Theodore Klinck; President, Chief Executive Officer, Director; Highwoods Properties Inc
Brian Leary; Chief Operating Officer, Executive Vice President; Highwoods Properties Inc
Brendan Maiorana; Chief Financial Officer, Executive Vice President – Finance, Treasurer; Highwoods Properties Inc
Nicholas Thillman; Analyst; Robert W. Baird & Co Inc
Please stand by for streaming text.
Good morning. Thank you for joining today’s Highwoods Properties Q3 2024 earnings call. My name is Colin, I’ll be the moderator for today’s call. (Operator Instructions) I’d now like to pass the call over to Hannah True, Manager of Finance and Corporate Strategy. Please go ahead.
Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; Brian Leary, our Chief Operating Officer; and Brendan Maiorana, our Chief Financial Officer.
For your convenience, today’s prepared remarks have been posted on the web. If you have not received yesterday’s earnings release or supplemental, they’re both available on the Investors section of our website at highwoods.com.
On today’s call, our review will include non-GAAP measures such as FFO, NOI, and EBITDAre. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today’s call are subject to risks and uncertainties.
These risks and uncertainties are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. With that, I’ll turn the call over to Ted.
Thanks, Hannah, and good morning, everyone. We reported excellent operating and financial performance once again in the third quarter. For the first three quarters of 2024, we’ve delivered financial results that are ahead of our initial expectations of building the foundation to drive sustainable growth over the long term.
First, our bottom-line financial results for this year continue to be better than we originally anticipated back in February. During the quarter, we delivered FFO of $0.90 per share and generated strong cash flows. At the midpoint, our FFO outlook is up $0.06 per share since the beginning of the year, including $0.03 increase this quarter. And this is even with interest rates higher than forecast and $84 million of non-core dispositions that were not included in our original outlook.
Second, our new leasing volumes have been very strong throughout this entire year and most prominently in the third quarter, which should drive strong organic growth after a long telegraphed occupancy trough in early 2025. With 1.3 million square feet of new second gen leases signed through the first three quarters of 2024, our leased rate is over 300 basis points higher than our in-service occupied rate of 88%, roughly 2 times our normal spread, indicating that we have sizable pipeline of leases that have been signed but where occupancy hasn’t yet commenced.
Third, we continue to make progress on our development pipeline, which is now 49% leased. So we have a healthy pipeline of strong prospects to drive our leased rate higher. Our development pipeline will be a significant driver of cash flow growth going forward as these assets deliver and stabilize.
Fourth, we continue to sell non-core assets and use the proceeds to recycle into higher-quality buildings and reduce leverage. We closed on one small non-core land sale this quarter and our marketing additional properties. We’re optimistic we’ll close on more asset sales over the next several months.
Finally, we’re laying the foundation for future wish with acquisitions by meeting with owners and lenders of high quality assets throughout our footprint. We have long believed it would take time for the bid-ask spread between buyers and sellers to narrow.
With the first interest rate cut now behind us, we can see a pathway for the office investment sales market to open back up. Overall, we continue to outperform our financial expectations. We’re making significant progress improving our portfolio quality and long-term growth rate while fortifying our already strong balance sheet. And we have a healthy number of signed, but not yet commenced leases in our development pipeline and our in-service portfolio that will further strengthen our cash flows.
Turning to operations, the combination of our BBD locations, [community] portfolio, strong balance sheet, and our hands-on approach to both customer service and property management is driving meaningful market share gains. New second gen leasing during the quarter was strong at 530,000 square feet, and that doesn’t include 39,000 square feet of net expansions, which are included in renewals. In fact, growing users outpaced contractions by ratio of 5:1.
Net effective rents, which in our view, are more meaningful than rent spreads, were the highest on our company’s history and 25% higher than the previous five-quarter average. Plus, our weighted average lease term was 10.4 years, also the highest in our history. Stated vacancy rates remained elevated, but these market-wide stats mask the improving competitive dynamics for top-of-market assets in our BBD footprint.
There’s still some office under construction, most of which will deliver by the middle of next year, but new starts are essentially non-existent. With high-quality blocks of space getting absorbed, there are less options for large users seeking Class A space with well-capitalized landlords. We expect these dynamics will continue over the next few years, which should allow us to drive occupancy and rents.
In addition, return to office mandates have steadily increased over the past several quarters as employers are emphasizing the value of in-person collaboration and culture-building that isn’t easily replicated with remote work. According to a recent KPMG survey of US CEOs, 79% expect a full return to the office over the next three years. The combination of dwindling large blocks of high-quality space limited to no development starts and increasing return to office requirements bodes well for the future of office demand.
