Highwoods Properties, Inc. (NYSE:HIW) Q2 2024 Earnings Convention Name July 24, 2024 11:00 AM ET
Firm Contributors
Hannah True – Supervisor, Finance and Company StrategyTed Klinck – President and CEOBrian Leary – EVP and COOBrendan Maiorana – EVP and CFO
Convention Name Contributors
Andrew Berger – Financial institution of AmericaGeorgi Dinkov – MizuhoYoung Ku – Wells FargoMichael Griffin – CitigroupRob Stevenson – JanneyPeter Abramowitz – JefferiesDylan Burzinski – Inexperienced StreetMichael Lewis – TruistOmotayo Okusanya – Deutsche Financial institution
Operator
Good morning. Thanks attending as we speak’s Highwoods Properties’ Q2 2024 Earnings Name. My title is Cole and I will be your moderator for as we speak. All strains might be muted in the course of the presentation portion of the decision with a possibility for questions-and-answers on the finish. [Operator Instructions]
I would now wish to cross it over to Hannah True. Please go forward.
Hannah True
Thanks, operator and good morning everybody. Becoming a member of me on the decision this morning are Ted Klinck, our Chief Govt Officer; Brian Leary, our Chief Working Officer; and Brendan Maiorana, our Chief Monetary Officer.
To your comfort, as we speak’s ready remarks have been posted on the net. When you have not obtained yesterday’s earnings launch or supplemental, they’re each out there on the Traders part of our web site at highwoods.com.
On as we speak’s name, our evaluate will embody non-GAAP measures similar to FFO, NOI, and EBITDAre. The discharge and supplemental embody a reconciliation of those non-GAAP measures to essentially the most immediately comparable GAAP monetary measures.
Ahead-looking statements made throughout as we speak’s name are topic to dangers and uncertainties. These dangers and uncertainties are mentioned at size in our press releases in addition to our SEC filings.
As you recognize, precise occasions and outcomes can differ materially from these forward-looking statements and the corporate doesn’t undertake an obligation to replace any forward-looking statements.
With that, I will flip the decision over to Ted.
Ted Klinck
Thanks, Hannah and good morning everybody. We delivered wonderful working and monetary efficiency within the second quarter. First, we reported FFO of $0.98 per share, representing 4% year-over-year development and we raised our full yr FFO outlook.
For the reason that starting of the yr, we’ve got elevated the mid-point of our FFO outlook by $0.03 even with promoting $80 million of non-core properties and absorbing the impression of higher-than-expected rates of interest, neither of which have been included in our authentic outlook. Additional, our disciplined and ongoing efforts to additional enhance our high-quality BBD portfolio proceed to repay within the type of resilient money flows.
Second, we signed 909,000 sq. ft of second gen leases, together with over 350,000 sq. ft of recent leases. That is the third consecutive quarter of sturdy new leasing quantity. This can be a testomony to our SunBelt markets, our BBD areas, our high-quality asset base, and our gifted staff. Our leasing pipeline continues to be strong, which makes us optimistic we are going to maintain sturdy leasing volumes for the rest of the yr.
Third, we signed seven first gen leases, encompassing 61,000 sq. ft throughout our growth pipeline. Upon stabilization, we count on these initiatives will present roughly $40 million of incremental NOI and be a major development driver for our money flows.
Lastly, our stability sheet is in wonderful form with debt-to-EBITDA of 5.8 instances at quarter finish. Being a long-term landlord with a powerful stability sheet is a transparent differentiator in as we speak’s market, as we’re in a position to fund leasing CapEx and reinvest in our best-in-class properties.
Our occupancy, which was regular at 88.5%, doesn’t but totally mirror the sturdy leasing over the previous few quarters. We have now a significant quantity of area that has been leased however the place occupancy has not but commenced, primarily in Atlanta, Nashville, Richmond, and Tampa, and can begin to contribute NOI later this yr and in 2025.
I wish to present an replace on the previous Tivity constructing in Nashville. As we talked about originally of this yr, we modified a lease with a backfill buyer for 110,000 sq. ft that at the moment leases 50,000 sq. ft in one other Highwoods constructing.
Since then, this buyer has additional reevaluated their long-term area wants. We’re at the moment in discussions with our buyer about what makes essentially the most sense going ahead, for each Highwoods and for them. It is attainable we might conform to cancel their lease in alternate for recouping our funding.
No matter what occurs, we’ve got wholesome prospect curiosity for this area, and actually, have already signed 66,000 sq. ft of recent leases on this constructing. We don’t count on any potential lease cancellation to have a significant impression to our close to or long-term monetary outlook.
Turning to growth, our $506 million pipeline is now 45% leased. Exercise is strong at GlenLake III, our $94 million, 218,000 sq. foot growth in Raleigh. We at the moment are 34% leased and have wholesome curiosity from further prospects.
At our $200 million, 422,000 sq. foot Granite Park 6 growth in Dallas that we’re growing with our 50/50 three way partnership accomplice, Granite Properties, we signed a full flooring consumer for 27,000 sq. ft to carry the leased fee to 26%.
We nonetheless have seven quarters to go earlier than professional forma stabilization at each GlenLake III and Granite Park 6 and stay assured within the long-term outlook for each developments.
Staying in Dallas, exercise is regular at our 642,000 sq. foot, $460 million, 23Springs mission in Uptown that we’re additionally growing in a 50/50 three way partnership with Granite.
The property is at the moment 56% leased and we’ve got an LOI for an additional full flooring consumer with wholesome curiosity from further prospects. As a reminder, this mission is scheduled for completion within the first quarter of 2025 and stabilization within the first quarter of 2028.
