Brian Leary: Thanks, Rob, for the question. Yes, as you mentioned and as I said in the prepared remarks, for this past quarter, most of the activity for folks kind of leaning in our small and medium-sized bread and butter customers. They expanded versus contracted, 5:1 for the quarter. Just to give a little color into what we’re seeing already for this quarter, we’re off to a good start. We’re feeling very enthusiastic about how this quarter is going to come in based on everything that’s gone, either to lease or have agreed to terms. So my guide is we’re going to be fairly consistent and — from first to second quarter on that expansion contraction with more volume for the quarter. The bigger users, as we’ve kind of mentioned, they’re either delaying or streamlining and rightsizing their space.
And it’s — I really do think it’s maybe less from a work-from-home headwind from a — this is how we’re going to use space going forward. And again, as a little bit of talk in our book is that they’re all telling us that it matters. The workplace matters and that they’re leaning in to make it a differentiating factor with regard to their talent.
Rob Stevenson: And Ted, how are you and the Board thinking about unlocking value now given your comments that dispositions at the upper end of the range weren’t likely given the current environment? I’m thinking of this in the context of your stock price, which is recently dip below $20 for the first time since the global financial crisis, which seems to totally contradict how your business did in your ’23 guidance?
Ted Klinck: Yes. Look, obviously, we talk about that a lot. And I think it’s — all office REITs are sort of being tagged with the same issue. So look, I think our view is we’re going to keep our head down. We’re going to continue to operate. We can’t control what our stock price is doing right now in times like this. Obviously, we’re in a — the office business is in a tough spot perception is, and the perception may not necessarily be what we’re seeing on the ground. But any recession or economic slowdown you tend to see increasing vacancy, sublease space increases, quite the quality and so forth. So we’re experiencing today the same thing we experienced in 2000, 2008, and so forth. So we’re intently focused on just going out and execute.
We think, over the long term, there’s going to be great opportunities over time. And as I think coming out of GFC, that’s where we end up buying a lot of great office buildings. Some of the best buildings in our portfolio were just coming out of the GFC. So I think there’s going to be similar type opportunities this time around. We got to be patient. And while we’re being patient, we need to execute as best we can, both on the leasing side, on the disposition side, while creating some dry powder to go take advantage of these opportunities. So it’s really the same little stuff, but it’s our playbook.
Rob Stevenson: And then lastly, not to leave Brendan out. Brendan, is second quarter going to be the low FFO per share quarter in ’23, given all you know at this point?
Brendan Maiorana: Well, with the caveat that you put on the last part of that question, probably with all we know, I think that, that’s probably likely. It depends a little bit on — I would say, second and third quarters are probably the low for what we are expecting. So occupancy is probably likely to kind of bounce around where we are currently for the next couple of quarters, and then we expect it to rebound in the fourth quarter. So given we had activity that moved out in the beginning of March, we had the CDC that moved out kind of mid-January, those contributed in the first quarter, they will not contribute in the second and third quarters because those backfill users won’t be back in that space. And then we do expect that operating margins will be lower in the remainder of the year. So with all that, yes, that probably means second, third quarter would likely be below.
Operator: Next question from the line of Camille Bonnel with Bank of America.
Camille Bonnel: I know your opening remarks noted that the first quarter is typically lighter from a leasing perspective. But looking a bit further into the activity this quarter compared to historic averages, the majority of the slowdown seems to be related to renewals. So can you comment on how the slowdown compared to your expectations for retention? And any color on what tenants are saying as the reason to not renew for their lease? It would be much appreciated.
Brendan Maiorana: Camille, it’s Brendan. I’ll start, and then maybe pass that along to Brian and Ted for additional color. But I would say the low level of whether renewals or retention in the quarter was largely expected given we had the activity move-out that we talked about for a long time. So that’s 263,000 square feet. So that was a nonrenewal in the quarter. We had the CDC, which was 116,000 square feet. So combined, those two are 380,000 square feet of kind of known non-renewals. And then recall that we also proactively took back 77,000 square feet with a user in Raleigh to extend their remaining square footage over a long lease. And with that, we have substantially backfilled the 77,000 square feet that we took back. So all of those things combined reduced the amount of renewal leasing that we did. But that was all known. So it was very much in line with expectations.