Turning to development. During the quarter, we signed 61,000 square feet of first gen leases, including a small retail build to suit, bringing our 1.6 million square foot, $514 million pipeline to 49% leased. We have strong prospects for an additional 140,000 square feet that we expect to sign over the next several months. We don’t expect to announce any other new development projects this year. New starts are very difficult for any developer to [pencil] given the current environment.
That being said, we’ve seen increasing inquiries for potential build-to-suits. I wouldn’t characterize any of these as being close to a decision, but the renewed interest is anecdotal evidence that large users are coming back to the market and are focused on the in-person experience for their teams.
As I mentioned earlier, we sold a small non-core land parcel during the third quarter, bringing our non-core asset sales to $84 million for the year. We’ve included up to an additional $150 million of non-core dispositions in our outlook. We may not hit the high end of the range before year end, but we expect to do so by early 2025.
In conclusion, we believe the outlook for Highwoods is bright. As evidenced by this year’s leasing. Demand for our Sunbelt BBD portfolio continues to be strong. This will drive meaningful growth in occupancy and NOI, following our trough in early 2025.
Our $500 million development pipeline is seeing healthy interest and will drive meaningful increase in our earnings and cash flow as it delivers and stabilizes over the next few years. Our balance sheet is in excellent shape and will enable us to capitalize on investment opportunities.
And finally, our underlying cash flows remain strong, which supports our attractive dividend and allows us to continue reinvesting in our portfolio.
Brian?
Brian Leary
Thanks, Ted, and good morning, all. Echoing Ted’s overview on leasing, we couldn’t be happier with the results our hardworking team posted in the third quarter. The quantity and quality of deals across our existing in-service portfolio and development pipeline is emblematic of the flight-to-quality occurring across our markets.
As we’ve mentioned previously, this flight-to-quality isn’t just about the physical space, but rather is representative of a positive bias toward quality buildings, quality landlords with access to capital, and the quality of a commute-worthy experience, which is core to our DNA as both an owner and an operator. We’re focused on building leasing momentum through year end.
With this, we signed 906,000 square feet for the quarter. New second generation leasing, a 530,000 square feet represents the highest quarterly performance in over a decade and is a testament to our customers’ willingness to make a move in order to secure a new workplace that helps them recruit, retain, and return at their best and brightest to the office.
Additionally, and subsequent to quarter end, we renewed two of our largest remaining expirations in 2025 and 2026 for approximately 300,000 square feet in Nashville and Raleigh in the aggregate. Portfolio leasing stats achieved high-water marks across a variety of metrics, including meaningful net effective rent and dollar-weighted average lease term. Our 10.4% cash and 22.4% GAAP rent spreads also reinforce our belief that customers see their relative investment in real estate as a real investment relative to their most valuable asset, their people.
Our 18.6% payback is in line with our previous 10-quarter average, highlighting our portfolio’s resilience in the face of continued and competitive concessions in the market. Our development pipeline continues to fill up, adding 61,000 square feet in the third quarter, which includes a new build-to-suit brewery and restaurant at our GlenLake mixed-use development in Raleigh.
This regional draw will be a tremendous compliment to the other food and beverage options we are curating to support that close to 1 million square feet of office customers we at GlenLake. I would believe that customers aren’t monolithic in their approach to the workplace. This relates to location and to one’s measure of commute-worthiness, which is greatly impacted by one’s commute.
This belief is representative of our best business district approach, where BBDs are both urban and suburban in nature. This strategy is proving out in our year-to-date leasing performance with approximately 20% of leasing activity in the CBDs, 50% in infill locations, and 30% in the suburbs.
Turning to our markets. In Atlanta, JLL reported sublease availability reached the lowest level in seven quarters. Overall, office inventory shrank, and there were no new construction starts for the quarter. There, our team signed 271,000 square feet, including 235,000 square feet of new deals. Included in this number is the 104,000 square foot substantial backfill of a customer who vacated Two Alliance in August.
In Raleigh, CBRE reports that sublease space is down almost 30% from its peak. And Cushman & Wakefield highlighted the market’s Class A properties are garnering the greatest leasing activity for 79% of the quarter’s leasing volume. We signed 217,000 square feet in Raleigh during the quarter and renewed 84,000 square feet after quarter end, representing a modest downsize for the company’s second largest 2026 lease expiration.
Moving to the market with the nation’s lowest unemployment rate in Nashville and where Highwoods owns more than 5 million square feet. Cushman & Wakefield reported positive net absorption in the quarter and noted close to 3 million square feet of active prospects over 10,000 square feet are looking for space in the market.
Our seasoned team in Nashville signed 54,000 square feet in the third quarter, and after quarter end, renewed the company’s second largest remaining 2025 lease expiration at 210,000 square feet. In downtown Nashville, our plans have been finalized for the repositioning of Symphony Place, where we have 300,000 square feet of known move-outs in 2025.