Midtown East in Tampa, our 143,000 sq. foot, $83 million mission we’re growing in a 50/50 three way partnership with Bromley within the Westshore BBD, continues to generate sturdy curiosity.
Midtown East is the one workplace mission at the moment below building in all the market. We’re 16% pre-leased two years earlier than scheduled stabilization and have a pipeline of further prospects.
As talked about earlier this yr, we don’t count on to announce any new growth initiatives in the course of the the rest of the yr. New begins are very troublesome for any developer to pencil given the present atmosphere, which is benefitting our present portfolio as giant necessities are seeing dwindling choices of high quality area out there throughout our footprint.
As we beforehand disclosed, we offered a bit of over $60 million of non-core property early within the quarter to carry our year-to-date complete to $80 million. We’re prepping further properties to carry to market and have included as much as a further $150 million of non-core tendencies in our outlook.
Whereas we haven’t any acquisitions included in our outlook, we’re having conversations with homeowners and lenders of wish-list properties in our markets. Whereas we’re snug being affected person, we do consider compelling funding alternatives will come up.
To be clear, our standards for capital deployment is extremely selective. Goal acquisition alternatives should be well-located in a strong BBD, have good bones, and be well-positioned to generate engaging risk-adjusted returns over the long-term.
In conclusion, we’re assured concerning the long-term outlook for Highwoods. First, demand for our Sunbelt BBD portfolio continues to be sturdy, which positions us to drive significant development in occupancy and NOI following our lengthy telegraphed trough in early 2025.
Second, our $500 million growth pipeline will come on-line over the subsequent few years and considerably bolster our money stream and earnings.
Third, we have been profitable monetizing non-core property and consider we will proceed to create further dry powder, which may also additional enhance our portfolio and money stream.
Fourth, our stability sheet is in wonderful form and can allow us to capitalize on acquisition alternatives. Fifth, even with increased rates of interest, our underlying money flows stay sturdy. This helps our engaging dividend and permits us to proceed reinvesting in our portfolio.
And eventually, I wish to thank my 350 Highwoods teammates who ship for our clients and shareholders every single day. It’s their effort that has positioned us for fulfillment for a few years to come back. Brian?
Brian Leary
Thanks, Ted and good morning all. The leasing momentum we had at the beginning of the yr continues. Our leasing groups are busy and within the second quarter signed 106 offers for 909,000 sq. ft, together with 352,000 sq. ft of recent offers.
We’re resolute in prioritizing occupancy and we’ll proceed to lean on our strengths as a long-term proprietor, whereas strengthening our long-term money flows. That is evidenced by our portfolio’s occupancy outperformance compared to our BBDs, by virtually 800 foundation factors. We’re seeing strong demand at varied value factors throughout our portfolio.
As demonstrated by the leasing quantity in our growth pipeline, the highest of the market is doing effectively, however we proceed to see essentially the most demand for our well-located second technology property.
It is because a big phase of shoppers and prospects prioritized a premier workplace expertise with a well-capitalized landlord at rents which are extra inexpensive than new building.
To this finish, over 70% of our leasing exercise for the quarter was in suburban BBDs. Our perception continues to be that the expertise inside a constructing is the actual trophy and the commute-worthy expertise we’re delivering is offering the life-style our clients prioritize to recruit, retain, and return their expertise to the workplace.
Earlier than we stroll via the markets, it is price noting that Virginia, North Carolina, Texas, Georgia, and Florida, 5 of our core six states, got here in a single via 5 in CNBC’s current annual rankings of one of the best states for enterprise. Our sixth state, Tennessee, was shut by in eighth.
Whereas Elon Musk might dominate the headlines together with his introduced headquarter relocations to Texas, there are a whole bunch of others discovering these aforementioned states as welcoming environments for his or her most respected useful resource, expertise.
That is additional highlighted by JLL, who famous Dallas’ ascension to the third largest workplace utilizing job market within the nation, just lately surpassing Chicago, whereas Dallas’ inhabitants is projected to cross the Windy Metropolis 5 years from now.
Shifting to our markets the place Nashville, Raleigh, Atlanta, and Richmond made up virtually 80% of this quarter’s complete leasing quantity. In Richmond, our staff signed 112,000 sq. ft within the quarter, together with 57,000 sq. ft of recent offers, together with a brand new company headquarters location for a Fortune 500 firm.
We’re seeing rising curiosity from prospects in our Innsbrook BBD the place our market-leading property and sponsorship are clear differentiators. Nashville signed essentially the most quantity within the quarter with 271,000 sq. ft, together with 157,000 sq. ft of recent leases, the biggest share of recent leasing throughout our portfolio for the quarter.
Our Nashville new leasing quantity was bolstered by a big new-to-market buyer. Cushman & Wakefield highlighted that the pure market posted constructive internet absorption for the fifth consecutive quarter.
68% of all leasing exercise out there was both expansions or new leases and new to market necessities elevated with 18 tenants on the lookout for greater than 850,000 sq. ft within the combination.
Additional, essentially the most lively Nashville submarkets within the quarter have been Brentwood and Cool Springs, the place our mixed leasing volumes have been up over 100% year-over-year. As a reminder, these two submarkets embody 60% of our 5.1 million sq. foot Nashville portfolio.
In Raleigh, our leasing staff signed 176,000 sq. ft of second gen leases within the quarter, plus 20,000 sq. ft of first gen area at our GlenLake 3 mixed-use growth. JLL reported combination area necessities out there elevated 70% year-over-year and the variety of prospects higher than 10,000 sq. ft elevated by 23%.
In conclusion, our leasing pipeline is wholesome, and our high-quality portfolio is proving its resilience. The flight to high quality features a flight to high quality buildings, a flight to high quality experiences, and a flight to well-capitalized homeowners who’re prepared and in a position to spend money on their portfolios.
