Highwoods Properties (HIW) Q2 2024 Earnings Call Transcript
Highwoods Properties (NYSE: HIW)
Q2 2024 Earnings Call
Jul 24, 2024, 11:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning. Thank you for attending today's Highwoods Properties Q2 2024 earnings call. My name is Cole, and I'll be the moderator for today's call. [Operator instructions] I'd now like to pass it over to Hannah True.
Please go ahead.
Hannah True -- Manager, Finance and Coporate Strategy
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 are 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.
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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.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Thanks, Hannah, and good morning, everyone. We delivered excellent operating and financial performance in the second quarter. First, we reported FFO of $0.98 per share, representing 4% year-over-year growth, and we raised our full year FFO outlook. Since the beginning of the year, we've increased the midpoint of our FFO outlook by $0.03, even with selling $80 million of noncore properties and absorbing the impact of higher-than-expected interest rates, neither of which were included in our original outlook.
Further, our disciplined and ongoing efforts to further improve our high-quality BBD portfolio continue to pay off in the form of resilient cash flows. Second, we signed 909,000 square feet of second-gen leases, including over 350,000 square feet of new leases. This is the third consecutive quarter of strong new leasing volume. This is a testament to our Sunbelt markets, our BBD locations, our high-quality asset base and our talented team.
Our leasing pipeline continues to be robust, which makes us optimistic will sustain strong leasing volumes for the remainder of the year. Third, we signed seven first-gen leases encompassing 61,000 square feet across our development pipeline. Upon stabilization, we expect these projects will provide approximately $40 million of incremental NOI and be a significant growth driver for our cash flows. Finally, our balance sheet is in excellent shape with debt-to-EBITDA of 5.8 times at quarter-end.
Being a long-term landlord with a strong balance sheet is a clear differentiator in today's market as we are able to fund leasing capex and reinvest in our best-in-class properties. Our occupancy, which was steady at 88.5%, doesn't yet fully reflect the strong leasing over the past few quarters. We have a meaningful amount of space that has been leased but where occupancy hasn't yet commenced, primarily in Atlanta, Nashville, Richmond and Tampa, and will start to contribute NOI later this year and in 2025. I want to provide an update on the former Tivity building in Nashville.
As we mentioned at the beginning of this year, we modified a lease with a backfill customer for 110,000 square feet that currently leases 50,000 square feet in another Highwoods building. Since then, this customer has further reevaluated their long-term space needs. We are currently in discussions with our customer about what makes the most sense going forward for both Highwoods and for them. It's possible that we may agree to cancel their lease in exchange for recouping our investment.
Regardless of what happens, we have healthy prospect interest for this space and, in fact, have already signed 66,000 square feet of new leases in this building. We do not expect any potential lease cancellation to have a meaningful impact to our near or long-term financial outlook. Turning to development. Our $506 million pipeline is now 45% leased.
Activity is solid at GlenLake Three, our $94 million, 218,000 square foot development in Raleigh. We're now 34% leased and have healthy interest from additional prospects. At our $200 million 422,000 square foot Granite Park Six development in Dallas that we are developing with our 50-50 joint venture partner, Granite Properties, we signed a full floor user for 27,000 square feet to bring the lease rate to 26%. We still have seven quarters to go before pro forma stabilization at both GlenLake Three and Granite Park Six and remain confident in the long-term outlook for both developments.
Staying in Dallas, activity is study at our 642,000 square foot, $460 million 23 Springs project in Uptown that we're also developing in a 50-50 joint venture with Granite. The property is currently 56% leased and we have an LOI for another full floor user, with healthy interest from additional prospects. As a reminder, this project is scheduled for completion in the first quarter of 2025 and stabilization in the first quarter of 2028. Midtown East in Tampa, our 143,000 square foot, $83 million project we're developing in a 50-50 joint venture with Bromley in the Westshore BBD, continued to generate strong interest.
Midtown East is the only office project currently under construction in the entire market. We're 16% pre-leased two years before scheduled stabilization and have a pipeline of additional prospects. As mentioned earlier this year, we don't expect to announce any new development projects during the remainder of the year. New starts are very difficult for any developer to pencil given the current environment, which is benefiting our existing portfolio as large requirements are seeing dwindling options of quality space available across our footprint.
As we previously disclosed, we sold a little over $60 million of noncore assets early in the quarter to bring our year-to-date total to $80 million. We're prepping additional properties to bring to market, have included up to an additional $150 million of noncore dispositions in our outlook. While we don't have any acquisitions included in our outlook, we are having conversations with owners and lenders of wish list properties in our markets. While we're comfortable being patient, we do believe compelling investment opportunities will arise.