This asset represents the next great opportunity for our unique Highwoodtizing approach to workplace-making, which has been proven successful elsewhere in Nashville, both in the Brentwood and Cool Springs BBDs. While it will take time, the opportunity to reposition one of Nashville’s most iconic towers is right in our wheelhouse and will provide meaningful upside and value creation upon stabilization.
Wrapping up our markets in Tampa, I’d like to highlight the tremendous work of our Tampa team in light of the 1-2 impact of hurricanes Helene and Milton. While many teammates are still personally dealing with the aftereffects of the storms, our portfolio fared well and was ready and waiting for our customers when the sun came back out.
Our portfolio’s resilience is a testament to our team’s resilience, and we are greatly appreciative of their collaborative and solutions-oriented approach to serving our customers. JLL notes in a recent market report that Tampa is strong and stable, and the 2.3 million square feet of leasing activity completed year to date in the Tampa market represents the greatest leasing volume among all markets in Florida. Additionally, Cushman & Wakefield highlighted that Tampa is one of the four hottest job markets in the US.
For the quarter, our Tampa team signed 97,000 square feet, including 26,000 square feet of first-generation leasing in our Midtown East development, the only office building under construction in the market and which is now 35% pre-leased. This exceptional asset joins our successful Midtown West development in the heart of Midtown’s mixed-use district, which includes a Whole Foods market, shops, restaurants, hotels, and apartments.
Midtown East delivers in the first quarter of 2025 and is projected to stabilize in the second quarter of 2026. In closing, the third quarter was a strong one for Highwoods. The hard work, foresight, and investment we’ve applied to our portfolio is delivering results. Our leasing volume and metrics are representative of a flight-to-quality of portfolio and people who deliver an exceptional experience.
We will continue to invest in our Highwoodtizing approach to reenergizing our core portfolio and delivering the most exceptional customer experience in our Sunbelt BBDs. Brendan?
Brendan Maiorana
Thanks, Brian.
In the third quarter, we delivered net income of $14.6 million, or $0.14 per share, and FFO of $97.1 million or $0.9 per share.
The quarter was relatively clean from an FFO perspective. Depreciation and amortization expense, which doesn’t impact FFO, but does flow through net income was modestly higher during the quarter. This was due to the write-off of tenant improvements and deferred leasing costs associated with the cancellation of a future 110,000 square foot lease at the former Tivity building in Nashville.
You may recall, we mentioned this was a possibility on last quarter’s call, the former customer has agreed to repay us our upfront investment over the next five years. Our balance sheet remains in excellent shape. At September 30, we had nearly $800 million of total available liquidity, including cash on hand, available capacity on our $750 million revolving credit facility and undrawn capacity from our joint venture construction loans.
As we mentioned last quarter, early in Q3, our unconsolidated McKinney & Olive and Granite Park Six joint ventures repaid over $200 million of secured loans. We, and Granite, our joint venture partner, each contributed over $100 million to these joint ventures. These properties will likely be a future source of capital as we plan to obtain long-term financing at some point in the future when conditions in the secured markets are more favorable.
As Ted and Brian mentioned, we had a strong leasing quarter, especially new leasing volume, which has driven our leased rate 310 basis points higher than our actual occupancy of 88%. This includes currently occupied space plus leases signed, but not yet commenced on vacant space. Net effective rents and average lease terms on signed leases this quarter were all-time highs, and we locked in over $340 million of total lease revenue from second gen lease signings, also a record for the company.
With such strong new leasing volume, rents and term obviously comes more leasing capital. This is a natural part of the real estate cycle when capable landlords with high-quality portfolios are able to drive occupancy higher. We expect this trend to continue in the near term as we fill the pockets of vacancy in the portfolio and push for longer weighted average lease terms.
We believe we are well-positioned to handle any short-term uptick in leasing CapEx given our healthy current cash flows and future embedded growth drivers. For 2024, our updated FFO outlook is $3.59 to $3.63 per share, which implies a $0.03 increase at the midpoint compared to our prior outlook. The increase is essentially all from higher NOI, driven by a combination of reduced expenses and higher revenues, partially offset by a modestly higher G&A.
The midpoint of our average occupancy range is unchanged at 88%, which implies a lower occupancy in Q4. This has been expected given our long-telegraphed known move-outs. At the beginning of this year, we projected year-end occupancy to be somewhere between 86% to 87%. We now believe the upper half of that range is most likely.
As we mentioned last quarter, the strong leasing we’ve achieved this year makes us confident that our trough occupancy early next year will be higher than we previously expected, and our recovery will be faster. A few items to note about our fourth-quarter expectations.