Whereas dealing with the identical headwinds as all workplace homeowners, we’re benefiting from the long-term attractiveness of our Sunbelt BBDs and the elevation of a brand new commute-worthy bar of office expertise, offering us throughout a wide range of value factors provides us a singular worth proposition. Brendan?
Brendan Maiorana
Thanks Brian. Within the second quarter, we delivered internet earnings of $62.9 million or $0.59 per share and FFO of $105.9 million or $0.98 per share. In the course of the quarter, the State of Tennessee modified the methodology for calculating franchise taxes, which lowers our annual franchise tax obligations and was utilized retrospectively.
In consequence, we obtained $5.8 million of tax refunds associated to prior years. This non-recurring refund is included in different earnings in our 2Q outcomes and was partially offset by a $1 million non-recurring cost recorded as a discount to rental and different revenues that additionally relate to prior years.
The web impression is a $4.8 million profit from these non-recurring gadgets, $2.5 million of which have been anticipated in our prior outlook. In different phrases, these non-recurring gadgets resulted in a internet $0.02 of upside in comparison with our outlook from April.
Our stability sheet stays in wonderful form. At June thirtieth, we had $27 million of obtainable money and nothing drawn on our $750 million revolving credit score facility. Subsequent to quarter finish, our unconsolidated McKinney & Olive JV paid off at maturity a $134 million secured mortgage with an efficient rate of interest of 5.3%. This property is now unencumbered.
Additionally subsequent to quarter-end, our unconsolidated Granite Park 6 JV paid down the $71 million stability on the development mortgage with an rate of interest of SOFR plus 394 foundation factors.
In reference to these paydowns, we and Granite every contributed $103 million to the respective joint ventures. These mortgage repayments will enhance our near-term money stream from operations and in addition possible be a future supply of capital as we plan to acquire long-term financing for each properties in some unspecified time in the future sooner or later when situations within the secured market are extra favorable.
As Ted and Brian talked about, we had a powerful leasing quarter, particularly new leasing quantity. Our lease fee, which incorporates present occupied areas plus leases signed however not but commenced on vacant areas, is 280 foundation factors increased than our precise occupancy of 88.5%.
And this present lease fee assumes we find yourself canceling the 110,000 sq. foot signed however not but commenced leased on the former Tivity constructing in Nashville that Ted talked about.
Sometimes, our lease fee ranges between 100 to 200 foundation factors above our precise occupancy fee. This present unfold illustrates the sturdy demand we’re capturing throughout our portfolio, which makes us optimistic for a future occupancy restoration.
As we said final quarter, if we proceed to put up sturdy leasing volumes, we consider our trough occupancy degree early subsequent yr might be increased than our authentic expectations and our restoration might be sooner. Our sturdy second quarter leasing quantity definitely helps this development.
As Ted talked about, we have up to date our 2024 FFO outlook to $3.54 to $3.62 per share, which means a $0.045 enhance on the midpoint in comparison with our prior outlook. As I discussed, $0.02 of this enhance is attributable to the extra sudden upside from the non-recurring gadgets we recorded in 2Q, with the remaining $0.025 of upside, principally attributable to raised NOI. There are nonetheless a number of variables in our outlook, together with projected property tax financial savings, which are not assured but.
Identical-property money NOI, which doesn’t embody the $5.8 million of prior tax refunds that have been booked in different earnings, does embody the $1 million non-recurring cost that pertains to prior years.
Even with this beforehand sudden cost, we nonetheless maintained our outlook for development in same-property money NOI of constructive 0.5% to 2%. Our up to date outlook, mixed with the sturdy first half of the yr outcomes, implies decrease quarterly FFO for the second half of the yr.
A couple of gadgets to notice. First, we do not count on any vital non-recurring gadgets within the second half of the yr. Second, the third quarter is usually our lowest from an working margin perspective as utility prices are usually highest over the summer time months. Given the warmth wave we have encountered thus far this summer time, we definitely count on decrease margins in 3Q in comparison with the total yr.
Third, as a result of GlenLake III and Granite Park 6 developments have been accomplished within the third quarter final yr, GAAP requires us to grab curiosity and expense capitalization on these initiatives within the third quarter of this yr. Whereas this might be a brief headwind to earnings, rising revenues from these initiatives will fall to the bottom-line as occupancy grows.
Lastly, we’ve got some lengthy telegraphed recognized move-outs late within the third quarter and early within the fourth quarter and subsequently, we count on common occupancy might be decrease within the second half. As talked about earlier, we count on occupancy to trough in early 2025 and get well thereafter.
To wrap-up, we’re very inspired concerning the future for Highwoods. The leasing exercise throughout our Sunbelt BBD portfolio has been strong, which ought to drive future NOI development. Plus, we’ve got sturdy embedded development potential inside our growth pipeline as these initiatives ship and stabilize. Our stability sheet is in wonderful form, which is able to permit us to capitalize on future acquisition alternatives, and our money flows proceed to be resilient.
Operator, we at the moment are prepared for questions.
Query-and-Reply Session
Operator
[Operator Instructions]
Our first query is from Camille Bonnel with Financial institution of America. Your line is now open.
Andrew Berger
Hello, good morning. That is Andrew Berger on for Camille. Simply wished to ask about bills. It appears rental bills have been a bit decrease this quarter. Simply curious if there was something particular driving this?
