, 2025.
• Same property Net Operating Income (NOI) decreased by 2.1% for both the three and six months ended June 30, 2025, indicating a decline in core operational performance.
• Funds From Operations (FFO) available for common stockholders per share decreased for both the three-month ($0.89 vs $0.98) and six-month ($1.72 vs $1.87) periods ended June 30, 2025.
• Interest expense increased by 4.9% for the three months and 2.6% for the six months ended June 30, 2025, due to higher average debt balances and lower capitalized interest.

Risks

• The financial condition of customers could deteriorate, leading to potential losses.
• Inability to lease or re-lease second-generation space quickly or on as favorable terms as old leases.
• Inability to lease newly constructed buildings as quickly or on as favorable terms as originally anticipated.
• Inability to complete development, acquisition, reinvestment, disposition, or joint venture projects as quickly or on as favorable terms as anticipated.
• Development activity in existing markets could result in an excessive supply relative to customer demand.
• Markets may suffer declines in economic and/or office employment growth.
• Increases in interest rates could increase debt service costs.
• Increases in operating expenses could negatively impact operating results.
• Natural disasters and climate change could have an adverse impact on cash flow and operating results.
• Inability to meet liquidity requirements or obtain capital on favorable terms to fund working capital needs and growth initiatives or repay or refinance outstanding debt upon maturity.
• Loss of key executive officers.
• Counterparties under debt instruments, particularly the revolving credit facility, may attempt to avoid their obligations, reducing available liquidity.
• 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 over the long-term.

Future Outlook

Management expects average occupancy in the office portfolio to range from 85.0% to 86.0% for the remainder of 2025. Same property Net Operating Income (NOI) and total NOI are anticipated to be lower for the remainder of 2025 compared to 2024, primarily due to lower expected average occupancy. Rental and other revenues are also projected to be lower, while rental property and other expenses are expected to decrease. Depreciation and amortization are expected to remain relatively consistent, and general and administrative expenses are forecast to be lower due to reduced incentive compensation and predevelopment cost write-offs. Interest expense is expected to be higher for the remainder of 2025. Net cash from operating activities is projected to be lower, and investing activities will be driven by potential acquisitions and development, partially offset by planned dispositions of up to $150 million in non-core assets.

Management Comments

• Our vision is to be a leader in the evolution of commercial real estate for the benefit of our customers, our communities and those who invest with us.
• Our mission is to create environments and experiences that inspire our teammates and our customers to achieve more together.
• We are in the work-placemaking business and believe that by creating exceptional environments and experiences, we can deliver greater value to our customers, their teammates and, in turn, our shareholders.
• Our simple strategy is to own and operate high-quality workplaces in the BBDs within our footprint, maintain a strong balance sheet to be opportunistic throughout economic cycles, employ a talented and dedicated team and communicate transparently with all stakeholders.

Industry Context

The company's focus on 'Best Business Districts' (BBDs) and 'work-placemaking' reflects a strategic response to evolving office market dynamics, including the impact of work-from-home arrangements. While overall occupancy and same-property NOI have declined, the strong leasing spreads on new and renewal leases suggest continued demand for high-quality, well-located office spaces within these prime submarkets. This indicates a bifurcation in the office market, where premium assets in desirable locations may outperform the broader market.

Comparison to Industry Standards

• NA

Related Party Transactions

• The company is involved in several unconsolidated joint ventures (Granite Park Six, 23Springs, McKinney & Olive, Midtown East, 2827 Peachtree) and one consolidated joint venture (Midtown West) with partners like Granite Properties and The Bromley Companies.
• The company has provided loans to the Midtown East joint venture ($30.3 million outstanding balance as of June 30, 2025) and the 2827 Peachtree joint venture ($48.4 million outstanding balance as of June 30, 2025).

Stakeholder Impact

• Shareholders: Experience a decline in quarterly EPS and FFO per share, but benefit from strategic capital recycling and a maintained dividend. The long-term strategy focuses on generating attractive and sustainable returns.
• Customers: Benefit from the company's 'work-placemaking' strategy, which aims to create high-quality, talent-supportive workplace options in Best Business Districts.
• Employees: Impacted by share-based compensation plans and the company's mission to create inspiring environments.
• Creditors: The company is in compliance with financial covenants, indicating a stable financial position, though interest expense has increased.

Next Steps

• Continue to evaluate potential acquisitions to upgrade the quality of the office portfolio.
• Sell up to $150 million of non-core properties during the remainder of 2025.
• Meet short-term liquidity requirements through available cash, cash flows from operating activities, and other available financing sources.
• Meet long-term liquidity needs through a combination of cash flows from operating activities, issuance of debt securities, secured debt, bank term loans, borrowings under the revolving credit facility, issuance of equity securities, and disposition of non-core assets.
• Pay a cash dividend of $0.50 per share of Common Stock on September 9, 2025.

Key Dates

Recommendation

While the company demonstrates a strong balance sheet, effective capital recycling, and impressive leasing spreads on new deals, the underlying operational metrics for the quarter and year-to-date show declines in rental revenue, occupancy, and same-property NOI. The increase in 6-month net income is largely attributable to one-time disposition gains, masking core operational headwinds in the office REIT sector. The outlook for continued declines in key operating metrics suggests ongoing challenges. Given the mixed performance and the uncertain broader office market, a 'hold' recommendation is appropriate, advising investors to monitor the company's ability to stabilize occupancy and improve core NOI in the coming quarters.

Keywords

Office REIT, Commercial Real Estate, SEC Filing, Quarterly Report, Financial Performance, Occupancy Rates, Net Operating Income, Funds From Operations, Property Acquisitions, Property Dispositions, Leasing Activity, Debt Management, Capital Recycling, Real Estate Investment Trust, Atlanta, Charlotte, Dallas, Nashville, Orlando, Raleigh, Richmond, Tampa