First, we expect to incur a higher level of OpEx in Q4 compared to the prior 2024 quarters. This is largely attributable to the timing of certain expense items that were pushed late into the year rather than being spent ratably over the four quarters.
Second, as I mentioned, the average occupancy is projected to be lower in Q4. Third, the GlenLake III and Granite Park Six developments, which were completed in the third quarter last year, will have no interest or OpEx capitalization during the fourth quarter.
While these items create short-term headwinds to our financial results, as occupancy recovers in our in-service portfolio and our development properties stabilize, we expect meaningful growth in our earnings and cash flow.
To wrap up, we’re very encouraged about the future for Highwoods. With our strong balance sheet and high-quality portfolio in BBD locations across the Sunbelt, we are gaining market share and expect rent economics to strengthen over time. This backdrop, combined with the meaningful embedded upside potential we have in our in-service portfolio and development pipeline, provides us a strong runway for future growth.
Finally, our balance sheet is in excellent shape, which positions us to capitalize on future investment opportunities. Operator, we are now ready for questions.
Operator
(Operator Instructions) Blaine Heck, Wells Fargo.
Blaine Heck
Great. Thanks. Good morning. Can you talk a little bit more about the rental rate strength you saw in the quarter? Were there any specific leases that drove that strength? It looked like Atlanta was the standout. So then, maybe you can comment on whether there are specific industries or tenant sizes that you’re finding that are more active in the market and willing to pay premium rent for that right space?
Theodore Klinck
Hi, Blaine. Good morning, it’s Ted. Look, obviously, we did have a great quarter on the leasing front. We had a couple of larger deals that did contribute and you nailed it in Atlanta. We had two, and in particular, one that drove the cash rent growth; one was financial services. And one was — I’m sorry, it’s professional services, a law firm. And then one was a GSA deal. They were driving those economics.
But — and even without those, we had a very strong quarter on the economics if you back those out. So we’re sort of seeing it — it’s a mix, right? And it sort of depends on the submarkets and the markets we’re in. But all in all, we’re seeing some strength in our leasing this past quarter.
And then with respect to smaller or larger, really, it just depends. I mean, I think it depends on the TIs that customers want. If we can get longer terms that are willing to provide TIs, then they’re willing to pay for it. I think we’re seeing some customers that are willing to pay for it. And that works out well.
What’s pretty interesting is we always talk about the flight-to-quality and flight-to-amenities and flight-to-capital. It’s a common theme we’ve talked about the last few quarters, and that still continues. But it’s not always the brightest, shiniest, newest buildings. And you’ve heard me say that several times.
We’ve been on both sides. So what I’m going to get ready to talk about, where we’ve been down to one of two for a customer and they chose the new construction, even though it’s $20 higher than what our offering is.
And we’ve also been down to one of two where we’ve won because we’ve been to more value play. So it all depends on who the customer is, what industry they’re in, who the CEO is. And in many cases, on the ability to — in terms of type of space they want.
Blaine Heck
Great. Thanks for all that color. Super helpful. So it looks like you guys are a little ahead of schedule on leasing up 23Springs. You’ve got an estimated stabilization date on that project in the first quarter of 2028, but you’re already 60% leased with completion expected in the quarter. I guess, how do you guys feel about potentially recognizing some revenue and [in line] of that project, maybe even as early as next year? And does that contribute to any of your productivity on 2025?
Theodore Klinck
Yeah, no, 23Springs is going very well. I think we moved it from last quarter. It was 56% and we moved it to 60% this quarter and we continue to see very strong activity. We have more strong prospect, so you’ll see, hopefully, some movement next quarter. If we can get a couple of things go.
And I think in general, our pipeline, we were about 140,000 square feet of strong prospects for our development pipeline. So yeah, with respect to 23Springs we’re probably ahead of schedule. But as a reminder, it’s a big building. We still have quite a ways to go. The building will be finished towards the end of the first quarter next year. And I think our first customer moves in on June.
And then, Brendan, do you want to take the rest of it?
Brendan Maiorana
Yeah, Blaine, it’s Brendan. So it’s a good question. And as Ted mentioned, we would expect some contribution in terms of earnings from 23Springs in 2025. That will be weighted towards the back half of the year and probably even weighted more towards fourth quarter than it will be — even third quarter because we do have some customers that move in kind of middle part of the year, but then even [more of that] would move in a little later in ’25.
So I think we feel good that that will be a contributor along with, I think the other development projects should all be kind of [additive] as we build throughout the quarters in ’25.
Blaine Heck
Great. That’s very helpful. And then just one last question, if I can. How are you guys thinking about the Pittsburgh portfolio in the near to midterm? Do you think those dispositions are kind of off the table still for now? Or are you seeing any signs of the transaction market returning there?