Brendan Maiorana
Hey Andrew, it is Brendan. Sure, there was — I imply, there’s all the time a bit of little bit of seasonality, however most likely the largest merchandise that was uncommon within the first quarter that didn’t happen within the second quarter is there was a — it had no impression on NOI, however there was a tax refund or a tax cost that was due associated to 2023 in a triple-net constructing. We recorded that as a gross-up by way of income within the first quarter after which there was a corresponding expense that zeroed out to no NOI impression associated to 2023.
However that drove up working bills could also be unusually increased within the first quarter. That didn’t recur. After which there was a bit of little bit of financial savings. There’s all the time a bit of little bit of seasonality in working bills going from Q1 to Q2, and that we might count on that to happen in Q3 and This fall as effectively. However that uncommon $3 million merchandise was the largest change that did not recur Q1 to Q2.
Andrew Berger
Received it. Thanks. And perhaps switching gears to tendencies. Simply curious if the client pool has expanded in any respect and any explicit markets the place you are sensing extra curiosity?
Ted Klinck
Hey Andrew, it is Ted. Sure, look, we do not have — as you recognize, we have closed about $80 million thus far this yr, $60 million of which was this previous quarter, truly occurred very early within the second quarter.
So, we’re listening to precisely what you simply stated. We do not have anything out out there proper now to have any knowledge factors ourselves. However definitely in conversations with brokers, we’re listening to, A, there’s some huge cash on the sidelines, and I believe individuals are beginning to assume that we’re hitting nearer to the underside on the capital markets. So, there are a bigger quantity of bidders which are property now and making provides.
Andrew Berger
Received it. Thanks very a lot. Congrats on the quarter.
Ted Klinck
Thanks.
Operator
Our subsequent query is from Georgi Dinkov with Mizuho. Your line is now open.
Georgi Dinkov
Hello, thanks for taking my query. Are you able to discuss mark-to-market and the place do you see that trending over the subsequent few quarters?
Ted Klinck
Certain. Look, that is Ted. I believe mark-to-market, I believe it is fairly flat. And I would not count on that to vary over the subsequent couple of quarters. As you recognize, we’re nonetheless in a — dealing with a difficult leasing atmosphere, a whole lot of headwinds. So, I’d assume it will be bouncing round roughly the place we’re from a mark-to-market perspective.
Georgi Dinkov
Nice. Thanks a lot.
Ted Klinck
Thanks.
Operator
Our subsequent query is from Younger Ku with Wells Fargo. Your line is now open.
Younger Ku
Sure, good morning on the market. Simply wished to return to your touch upon the Tivity backfill lease. I am unsure if that is going to be impacting the graduation time line, however any particulars could be useful.
Ted Klinck
Sure, I do not assume it will change an entire lot. As you recognize, they have been going to be shifting in — actually, by way of lease, and Brendan can soar in right here in a second. So, we have nice prospects on that. As we referred to as out constructing out Cool Springs V, however we have a whole lot of prospects to backfill that.
And look, the truth with Landmark, it is a — the exercise we’re seeing in that submarket is so good. Once they got here to us and stated they proceed to have challenges of their enterprise and so they’re struggling and so they’re reevaluating their workplace wants, we simply did not assume it made sense to saddle the client the lease that clearly is just not going to work for them long-term.
After which simply given the exercise we’re seeing on the area, we’re making an attempt to work out one thing with them proper now that is sensible for each of us.
Brendan Maiorana
Sure, Younger, it is Brendan. Simply perhaps to only put it by way of the context of expectations for this yr and the way we must always take into consideration that. We have now assumed that — we had assumed in our present outlook no income related to the backfill consumer in that area all through 2024. That additionally has been taken out of the occupancy numbers as effectively.
And I believe, as I discussed, it is also out of the lease fee. So, even with all of that, I believe we really feel superb concerning the outlook. We nonetheless count on occupancy at year-end 2024 to be according to the place we have been beforehand, which excludes the backfill. And I would not count on that there’d be an actual significant impression, even by way of near-term earnings impression.
So, I believe, in the end, the place we’ll get to is we’ll most likely have a greater long-term outlook for that constructing. I do not assume there might be a lot impression this yr or subsequent yr. And we predict it is helpful for our present buyer, we predict it is helpful for future clients and for long-term might be helpful for us as effectively.
Younger Ku
Received it. Thanks Brendan. After which simply wish to go into steering a bit of bit. So, it seems to be just like the core expectation is up $0.025. However after we take a look at your assumptions, they actually did not change a lot. So, I used to be questioning should you can go — should you can discuss concerning the ins and outs?
Brendan Maiorana
Sure, good query. So, on same-property, we did not change these assumptions. We did take the $1 million cost associated to prior years into same-property. So, that quantity — however for that, we most likely would have raised the same-property outlook.
The straight-line numbers, we did not change, however we’ve got labored with various customers the place we’re offering a bit of little bit of short-term, sort of, free lease in alternate for lease extensions, so, that is had a bit of little bit of a damaging impression on the money NOI. We have offset that with simply higher exercise elsewhere all through the same-store portfolio.
So, all of these issues on the base degree allowed us to sort of hold same-property outlook unchanged though there have been some headwinds inside these numbers. After which every thing else to us seems like it’s trending in the fitting course, even with the increase on FFO.
Younger Ku
Received it. Thanks Brendan.
Operator
We have now a query from Michael Griffin with Citigroup. Your line is now open.
Michael Griffin
Nice. Thanks. First query was simply on sort of the leasing atmosphere and expectations there. It looks as if significantly new leasing has been fairly strong this primary half of the yr. Are you able to give us a way, are these expansions, I imply, are tenants extra prepared to signal and decide to leases? And has the atmosphere sort of improved in any respect as we glance towards the again half of the yr?