To be clear, our criteria for capital deployment is highly selective. Target acquisition opportunities must be well located in a solid BBD, have good bones, and be well-positioned to generate attractive risk-adjusted returns over the long term. In conclusion, we're confident about the long-term outlook for Highwoods. First, demand for our Sunbelt BBD portfolio continues to be strong.
which positions us to drive meaningful growth in occupancy and NOI following our long telegraphed trough in early 2025. Second, our $500 million development pipeline will come online over the next few years and significantly bolster our cash flow and earnings. Third, we've been successful monetizing noncore assets and believe we can continue to create additional dry powder, which will also further improve our portfolio and cash flow. Fourth, our balance sheet is in excellent shape and will enable us to capitalize on acquisition opportunities.
Fifth, even with higher interest rates, our underlying cash flows remain strong. This supports our attractive dividend and allows us to continue reinvesting in our portfolio. And finally, I want to thank my 350 Highwoods teammates who deliver for our customers and shareholders every day. It is their effort that has positioned us for success for many years to come.
Brian?
Brian M. Leary -- Executive Vice President, Chief Operating Officer
Thank you, Ted, and good morning, all. The leasing momentum we had at the start of the year continues. Our leasing teams are busy, and in the second quarter signed 106 deals for 909,000 square feet, including 352,000 square feet of new deals. We are resolute in prioritizing occupancy and we'll continue to lean on our strengths as a long-term owner while strengthening our long-term cash flows.
This is evidenced by our portfolio's occupancy outperformance in comparison to our BBDs, by almost 800 basis points. We're seeing solid demand at various price points across our portfolio. As demonstrated by the leasing volume in our development pipeline, the top of the market is doing well, but we continue to see the most demand for our well-located second-generation assets. This is because a large segment of customers and prospects prioritized a premier office experience with a well-capitalized landlord at rents that are more affordable than new construction.
To this end, over 70% of our leasing activity for the quarter was in suburban BBDs. Our belief continues to be that the talent within a building is the real trophy and the commute-worthy experience we're delivering is providing the lifestyle our customers prioritize to recruit, retain and return their talent to the office. Before we walk through the markets, it's worth noting that Virginia, North Carolina, Texas, Georgia and Florida, five of our core six states, came in one through five in CNBC's recent annual rankings of the best states for business. Our sixth day Tennessee was closed by in eighth.
While Elon Musk may dominate the headlines with his announced headquarter relocations to Texas, there are hundreds of others finding these aforementioned states as welcoming environments for their most valuable resource, talent. This is further highlighted by JLL, who noted Dallas' ascension to the third largest office using job market in the nation, recently surpassing Chicago, while Dallas' population is projected to pass the Windy City five years from now. Moving to our markets where Nashville, Raleigh, Atlanta and Richmond made up almost 80% of this quarter's total leasing volume. In Richmond, our team signed 112,000 square feet in the quarter, including 57,000 square feet of new deals, including a new corporate headquarters location for a Fortune 500 company.
We're seeing increasing interest from prospects in our Innsbrook BBD where our market-leading assets and sponsorship are clear differentiators. Nashville signed the most volume in the quarter with 271,000 square feet, including 157,000 square feet of new leases, the largest share of new leasing across our portfolio for the quarter. Our Nashville new leasing volume was bolstered by a large new-to-market customer. Cushman & Wakefield highlighted that the natural market posted positive net absorption for the fifth consecutive quarter.
68% of all leasing activity in the market was either expansions or new leases, and new to market requirements increased with 18 tenants looking for more than 850,000 square feet in the aggregate. Further, the most active Nashville submarkets in the quarter were Brentwood and Cool Springs, where our combined leasing volumes were up over 100% year over year. As a reminder, these two submarkets encompass 60% of our 5.1 million square foot Nashville portfolio. In Raleigh, our leasing team signed 176,000 square feet of second-gen leases in the quarter, plus 20,000 square feet of first-gen space at our GlenLake Three mixed-use development.
JLL reported aggregate space requirements in the market increased 70% year over year, and the number of prospects greater than 10,000 square feet increased by 23%. In conclusion, our leasing pipeline is healthy, and our high-quality portfolio is proving its resilience. The flight to quality includes a flight to quality buildings, a flight to quality experiences, and a flight to well-capitalized owners who are willing and able to invest in their portfolios. While facing the same headwinds as all office owners, we're benefiting from the long-term attractiveness of our Sunbelt BBDs and the elevation of a new commute-worthy bar of workplace experience, providing us across a variety of price points gives us a unique value proposition.
Brendan?
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Thanks, Brian. In the second quarter, we delivered net income of $62.9 million or $0.59 per share, and FFO of $105.9 million or $0.98 per share. During the quarter, the State of Tennessee modified the methodology for calculating franchise taxes, which lowers our annual franchise tax obligations and was applied retrospectively. As a result, we received $5.8 million of tax refunds related to prior years.
This nonrecurring refund is included in other income in our 2Q results and was partially offset by a $1 million nonrecurring charge recorded as a reduction to rental and other revenues that also relate to prior years. The net impact is a $4.8 million benefit from these nonrecurring items, $2.5 million of which were anticipated in our prior outlook. In other words, these nonrecurring items resulted in a net $0.02 of upside compared to our outlook from April. Our balance sheet remains in excellent shape.