Are there any Pittsburgh properties in the potential $150 million that you’ve identified for potential dispositions? And I guess just strategically, maybe talk about how you think about the balance between waiting for an acceptable price to exit versus selling [suite] or wherever the market pricing is? That maybe saving some capital needed for lease up and any renovation or refreshing projects there?
Theodore Klinck
Sure, Blaine. Look, I think — in fact, we’ve got a team up in Pittsburgh today. We’re working on some leasing deals. So look, obviously, we want to get out of Pittsburgh at the right time. But as you know, the 2.5 years since the interest rates started rising up in the capital market sort of locked up. It’s hard to get any office deal done. You got to get financing and it’s really hard to get a big office deal done.
So I don’t think a whole lot has changed over the last couple of years versus we looked at Pittsburgh. From my investment sales standpoint, I think we’re going to sell the right time. But I think we’ve now hit the start of the interest rate cuts. If we can get a few more cuts done, whether be it a couple of this year and into next year, I think that’s going to do a lot to open up the overall investment sales market.
And then certainly, that would include Pittsburgh. But in the meantime, what’s been pretty encouraging is the leasing activity we’re seeing in Pittsburgh. So we like the activity we’re seeing there both PPG, starting to see more activity at EQT as well. I’m encouraged overall by both the fundamentals and then eventually our ability to get out. But just going to take time and we’re going to be patient.
Blaine Heck
Very helpful. Thank you, guys.
Operator
Ronald Kamdem, Morgan Stanley.
Ronald Kamdem
Hey, just two quick ones from me and just starting on the leasing front, which is sort of been pretty strong. I think you talked about during the year sort of the better half of the [87%-plus] sort of range and so forth. I guess my question is just, number one, is it just more leasing activity overall in the market? Or is it really sort of this flight-to-quality versus the share gain?
And then number two, just any more commentary in terms of the (inaudible), could you share us or what levels are you guys sort of thinking at all else equal? Thanks.
Brendan Maiorana
Hey, Ron, it’s Brendan and good morning. So yes, so just first on kind of that outlook for year end. So I think what we’ve said for the past quarter or so, I think originally part of the year, we said [86%] to [87%]. I think we feel in terms of the year-end occupancy, we feel comfortable in the upper half of that range now. So kind of somewhere between 86.5% and 87% is where we think we’ll kind of end the year. So that’s kind of where we expect those levels to be.
I think the reason why we feel better overall or why that number is higher is just the leasing activity that we’ve had this year has been better. And I do think that that is largely market share driven. If you look at our occupancy, relative to the markets that we operate in, that spread has continued to widen. And we think that that’s likely going to be the case as we go forward for all the things that Ted mentioned earlier, which is kind of flight-to-quality buildings, flight-to-quality, landlord and landlords that have access to capital.
So we would expect that would continue. When you get past year end, there’s still some known vacates that we have in the early part of 2025 that we’ve talked about. We think we have mitigated a lot of that risk through the leasing that we’ve done thus far on future leasing that will commence generally lower later in ’25. So the trough is still going to be lower in the first half of the year than it is for year-end ’24.
But we think we’re going to build that back as we progress throughout 2025 because once you get through the first part of the year, there really aren’t a lot of large known vacates in the portfolio. And as we disclosed last night in the press release, our second largest remaining 2025 expiration, we’ve renewed, so we feel good about that. So we think we will end next year from an occupancy standpoint, probably somewhat comparable to where we’ll end 2024.
Ronald Kamdem
Great. That’s really interesting. So it’s sort of flattish next year? I’m just switching gears a little bit to the capital market, but now we had a couple of conversations about getting back on offense and start — especially as far as the cycle. Maybe could you just provide some updated thoughts what you’re seeing out there in terms of whether it’s distressed or not distressed opportunities? Any sort of cap rate commentary to get back on offense? Thanks.
Theodore Klinck
Sure, Ron. Look, we continue to look at everything that’s in the market. There’s just not a lot of wishlist quality assets that are out there. A couple of may be traded in the last quarter. But there’s not a lot. So I think the distress continues to build. I think there’s a lot of — as well as the bid-ask spread is still there. So the sellers that — even if they’re not distressed, a lot of sellers don’t want to sell in this environment.
So I think my optimism is we can get a couple of more cuts the next two quarters by the fed by the end of the year, next couple of months and then maybe into the first quarter of next year, capital markets are going to open back up. And there’s going to be a fair amount of assets that do come to market early next year.
But as of right now, there’s just not a lot out there. We continue to hang around the hoop and work our wishlist assets, but just not a lot out there right now.
Ronald Kamdem
Great. That’s it for me. Thanks so much.
Operator
Rob Stevenson, Janney.