Ted Klinck
Hey Michael, it is Ted. I will begin, and if Brian needs to leap in. Look, as you noticed, we have had our third straight very sturdy leasing quarter in a row and I can inform you our leasing staff, they’re laser-focused on capturing each deal we will get.
And what’s fascinating is the summer time slowdown actually did not occur this yr with — in most of our markets, perhaps in a few them. However basically, our leasing people are actually busy. Our pipelines, as sluggish it has been in fairly a while.
I believe I could also be talked about final quarter that we’re beginning to see bigger offers, and I will outline bigger in full flooring, two-floor offers, for 25,000 to 50,000 ft. We’re seeing a few of these get carried out as effectively.
So, — and look, I do assume we’re additionally benefiting and we proceed to learn from among the misery out there, among the buildings that do not have capital to speculate, we’re gaining market share. So, I do assume there is a bifurcation there out there. So, — however basically, our exercise is excellent. Our pipeline is full. I am fairly optimistic that the second half of the yr goes to proceed to be fairly sturdy.
Brian Leary
Michael, I’d clip on. That is Brian. The three years of kicking the can and sort of coming to consensus round return to work, we’re seeing that sort of come to roost. We even — we forwarded inside e-mail to a 185,000-person firm who the CEO is like, look, we’re higher collectively, we’re again this fall, I look ahead to seeing you. That is the quick model.
So, I believe I believe these — the larger firms which have sort of delayed making these choices can now have conviction round making choices. I believe we nonetheless are typically increasing greater than contracting. The larger ones are extra rightsizing basically. We’re seeing that throughout, whether or not it is in our portfolio outdoors of the portfolio within the markets, however it does really feel busy for certain.
Michael Griffin
And Brian, to that, and have giant area necessities picked up throughout your markets or is it nonetheless sort of that small to medium-sized tenant that you simply’re seeing principally?
Brian Leary
Nice query. It is fascinating, I’ve it sort of right here in my notes once I discuss concerning the market, it is fascinating. I believe inbounds — sort of code-named inbounds has kind of been quiet with the run-up in rates of interest the place everybody was sort of ready to see what occurs. They’ve returned. So, the financial builders and the Chambers of Commerce is now have the sort of the code names again.
What’s fascinating, they’re multi-market and so they’re multi-markets inside our markets. So, we’ll see the identical code title present up in a single metropolis or the opposite. So, that has positively picked up, and a few of these are bigger, proper?
I imply you are even seeing, not in our portfolio, however a brand new to market in Nashville, Oracle introduced their headquarters, is relocating from Texas to Nashville, after which they went forward and expanded and renewed sort of the place they’re at. So, the pipeline of recent inbounds is exhibiting up.
And to your query about measurement, Nashville code title 500,000 sq. ft might be the largest one we have seen. To Ted’s level, two flooring, three flooring. They’re extra within the radar now, which is sweet to see.
Michael Griffin
Nice, that is useful. After which only one extra I would be curious to get your ideas, Ted, you talked about in your ready remarks that there are choose acquisition alternatives that you are looking to see.
I imply if you’re underwriting these prospects, are these high-quality buildings which may have poor capital buildings the place you could possibly contribute fairness or perhaps assume the mortgage? After which are you able to give us any sense on sort of what hurdle charges or IRRs you are underwriting to on potential acquisitions?
Ted Klinck
Certain. So, sure, look, on the acquisitions, you are beginning to see a couple of issues commerce largely — you want vendor financing to get the upper high quality and the bigger offers carried out. So, what we’re is it is kind of a mix of each, proper? It is high-quality property, property which are in our submarkets which have good bones, and we predict you will get a really engaging risk-adjusted yield.
Now, what’s that yield? I believe it varies based mostly on the profile of the asset. So, a core constructing goes to underwrite to a decrease required yield than a big value-add asset, proper? They is perhaps 80% leased as we speak, going to 70%, or perhaps even decrease than that. So, we’re kind of all around the board, however definitely, they’re double-digits, Michael.
And — however once more, variety of distressed offers is rising, and there is a whole lot of offers which are on the market proper now, however it’s simply arduous to get them to determine as a result of the lenders are shifting actually sluggish. After which the homeowners, in some circumstances, try to guard their fairness if there may be any left. So, every thing we’re is it is not straightforward proper now, however we’ll stay affected person and I believe these alternatives might be there.
Michael Griffin
Nice. That’s it for me. Thanks for the time.
Ted Klinck
Thanks Michael.
Operator
Our subsequent query is from Rob Stevenson with Janney. Your line is now open.
Rob Stevenson
Good morning guys. Brendan, what is the magnitude of the projected property tax financial savings within the again half of the yr? Attempting to get a really feel if that is as much as $0.01 or greater than that? And is {that a} one-time factor or is that anticipated to recur in 2025 and past given your feedback about no vital non-recurring gadgets within the second half yr?
Brendan Maiorana
Sure, Rob, it is about $0.01, could possibly be perhaps $0.01 of upside with, I’d name it, a roughly about $0.01 of draw back if none of that was realized. And the overwhelming majority of that will be recurring, so associated to this yr and would recur thereafter.
Rob Stevenson
Okay. After which how materials is the extra curiosity expense on GlenLake and Granite Park which you can’t capitalize? Attempting to get a way of the headwind there.
Brendan Maiorana
Sure. So, I will attempt to stroll via this with you and to your profit and everyone else on the road and should you’ve received follow-ups offline, I am joyful to take that. So, — as a result of I wish to put this in context as a result of I do know it is difficult a bit of bit to sort of mannequin.
If you happen to take a look at what we’ve got spent to-date on these two initiatives, it is about $150 million at our share. They’re, in occupancy, they’re about 20% commenced occupancy. So, you have received 80% of the capital that’s being capitalized from an curiosity expense standpoint. So, that 80% of that $150 million is $120 million.
