10-Q: Highwoods Q3 2025: Net Income Rises, Occupancy Dips

Highwoods Properties reports increased net income for the nine months ended September 30, 2025, despite a slight decrease in office portfolio occupancy and lower rental revenues for the quarter.

Summary

• Net income for the nine months ended September 30, 2025, increased to $132.9 million from $107.4 million in the prior year.
• Net income for the three months ended September 30, 2025, decreased to $13.7 million from $15.5 million in the prior year.
• Rental and other revenues decreased by 1.2% for Q3 2025 ($201.8 million vs $204.3 million in Q3 2024) and 2.8% for the nine months ($602.8 million vs $620.3 million in 2024).
• Office portfolio occupancy decreased from 87.1% as of December 31, 2024, to 85.3% as of September 30, 2025.
• Same property Net Operating Income (NOI) was $3.6 million, or 2.7%, lower in Q3 2025 compared to Q3 2024.
• Annual combined GAAP rents for new and renewal second-generation leases signed in Q3 2025 were $40.13 per rentable square foot, 18.3% higher compared to previous leases in the same office spaces.
• Acquired the Legacy Union parking garage in Charlotte for $110.2 million in Q3 2025 and Advance Auto Parts Tower in Raleigh for $137.9 million in Q1 2025.
• Sold a building in Richmond for $16.0 million, recording a gain of $5.7 million, in Q3 2025.
• Sold three buildings in Tampa and land in Pittsburgh for an aggregate sales price of $146.3 million, recording aggregate net gains of $82.2 million, in Q1 2025.
• Recorded an $8.8 million impairment charge on two non-core, out-of-service assets at Century Center in Atlanta in Q3 2025.
• Modified a $200.0 million unsecured bank term loan, extending its maturity from May 2026 to January 2029.
• Issued 1,550,588 shares of common stock for net proceeds of $48.6 million in Q3 2025 under existing equity distribution agreements.
• The leverage ratio, 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.

Sentiment

Score: 6

Explanation: While nine-month net income and disposition gains were strong, and new lease rents are higher, the decline in quarterly net income, overall rental revenues, occupancy, and same-property NOI indicates operational challenges. Proactive debt management and strategic acquisitions/dispositions are positive, but the overall office market sentiment and work-from-home risks remain.

Positives

• Net income for the nine months ended September 30, 2025, increased significantly to $132.9 million from $107.4 million in the prior year.
• Diluted earnings per common share for the nine months increased to $1.19 from $0.98.
• Annual combined GAAP rents for new and renewal second-generation leases signed in Q3 2025 were 18.3% higher ($40.13 per rentable square foot) compared to previous leases in the same spaces, indicating strong pricing power for premium assets.
• Successful dispositions of non-core assets generated significant gains: $5.7 million in Q3 2025 and $82.2 million in Q1 2025.
• Proactive debt management included modifying a $200.0 million unsecured bank term loan, extending its maturity from May 2026 to January 2029.
• No scheduled debt maturities within one year from October 28, 2025, providing financial flexibility.
• Maintained a conservative and flexible balance sheet with ample liquidity, including $529.9 million in unused revolving credit facility capacity as of September 30, 2025.
• Acquired high-quality assets, including the Legacy Union parking garage for $110.2 million and Advance Auto Parts Tower for $137.9 million, aligning with the strategy to upgrade the portfolio.

Negatives

• Net income for the three months ended September 30, 2025, decreased to $13.7 million from $15.5 million in Q3 2024.
• Diluted earnings per common share for the three months decreased to $0.12 from $0.14.
• Rental and other revenues decreased by 1.2% for Q3 2025 and 2.8% for the nine months ended September 30, 2025, primarily due to property dispositions, lower consolidated same property revenues, and properties taken out of service.
• Office portfolio occupancy decreased from 87.1% as of December 31, 2024, to 85.3% as of September 30, 2025.
• Consolidated same property NOI was $3.6 million, or 2.7%, lower in Q3 2025 compared to Q3 2024, driven by decreased same property revenues and increased expenses.
• Recorded an $8.8 million impairment charge on two non-core, out-of-service assets at Century Center in Atlanta in Q3 2025.
• Equity in earnings of unconsolidated affiliates was lower in both the three and nine months ended September 30, 2025, primarily due to higher net losses from the 23Springs and Granite Park Six joint ventures, which own newly constructed buildings not yet stabilized.
• Interest expense increased for both the three and nine months ended September 30, 2025, due to lower capitalized interest and higher average debt balances, despite lower average interest rates.