Robert Stevenson
Good morning, guys. Ted, how much beyond this sort of $150 million of dispositions are you guys thinking about teeing up over the next, call it, six months? I mean, is this it for a while until you start to see some of these acquisition opportunities? Or you’re going to continue to be active regardless of acquisition opportunities, selling down some of the assets over the next six to nine months?
Theodore Klinck
Yeah. Hey, Rob. Look, I think we’re — if you look at our history, we have continuous asset recyclers. So we’re always [solar, polar] from the bottom and selling assets and repositioning and into higher quality stuff. I think you’re going to see us continue to do them. And then just a reminder that $150 million, I think Blaine asked the question. It does not include Pittsburgh.
So $150 million as other assets we have out in the market that we’re actively marketing. And yeah, most of them — what you’re going to see us sell is a lot like what we sold the last several years. I think it’s largely multi-tenant, some of our low larger assets that are more capital-intensive. So I think you’re going to continue to see us do that and hopefully rotate into higher quality assets once the capital markets are open back up.
Robert Stevenson
Okay. That’s helpful. And then, beyond the actual income-producing assets. Are you guys also out there looking for office development sites for the next cycle and how is pricing there? They’ve gone down materially, stayed relatively flat, or is that just been re-entitled for apartments or something else at this point? How would you characterize your demand, your desire for land as well as pricing?
Theodore Klinck
Yeah, well if you look at our land bank, I think we’ve done a great job over the last several years. Selling off older land that maybe had a higher and better use that was not office. We sold several parcels to multifamily developers over the last several years as well as we bought what we think is better BBD, our mixed-use type development land.
So when I look at our land bank today, it’s probably in the best shape it’s been a long time. And so we’re really not actively looking for any land right now. In fact, we just sold a small parcel this past quarter and we have a couple of other parcels that we’ll likely sell next year. So it’s hard to characterize it given we’re not out there making offers on land to buy.
But I do think there’s plenty of buyers out there for the right parcels. (multiple speakers) —
Brendan Maiorana
Yes, Rob, sorry, it’s Brendan. I’m just going to add to that a little bit. We in the SAP, we’ve got kind of 300 million plus of of land held for development between core and non-core. I think you should expect that number to go down over time. So that’s a that’s probably a little bit higher than what we would expect to carry.
So if anything, I think we’ll get net proceeds from land sales that will be helpful in terms of of in terms of capital coming in the door rather than looking to acquire additional land for development.
Robert Stevenson
Okay. Is there any of that contemplated in the fourth quarter guidance? Natalie infield gathering in Q4. Okay. All right. And I know nothing about Q4 and nothing in that one. Okay. And then you guys, fortunately only report one FFO number. Is there any impact to Q4 earnings from the hurricanes at this point for you guys?
Theodore Klinck
Yes, it’s a good question. It’s a week and there’s there’s probably a little bit that is in there that we would expect to incur in terms of some non-recoverable operating expense items. I wouldn’t say it’s a big needle mover.
But if you’re kind of looking for something at the mark, again, there’s there’s a modest impact there, but it’s not something that we felt like was significant and on and we would expect to recover most of those costs. But not all of them is appreciating this morning.
Operator
Michael Griffin, Citi.
Michael Griffin
Great. Thanks, Tom. I wanted to ask my first question just on the leasing pipeline and particularly in the weighted average lease terms. This quarter, they seem pretty strong. I know that can fluctuate around quarter to quarter and maybe at some largely impacted by some large leases that you’ve done.
But should we take this as kind of a expectation that there has been more confidence in real estate decision makers, signing leases for our people still kind of dragging their feet when it comes to committing to kind of rightsizing their office footprint?
Theodore Klinck
Yes, Michael, look, I do think the decision making has really slowed down the last couple of quarters. And I think that’s partially economy, but it’s also the return to work on. It gives us more mandates that are required in their teammates to come back to the office. I do think some comfort these over over disposed or shrink their offices.
We’ve seen several come back to us after we signed a lease with need more space. So but the decision making in general has slowed down. In terms of large the term, I think it has more to do with the build-out of their space and their TI.s. Again, we’re able to keep face rents on our lease economics today, face rents are still high. And in some cases climbing the TI.’s are as well.
And to get for the tenant and customer to get the build out, do they need they’ve got to commit to more term and we’re seeing the willingness to do that. So I think that’s had an impact on the Lincoln the term. That makes sense.
Michael Griffin
Great. That some that’s very helpful to add on. And then just maybe going back to kind of transaction opportunities. I know you said the bid-ask spreads are still why it and you haven’t found anything that’s in your wheelhouse from your criteria yet.