If you happen to take a look at that and also you simply put a 5% capitalization fee on that, that annualizes to about $6 million a yr or about $1.5 million on a quarterly foundation that we’ll cease capitalizing curiosity halfway via the third quarter after which haven’t any capitalization of that curiosity within the fourth quarter.
Along with that, you have received working bills which are capitalized on uncommenced occupancy at these — at that — at these two buildings. And that has a couple of $0.5 million impression when you concentrate on that on 2Q in comparison with a 4Q run fee with none of that — with none of these bills capitalized. So, what which means is it is a couple of $2 million impression on a quarterly foundation.
However what occurs is now we’ve got little or no NOI that is being generated out of these property because it stands as we speak. However — and we’ve got no curiosity capitalization, no less than as of sort of mid-third quarter.
So, as these buildings lease up, all of that falls to the bottom-line. So, there’s vital upside relative to sort of the again half 2024 run fee as these property lease up. So, that is going to create a whole lot of development potential. Now, there’s execution and we have to get some further leases carried out, however that creates a whole lot of upside.
That can also be a really related dynamic to 2 buildings that we’ve got which are vacant in our working portfolio. So, 2500 Century Heart and Cool Springs V. Each of these buildings are producing damaging NOI this yr in 2024.
We’ve not taken these buildings out of service, which implies at — and there is vital leasing at each of these property. So, they’ll generate constructive NOI. So, not solely will we not have the damaging drag subsequent yr, they’ll generate constructive NOI. So, there’s a whole lot of upside in these two property as effectively.
And that creates a bit of little bit of volatility in our numbers as a result of we do not take these buildings out of service, however it drives a whole lot of upside as they arrive on-line. And so that you’re kind of seeing the confluence of sort of these two property which are in service and the 2 growth properties all hit sort of late this yr, which we’re taking that sort of headwind.
Nevertheless it additionally means there is a vital quantity of upside as these properties come on-line. The 2 working property might be on-line early in 2025. After which as we lease-up GlenLake III and Granite Park 6, that can drive a whole lot of development later in 2025 and into 2026.
Rob Stevenson
Okay, that is extraordinarily useful. Thanks for that element. After which the final one for me. Ted, how are you these tendencies? Has the pricing for property improved as we get nearer to the speed cuts? Are these going to be fairly related pricing to the year-to-date gross sales? How would you characterize that?
Ted Klinck
Sure, Rob. Once more, we do not have something out there proper now. However what we’re listening to is, once more, there’s extra capital seeking to come again. The debt markets, whereas they’re nonetheless difficult, CMBS is coming again. I believe there is a hope that rate of interest reduce is perhaps coming in September and I believe that is going to assist.
So, all these items, hopefully, are going to be come Labor Day or the again half of the yr going to allow extra issues to begin buying and selling. Clearly, smaller offers is what we have been promoting. They’re simpler to get carried out than bigger offers.
So, definitely, I’d count on pricing goes to get higher is my view, simply given the quantity of capital that is on the market, if rates of interest come down, all these issues needs to be good for asset pricing.
Now, by way of what we’ll promote, clearly, we offered some quasi-medical buildings within the first half of the yr. So, I’d count on the yields on the tendencies going ahead are going to be a bit of bit increased than what we’ve got achieved earlier this yr. However nonetheless, once more, we’re hopeful the value goes to enhance for our subsequent wave of property.
Rob Stevenson
What are you going to make use of the proceeds for? I imply is that simply to fund the remaining on the event dedication or is that earmarked for one thing else since you guys have no near-term debt maturities?
Brendan Maiorana
Sure, Rob. Sure, clearly, we have a bit of little bit of growth spend to do. There’s capital that is sort of, basically, I’d say, out there. I believe we have discovered good makes use of of capital.
So, should you simply take into consideration what we introduced subsequent to quarter to quarter-end, proper, we paid off a mortgage that we had coming due at a JV property with our accomplice.
We paid down a comparatively excessive rate of interest building mortgage. So, there might be makes use of of that capital. After which in fact, that is replenishing the dry powder to then hopefully have the ability to reinvest into funding alternatives.
Rob Stevenson
Okay. Thanks guys. Respect the time this morning.
Ted Klinck
Thanks Rob.
Operator
Our subsequent query is from Peter Abramowitz with Jefferies. Your line is now open.
Peter Abramowitz
Thanks. Sure. Simply wished to take a step again. Brendan, you have made these feedback round occupancy, I believe, this quarter and final quarter, that your expectations across the restoration, as soon as you have cleared these recognized move-outs, are most likely increased than they have been this time a yr in the past or if you began this yr. Simply questioning should you might sort of dig into that a bit of bit?
Questioning sort of what do you see because the long-term like actual potential to your stabilized occupancy within the portfolio? You are hovering round 88% as we speak and for the final couple of quarters.
I believe at peak earlier than the pandemic was someplace in that 93% vary. Simply questioning should you might remark round sort of long-term potential, the place do you assume you’ll be able to actually stabilize occupancy?
Brendan Maiorana
Hey Peter, thanks for the query. So, I will begin and perhaps provide you with some coloration as to why we’re so inspired by way of the exercise that we have seen and the potential, after which perhaps I will let Ted and Brian opine on the place they see the stabilized ranges.
However should you return to the start of the yr, the portfolio was round 89% occupied and the lease fee was round 91%. So, we have been round 200 foundation factors increased on lease fee. Throughout that point, occupancy has come down a bit of bit, so we’re down about 50 foundation factors.