Ted Klinck: So the only thing I would add is in any — again, any downturn, you see companies contract their space. You see companies consolidate operations if they have more than one office in a submarket. We’ve got companies going out of business. Obviously, flight to quality. And flight to quality, we talk about it a lot now, but any downturn, people are looking for a deal and they may want to upgrade their space. So we’re losing our retention ratios being impacted just by the overall economic environment and some of the — just what’s going on with the customers, whether, again, consolidation of offices, closing regional offices and so forth. So not too dissimilar to any other downturn. I guess, with the caveat that certainly hybrid work is one of the additional headwinds.
Camille Bonnel: And just to follow up on that point. I think you mentioned excluding those first quarter move-outs, you’re expecting retention for the rest of the year to remain around that 50%. So is there any change to this assumption for the back half of this year?
Brendan Maiorana: No, I think that’s very much in line with kind of our expectations. So you had no change to the outlook for the year. And I think you can see that generally in the outlook that we provided. We still expect year-end occupancy to be between 89% and 91%. I’d say we’re feeling maybe a little bit better about the business overall, given we did nudge up our same property NOI growth outlook. So all those things are very much in line with expectations. I’d say, net-net, we probably feel a little bit better sitting here in late April compared to when we provided that outlook in the beginning of February.
Camille Bonnel: And finally, I know you’ve commented on having the flexibility around timing to execute on the Pittsburgh disposal and the fact that the market could look very different when you do. Historically, you’ve also had a very good track record in exiting markets while growing FFO. So just stepping back, how do you think about Highwood’s ability to continue to deliver FFO growth in this tough market environment and the potential dilution from this sale?
Ted Klinck: Yes. Look, I think, as you said, we had 12 consecutive years of FFO growth, which has been — very few companies have done that. I do think it’s a tougher environment, right? There’s no question. We recognize it, and it’s going to be tougher to do that. So we’re going to obviously wait for Pittsburgh. We’re in no huge hurry to sell Pittsburgh. But certainly, when we do, just given capital market environment, we got the headwinds there. So there will be some FFO dilution. I do think, at the same time, our development pipeline is going to deliver over the next couple of years. And that’s helped us in the past. And I think it’s over $40 million of NOI when we stabilize that. So that’s going to help on the growth standpoint. I think that’s one of the benefits of Highwoods is having that development value creation platform that can deliver some solid NOI growth with the development deliveries.
Operator: Our next question is from the line of Michael Griffin with Citi.
Michael Griffin: As much as I love the office and actually was down in Atlanta this week, so we’ll have to stop by 2827 in Glenlake at some point. But on that day, my question was about State of Georgia. I noticed, I think there was a footnote in the looks like you’re going to be taking about 60% less space on that $290,000 and 1,800 century. Just curious how you’re thinking about backfilling that? Other tenant needs? Maybe it’s not — I think it’s a little bit of past bucket, but anything you’d add there would be great.
Ted Klinck: Sure. On specifically on the department of revenue — as you know, we put the note in the 10-Q. That asset is a noncore asset for us. So when we got the RFP less than 2 weeks ago, just given our conservatism and transparency, we wanted to add that because it is. It’s a — they’ve been in that building for a long time, over 20 years. And up until, again, a couple of weeks ago, we thought it is a good chance for renewal. So we’re looking at it right now. There’s a chance that we can keep them in that same building. There are other options in our portfolio that they may be interested in as well. So it’s early days on that, but it will be a significant downside if we keep them. Again, there’s an RFP out there, and we’re going to be competing for it.
So I’m hopeful, but we’ll see. It’s a good — it’s definitely going to be competitive. It’s a big, big requirement. So I’m sure a lot of folks will be chasing it. But — so anyway, that’s that one. And then the other big ones, is the other big 1 in one in Atlanta. Michael, and that’s, as you know, it’s 169,000 square feet expires in September of ’24. They moved out late last year across the street to Fips Plaza. So we now have a space vacant. They’re still paying rent on it. So — but we’re showing it. We had two large tours just in the last 30 or 45 days. And as we’ve mentioned in the past, they have subleased about 43,000 square feet. And who knows if we can keep those guys or not. It’s another competitive opportunity just given the size.
But — so it’s great space, great building, great location. So it’s — I think over time, we’re going to — we’ll be able to lease that up to a great customer going forward.