But when you’re underwriting transactions, you give us a sense of maybe the IRR over time current hurdles that you’re looking at, maybe relative to your cost of capital and then in terms of potential funding needs or have you seen an open this up in the debt markets in the capital markets? Would you use for equity funding? Just trying to get a sense of how you might structure perspective transactions.
Theodore Klinck
Yes. Maybe I’ll hit the sort of the way we look at the underwriting. Look, I mean, I think there’s a lot of levers to pull there and have it all depends. When we look, as you know, we bought coming out of the GFC last cycle. It was we bought a lot of opportunistic and value-add office, but we’re also buying Core and Core Plus. So it’s all risk adjusted for us.
We may need a double digit IRR on a value add deal. And if it’s a core asset with long, long lease term, great credit, it will be a little bit below that. So we’re all over the board. We’re looking for high-quality assets. We can get attractive risk-adjusted returns on, and that’s over over a longer period of time. Michael Brennan today on the funding of a brand that you’ve seen, the bond, the bond market’s been been there.
And I think you’ve seen good response from the bond market, so that capital certainly available. And then as Ted mentioned earlier, we’ve been successful in monetizing non-core asset sales and would would have those funds available to recycle into higher quality assets that have a better long-term growth path. So I think those would be sources of capital for us.
Michael Griffin
Great. Appreciate that color brand, and that’s it from a mix of the time.
Operator
Nick Thillman, Baird.
Nicholas Thillman
Hey, good morning, guys. Just wanted to get some color on kind of a larger users and requirements. We had heard in Atlanta in particular that there are some new to market customers really looking in more suburban markets like North Fulton, then Central Perimeter.
But just wondering about the trends you guys are kind of noticed that some of your other markets in particular, I think absolutely you’re seeing larger customers come back to the office or come back to the market.
Theodore Klinck
Right. Many of our markets, there are a lot of large users that are out there in the fall of 22 and then interest rates start to tick up fairly quickly. A lot of those went to the sidelines. They continue to reevaluate the return to office, but we’re seeing them. And we’re seeing both not only some of the in-migration, some of the inbound activity. We’re seeing it, as I mentioned on our prepared remarks in the development there, the outreach for potential development deals from very large user.
So again, no, no, it’s all anecdotal, right? We are starting to see more customers. We define large. I mean during COVID, we got to a point where defined largest 25,000 square feet or more, but certainly those those that sizes back, but even the 50s, hundreds to hundreds, you’re starting to see more activity.
Nicholas Thillman
That’s helpful, Tide. And then, Brendan, it sounds like repositioning plans for Symphony place or kind of do you have like a rough estimate of what the cost is going to be for that? And then as we look at same-store, I know you guys traditionally don’t move assets out of the pool, but are you planning on keeping that within the pool or not for 2025?
Brendan Maiorana
Yes. Hey, Nick, it’s Brendan. So on the high wood ties and plans there on that is and we have a pretty regular and robust what I would call pool of renovation dollars that go back into the portfolio on a normal basis, kind of every year on Symphony place kind of fits within that.
So we’ve been planning for this. I’m so I wouldn’t expect that you would see anything dramatically different in terms of capital spend associated with the highway de-icing plans there versus just kind of what you’ve seen us do over the past many years, and we’ve done that successfully in our headquarter building here at one 50 Fayetteville Street. We’ve done it yet. Assets on in Brentwood in Cool Springs recently in Nashville as well. So that spend will kind of be consistent with what we’ve done over long periods of time on.
And then with respect to same story as you correctly point out, and we’re not we don’t take assets that our office buildings that are going to remain office buildings out of our same-store pool. So that will be in there. We will expense all of the operating expenses associated with that building, and we’ll book expense all of the capital on leasing associated with that building home through the normal channels.
Nicholas Thillman
That’s it for me. Thank you.
Operator
Peter Abramowitz, Jefferies.
Peter Abramowitz
Yes. Thank you of just wondering if you could comment on any uplift in rents on the Vanderbilt lease as well as the other lease you called out in the press release and sort of how that impacted the leasing spreads in the quarter.
Brian Leary
Hey, Peter, Brian here. We’ve had a long relationship with Vanderbilt. They kind of renew in place as they have kind of every five years. And it’s a good economic deal, um, and there’s not much more to talk about the specifics on that, but we were happy with the net effective on that and low capital committed to it.
First, I’m wondering when you say they renew in place, there’s no uplift in rents on renewal kicks in next year.
Brendan Maiorana
Yes, Peter, it’s Brendan on. Yes, it’s just it’s just sort of a continuation of kind of a normal rent escalators that that we’ve had there. So we shouldn’t expect to see any any big needle movers there with respect to that renewal.