But on the similar time, our lease fee has gone as much as 91.3%. And if you concentrate on at first of the yr, we additionally had inside that lease fee the 110,000 sq. foot backfill consumer at Cool Springs V. That’s now stripped out of the 91.3%.
So, I believe that offers you context by way of simply the nice exercise that we’re seeing and the way a lot internet absorption we’re driving on the working portfolio. So, that basically makes us optimistic by way of sort of that if we will maintain this degree of leasing, that that is going to drive the restoration in occupancy sort of after we get to what we count on to be trough ranges early in 2025.
Ted Klinck
After which the one factor I’d add on stabilized occupancy, look, I believe you are proper on pre-COVID we’re in that 92% to 93% vary. I do not see any purpose why we will not get again to these ranges.
If you concentrate on what we have carried out over the past a number of years, we have considerably improved our market choice, our portfolio high quality, and I believe the tendencies popping out of COVID, the flight to high quality and the flight to capital. By no means has it in my profession, however extra necessary, to be a landlord, a well-capitalized landlord.
So, I believe we’ll proceed to realize market share on the expense of others. So, look, it will take a while surely, proper? I imply we have set to work via the subsequent yr or so. However I believe we will get again to a stabilized in that 92% vary, most likely, within the subsequent a number of years.
Peter Abramowitz
That is useful, Ted. Thanks. And thanks, Brendan. After which only one different one. May you simply remark any replace and coloration on the function sort of distressed actions enjoying within the transaction market as you take a look at offers?
Ted Klinck
Sure, by way of the distressed transactions on the market, is that your query, Peter?
Peter Abramowitz
Right. Sure.
Ted Klinck
Sure. Look, there’s positively distressed transactions — that is taking a very long time, proper? It is simply — I believe we’re all — all of us get pissed off, however I proceed to remind our staff that, popping out of the GFC, it took 4 years or so popping out of the GFC for any misery of the very best high quality buildings to come back and that is what we’re on the lookout for as we speak.
There is a honest quantity of misery of the lower-quality property as we speak, and people are beginning to commerce a bit of bit and a few value resets on these. These aren’t the property we would like.
The property that we have on our — we have a reasonably well-defined vetted want checklist of property. Most of these aren’t distressed. Quite a lot of them do — the sellers do wish to promote and clear it in some unspecified time in the future, however it’s simply going to take a while. So, whereas there may be a whole lot of misery on the market, not as a lot for the property we would like, or whether it is, it is simply they’re very troublesome to get your arms on.
Peter Abramowitz
That’s all for me. Thanks.
Ted Klinck
Thanks.
Operator
Our subsequent query is from Dylan Burzinski with Inexperienced Avenue. Your line is now open.
Dylan Burzinski
Hello guys, thanks for taking the questions. Simply kind of curious, I do know you guys have been centered on prioritizing occupancy as you kind of work your manner via among the recognized move-outs. However I assume, simply curious kind of what which means for internet efficient rents as we kind of take into consideration the trajectory there. I imply it looks as if base rents are nonetheless holding regular. However I assume from a concession perspective, have issues began to stabilize there? Or are you persevering with to see additional stress on that entrance?
Ted Klinck
Hey Dylan, it is Ted. I will begin and if Brian needs to leap in. Look, you are still seeing — I believe it stabilized in a few of our greatest BBDs, the Brentwood in Nashville, the South Park in Charlotte proceed to be very sturdy markets for us. However basically, the overall general remark is there’s nonetheless stress on internet efficient rents.
And I believe what we’re seeing is strictly what you stated. We’re typically holding face lease regular. In some markets, we’re truly rising face rents. However the TI stress has not abated for essentially the most half. Free lease continues to be quite common, usually a month or so per yr of lease time period. So, it is nonetheless difficult on that entrance.
The great factor is we’re getting extra time period after we’re spending extra TI. So, that could be a trade-off. And if we will get good credit score, good time period, we’ll spend extra on TI. Nevertheless it’s — I do not assume we’re seeing any indicators of it abating, apart from choose submarkets.
I do assume markets have gotten extra bifurcated with respect to markets and submarkets. So, you have to actually drill down. That is the identical factor on the emptiness as effectively. Quite a lot of the market emptiness is concentrated in just some buildings right here and there. So, we’re truly not anticipating it to abate anytime quickly both. I believe we’re nonetheless dealing with the identical headwinds we confronted.
Dylan Burzinski
Respect that. After which happening — going again to your feedback on acquisitions. It would not sound like something is imminent. However simply curious kind of the way you guys take into consideration the potential acquisition atmosphere versus the stability sheet. And curious should you guys are prepared to kind of lever up a bit of bit ought to acquisition alternatives come up additional?
Ted Klinck
Sure, I will begin, and if Brendan needs to leap in. Look, I believe we’re laser-focused on persevering with to construct our dry powder and get a couple of extra tendencies out the door. Issues do not occur in a linear vogue on a regular basis, Peter. So, we, as we have confirmed over time, we have been in a position to flex our stability sheet if and when we have to.
However as you said, actually, there’s nothing imminent from our standpoint. We’re not afraid to do it if we have to. However proper now, we’re centered on the disposition aspect. After which discovering the fitting acquisition on the proper value. Once more, our — the great factor is our underwriting staff, they’re getting a whole lot of observe proper now. We’re getting a good quantity of reps in, however nothing imminent at this level.
Brendan Maiorana
Sure, Dylan, the one factor that I’d add is I believe we’ve got a whole lot of arrows within the quiver with respect to sort of capital availability. And as Ted talked about, we’re centered on — what I’d say, over time, I believe the bias is that leverage will transfer down somewhat than transfer up on a long-term foundation. However as Ted stated, that does not occur in a linear vogue.
Dylan Burzinski
Respect the feedback. Thanks guys.