Risks

• The financial condition of customers could deteriorate.
• Assumptions regarding potential losses related to customer financial difficulties could prove incorrect.
• Counterparties under debt instruments, particularly the revolving credit facility, may attempt to avoid their obligations, which would reduce available liquidity.
• 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.
• The company could lose key executive officers.
• 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.
• Recent and future acquisitions and development properties may fail to perform in accordance with expectations and may require renovation and development costs exceeding estimates.
• Inability to repay, refinance, or extend any or all debt at maturity or upon any acceleration.
• Refinancing at higher interest rates could adversely affect cash flow and ability to pay distributions.
• New financing could impose tighter financial ratios and other covenants that restrict the ability to take actions that could otherwise be in the best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing securities, or paying distributions.
• An event of default on the revolving credit facility could lead to acceleration of all outstanding borrowings and prohibition from further borrowing.
• Certain unsecured debt agreements contain cross-default provisions that could trigger defaults if in default under more than $35.0 million with respect to other loans in some circumstances.

Future Outlook

The company expects average occupancy in its office portfolio to range from 85.0% to 86.0% for the remainder of 2025. It anticipates selling between $50 million and $500 million of assets over the next six months and is evaluating opportunities to acquire over $500 million in high-quality office buildings. The company believes its available cash, operating cash flows, and various financing sources will be adequate to meet both short-term and long-term liquidity requirements, with no debt scheduled to mature prior to 2027.

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.
• By creating and operating commute-worthy places, we support the growth and success of our customers and contribute to the vitality of our communities.
• 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.
• We continue to maintain a conservative and flexible balance sheet and believe we have ample liquidity to fund our operations and growth prospects.
• We generally believe existing cash and rental and other revenues will continue to be sufficient to fund our short-term liquidity needs such as funding operating and general and administrative expenses, paying interest expense, maintaining our existing quarterly dividend and funding existing portfolio capital expenditures, including building improvement costs, tenant improvement costs and lease commissions.

Industry Context

The company's strategic focus on owning and operating high-quality workplaces in 'Best Business Districts' (BBDs) reflects a response to evolving tenant demands and the challenges posed by work-from-home trends. This 'flight to quality' within the office market is supported by the 18.3% higher GAAP rents achieved on new and renewal leases in Q3 2025, indicating strong demand and pricing power for premium, amenity-rich office environments. The ongoing disposition of 'non-core, out-of-service assets' and the impairment charge on such properties align with a broader industry trend of portfolio optimization, shedding less desirable or older assets to concentrate on higher-performing, modern spaces that can better compete in a changing landscape.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or global benchmarks for direct assessment against industry standards. The analysis is based on the company's internal performance metrics and strategic objectives.

Corporate Governance

Related Party Transactions

• Investments in and advances to unconsolidated affiliates, including 50.0% interests in Granite Park Six JV, LLC, GPI 23 Springs JV, LLC, M+O JV, LLC (McKinney & Olive joint venture), Midtown East Tampa, LLC, and Brand/HRLP 2827 Peachtree LLC.
• Loans provided to the Midtown East Tampa, LLC joint venture with an outstanding balance of $31.8 million as of September 30, 2025.
• Loans provided to the Brand/HRLP 2827 Peachtree LLC joint venture with an outstanding balance of $49.4 million as of September 30, 2025.
• Consolidated affiliate HRLP MTW, LLC (Midtown West joint venture) where the company owns an 80.0% interest and is the primary beneficiary.

Stakeholder Impact

• Shareholders are impacted by the declared cash dividend of $0.50 per share, changes in EPS and FFO, and the company's long-term strategy to generate returns through portfolio upgrades and a strong balance sheet. Potential for dilution from ongoing equity raises.
• Customers benefit from the 'work-placemaking' strategy focused on high-quality, amenity-rich properties in Best Business Districts.
• Employees are impacted by share-based compensation plans.
• Creditors are affected by the company's debt management strategies, compliance with financial covenants, and the extension of loan maturities, which enhance financial stability.
• Communities benefit from the company's focus on creating 'commute-worthy places' and contributing to the 'vitality of our communities' through its property developments and operations.

Next Steps

• Pay a cash dividend of $0.50 per share of Common Stock on December 9, 2025.
• Continue to evaluate opportunities to acquire high-quality office buildings (wholly-owned or joint ventures) in excess of $500 million.
• Expect to sell between $50 million and $500 million of assets over the next six months.
• Monitor average occupancy in the office portfolio, expected to range from 85.0% to 86.0% for the remainder of 2025.
• Adopt new ASU for disaggregated disclosure of income statement expenses starting with the 2027 Annual Report on Form 10-K.

Key Dates

Recommendation

The company demonstrates a clear strategy of portfolio optimization through strategic acquisitions in Best Business Districts and dispositions of non-core assets, which is a positive long-term move in the current office market. The ability to secure higher GAAP rents on new and renewal leases indicates strong demand for its premium properties. However, the decline in overall occupancy, quarterly net income, and same-property NOI, coupled with ongoing risks from work-from-home trends and stabilizing joint venture projects, suggests near-term headwinds. The proactive debt management is commendable, but the overall market for office REITs remains challenging. A 'Hold' recommendation reflects the balance between strategic strengths and current market pressures, advising investors to await further clarity on occupancy trends and the stabilization of new developments.

Keywords

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