Peter Abramowitz
Okay. Got it. And then stepping back overall on on a higher effective rates and the better leasing spreads overall in the quarter, I guess, should we kind of take it overall as a sign of increasing pricing power? Or was there anything sort of more one-off? I know, I think, Brent, in the past, and it’s still been the case recently that you talked about physically kind of plus or minus 5% mark-to-market cash from of portfolio. So I’m just curious if we should take out this quarter’s results as a sign of that getting better going forward.
Brendan Maiorana
Yes, Peter, it’s Brandon. And I’ll start maybe lead to Brian add to it. I still think what we’ve talked about is kind of on a cash basis. I mean, mark to market plus or minus in a flattish, we think is still probably a good kind of guidepost. Obviously, in any given quarter, things are going to be volatile. So this quarter or was it was high at over 10% positive?
Yes, I think we were negative maybe modestly in the first couple of quarters of the year. So those things are going to bounce around a little bit. I still think it’s probably a pretty good guide to the kind of be flat to low single digit. Positive is probably a good gauge from a from a cash rent spread perspective. The only thing I would add also that Peter is again, we focus more on net effective rents versus the spreads just because we do every quarter a quarter in quarter out.
We do several as-is deals that really don’t require any capital. And in those cases, sometimes you do have a little bit of a rolldown in rents. But if we can get an attractive net effective rent, we’re okay doing those type of deals.
Peter Abramowitz
Thanks a lot more if I could of You called out the renewed interest in build-to-suits and other conversations is still early, but just wondering if you could comment on which specific market bears interest at it?
Theodore Klinck
Yes. Probably early to do that. What I will share and look forward, we’ve had more than a well thought out a handful type of conversations. one is the dividend would be a new market or might end up being a fee type thing. If it goes anywhere who knows all these are early, we’re just to our development teams just static that we’ve got stuff to work on, but it’s great to see.
The inbounds again has been quite some time, you know, has been three or four years since we’ve had the practice, but just receiving the call and getting the inquiry and the interest level is great from an in-migration standpoint. But it’s also great to see large users and some other their views on return to work and the importance of being in the office.
So again, these things are going to take a look long time. As I think we’ve talked about in the past of our development deals take two or three years to play out. But even just being at the table, I think is a is nice to say that’s all from me.
Operator
Dylan Burzinski, Green Street.
Dylan Burzinski
Hi, guys. Can just sort of on a continuing with the build to suit theme here. I mean, I know it’s still in the early stages, but sort of curious what sort of return hurdles or yield on cost hurdles you guys would need in order to progress with those build to suit opportunities?
Theodore Klinck
Yes, Bill. And look, the bar is high right now in development, very similar to what it is on acquisitions. So we’re going to look at our cost of capital. But really what’s what’s there was the big hurdle here is the rental rate necessarily. We’re not seeing costs come down. So without a doubt, the return on cost going to be higher, the the the financing costs are higher, even to go get alone there.
There’s build to suits out there that have had very difficult time even obtain financing. So that gets factored into the mix. And then the hard and soft costs are coming down either. So the bar is high, and I think customers are getting educated on that right now, but but it’s, you know, just just given the environment, the bar is pretty high from a yield perspective, which translates to an overly high rent.
Dylan Burzinski
And then maybe just touching on net effective rent growth prospects that you guys highlighted sort of having the highest net effective rent in leases signed in the quarter. But as you sort of look at the portfolio today, I know you’re approaching a high 80s occupancy. Obviously you’ll have a vacancy early next year, but you had alluded to recover and a lot of that occupancy and a lot of has a 2025 is sort of trying to get a sense for prospects for a continuation of a further net effective rent growth as you sort of approach that 90% portfolio level occupancy.
Theodore Klinck
Okay. Okay. I’ll maybe I’ll start and Brian in her her Brian can jump in. And look, I think net effective rents jump around. There’s still pressure on net effective rents from ITI. perspective. And then certainly free rent to I think, you know, our markets are still challenging without a doubt, right? You still have elevated market vacancy rates. So I think that’s going to continue for a while.
So I think, you know, I think if we can maintain net effective rents may be grown a little bit. I think we’d be happy with that. But I don’t I don’t think anybody should come along vision that there’s a lot of pricing power and most of our markets. I think I do think it’s submarket by submarket and BBD. by BBD.
So it depends on the mix of leases you do in a certain quarter, but the leasing market still challenging and it’s competitive and done. So we are maintaining net effective rents are sort of our goal and to groom room a little bit if we can.
Thanks, Ed. Appreciate it. Thank you.
Operator
There are no further questions in queue at this time. So as a final reminder, it’s star one to join the question here.
Theodore Klinck
Well, thanks, everybody. For joining our call today. We appreciate your interest in Highwoods, and we look forward to seeing everybody had maybe a daily next month. Have a great day.
That concludes today’s call. Thank you all for your participation. You may now disconnect your lines.