Brendan Maiorana
Thanks.
Operator
We have now a query from Michael Lewis with Truist. Your line is now open.
Michael Lewis
Thanks. Really, I used to be going to ask that final query from sort of a unique angle. And I used to be excited about it, we had talked about this previously so far as funding sources for acquisitions. Your inventory is up virtually 30% year-to-date now.
I used to be simply questioning, it is nonetheless under NAV, considerably, I believe, the consensus NAV. Would you contemplate issuing inventory even under NAV now to fund an funding if it was accretive and if that made sense and perhaps it solves the difficulty of — or it reaches the aim of reducing your leverage as effectively?
Brendan Maiorana
Michael, it is Brendan. We have had — we take into consideration all kind of sources of capital. I believe what we have been very profitable by way of our funding program over the previous a number of years has been monetizing non-core property and recycling that capital into growth and acquisitions.
That has been accretive to our money stream, has been largely stability sheet impartial and has been a profit by way of general portfolio high quality. So, that mannequin has labored effectively for us.
In prior cycles and prior instances, fairness was a portion of that. So, that is one thing that’s definitely an possibility, however I believe we have been very profitable over the previous 5, six years of investing a whole lot of capital, doing it in a manner that was stability sheet impartial, with simply sort of utilizing proceeds from non-core asset gross sales. So, that sort of is, I’d say, definitely in the beginning for us, however we’ll take into consideration different sources of capital if that is sensible as effectively.
Michael Lewis
Okay, nice. After which my second query is said to the 2 JV mortgage paydowns. I am curious sort of what choices have been out there or what you thought-about. Is there any read-through to the refi market by way of out there capability or proceeds or whether or not the pricing is prohibitively costly? Or perhaps how a lot of that is — should you wait two, three, six months, perhaps the Fed has a number of cuts arising and you could possibly do this refi extra attractively later?
And even in considered one of your different solutions you talked about, perhaps there is no higher use of capital, no less than proper now, in paying down these loans. So, how did you sort of take into consideration that and are available round to paying these loans down somewhat than doing the refi now?
Brendan Maiorana
Sure. Good questions. So, every is a bit of bit totally different. So, at M&O we — as we disclosed final quarter, we have a buyer there that wanted to develop, we could not accommodate them at M&O. So, they’re shifting down the road to 23Springs.
So, the lender there, I believe we — was much less prepared to offer a better mortgage to worth or the V was a bit of bit decrease the pending emptiness. We’re very assured by way of that backfill and wished to get these backfill customers that these sturdy prospects that we’ve got inked, and subsequently, have the ability to return to the lending neighborhood and get extra get extra proceeds out of that one.
So, I believe we wish to sort of get that lease roll stabilized earlier than reintroducing that to the mortgage market, after which get what we view as a horny phrases on a possible mortgage. So, that was the rationale for kind of not doing a refi because it stands proper now. So, I’d name that one a bit of bit extra momentary.
After which I believe at Granite Park 6, that was extra opportunistic. Clearly, with the place charges are by way of SOFR after which the unfold on that building mortgage, that is increased.
Now, to be clear, we did not pay that down. We simply paid down the stability, however that mortgage continues to be excellent. So, we will nonetheless draw on that building mortgage for future proceeds if we select to do this.
However given the capital that we’ve got and that our accomplice has, that simply made monetary sense given the excessive rate of interest on that one now. And similar sort of factor as we get that constructing stabilized, I believe we are going to go to the mortgage market and that might be a great supply of proceeds for us and our accomplice.
Ted Klinck
The one factor I’d add is I believe it is a testomony to our — the power of our three way partnership accomplice, Granite Properties. I imply we have been in lockstep and settlement on the technique for each these property, and so they have been in a position to step up and write a reasonably vital verify alongside us to effectuate these paydowns.
Michael Lewis
Good possibility. Thanks.
Operator
We have now a query from Omotayo Okusanya with Deutsche Financial institution. Your line is now open.
Omotayo Okusanya
Sure, good morning everybody. Brendan, I hoped you could possibly return to 2024 steering. I assume nonetheless making an attempt to know among the overage that you simply talked about earlier on, once more, taking out the tax refund scenario, this sort of $0.02 enhance on higher NOI.
However once more, none of your same-store numbers actually modified. I do know there is a sort of further $1 million cost now that is within the numbers. However might you sort of stroll us via precisely what that NOI enhance on the finish of the day is, particularly if it is sort of coming from non-same-store NOI?
Brendan Maiorana
Sure, Tayo. So, simply, it — what I’d say is the NOI enhance, it’s same-store. We information to money same-property NOI development. I’d say a few of that profit is — there may be some money profit general, however that was largely offset by the $1 million cost, which was not in our prior outlook, and is flowing via same-store.
The rest of the $0.025 of upside might be extra on the non-cash aspect. I did point out, I believe, in response to a earlier query, we’ve got carried out some lease extensions with some customers that carried some proactive free lease into 2024, which we did not beforehand forecast.
However these are good financial offers for us, which pushes these lease extensions out a lot into future years. So, it is a bit of little bit of a money hit in 2024 for future — for profit in future years. So, it is all in NOI, however there’s a portion of it which is GAAP NOI and never money NOI, which is what we information to.
Omotayo Okusanya
Received you. Okay, that’s useful. Thanks.
Operator
We have now no further questions at the moment. So, I will cross the decision again to the administration staff for any closing remarks.
Ted Klinck
Nicely, thanks everybody for becoming a member of the decision as we speak and thanks to your curiosity in Highwoods. When you have any follow-up questions, please be at liberty to succeed in out and I look ahead to seeing you quickly. Thanks.