At June 30, we had $27 million of available cash and nothing drawn on our $750 million revolving credit facility. Subsequent to quarter-end, our unconsolidated McKinney & Olive JV paid off at maturity a $134 million secured loan with an effective interest rate of 5.3%. This property is now unencumbered. Also, subsequent to quarter-end, our unconsolidated Granite Park Six JV paid down the $71 million balance on the construction loan with an interest rate of SOFR plus 394 basis points.
In connection with these paydowns, we and Granite each contributed $103 million to the respective joint ventures. These loan repayments will increase our near-term cash flow from operations and also likely be a future source of capital as we plan to obtain long-term financing for both properties at some point in the future when conditions in the secured market are more favorable. As Ted and Brian mentioned, we had a strong leasing quarter, especially new leasing volume. Our lease rate, which includes current occupied spaces plus leases signed but not yet commenced on vacant spaces is 280 basis points higher than our actual occupancy of 88.5%.
And this current lease rate assumes we end up canceling the 110,000 square foot signed but not yet commenced leased at the former Tivity building in Nashville that Ted mentioned. Typically, our lease rate ranges between 100 to 200 basis points above our actual occupancy rate. This current spread illustrates the strong demand we're capturing across our portfolio, which makes us optimistic for a future occupancy recovery. As we stated last quarter, if we continue to post strong leasing volumes, we believe our trough occupancy level early next year will be higher than our original expectations and our recovery will be faster.
Our strong second quarter leasing volume certainly supports this trend. As Ted mentioned, we've updated our 2024 FFO outlook to $3.54 to $3.62 per share, which implies a $0.045 increase at the midpoint compared to our prior outlook. As I mentioned, $0.02 of this increase is attributable to the additional unexpected upside from the nonrecurring items we recorded in 2Q, with the remaining $0.025 of upside, mostly attributable to better NOI. There are still several variables in our outlook, including projected property tax savings, which aren't assured yet.
Same-property cash NOI, which does not include the $5.8 million of prior tax refunds that were booked in other income, does include the $1 million nonrecurring charge that relates to prior years. Even with this previously unexpected charge, we still maintained our outlook for growth in same-property cash NOI of positive 0.5% to 2%. Our updated outlook, combined with the strong first half of the year results, implies lower quarterly FFO for the second half of the year. A few items to note.
First, we don't expect any significant nonrecurring items in the second half of the year. Second, the third quarter is typically our lowest from an operating margin perspective as utility costs tend to be highest over the summer months. Given the heat wave we've encountered so far this summer, we certainly expect lower margins in 3Q compared to the full year. Third, because GlenLake Three and Granite Park Six developments were completed in the third quarter last year, GAAP requires us to seize interest and expense capitalization on those projects in the third quarter of this year.
While this will be a temporary headwind to earnings, rising revenues from those projects will fall to the bottom line as occupancy grows. Finally, we have some long telegraphed known move-outs late in the third quarter and early in the fourth quarter, and therefore, we expect average occupancy will be lower in the second half. As mentioned earlier, we expect occupancy to trough in early 2025 and recover thereafter. To wrap up, we're very encouraged about the future for Highwoods.
The leasing activity across our Sunbelt BBD portfolio has been solid, which should drive future NOI growth. Plus, we have strong embedded growth potential within our development pipeline as those projects deliver and stabilize. Our balance sheet is in excellent shape, which will allow us to capitalize on future acquisition opportunities, and our cash flows continue to be resilient. Operator, we are now ready for questions.
Questions & Answers:
Operator
[Operator instructions] Our first question is from Camille Bonnel with Bank of America. Your line is now open.
Andrew Berger -- Bank of America Merrill Lynch -- Analyst
Hi. Good morning. This is Andrew Berger on for Camille. Just wanted to ask about expenses.
It seems rental expenses were a bit lower this quarter. Just curious if there was anything specific driving this.
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Andrew, it's Brendan. Yes, there was -- I mean, there's always a little bit of seasonality, but probably the biggest item that was unusual in the first quarter that did not occur in the second quarter is there was a -- it had no impact on NOI, but there was a tax refund or a tax payment that was due related to 2023 in a triple-net building. We recorded that as a gross-up in terms of revenue in the first quarter and then there was a corresponding expense that zeroed out to no NOI impact related to 2023. But that drove up operating expenses may be unusually higher in the first quarter.
That did not recur. And then, there was a little bit of savings. There's always a little bit of seasonality in operating expenses going from Q1 to Q2, and that, we would expect that to occur in Q3 and Q4 as well. But that unusual $3 million item was the biggest change that didn't recur Q1 to Q2.
Andrew Berger -- Bank of America Merrill Lynch -- Analyst
Got it. And maybe switching gears to dispositions. Just curious if the buyer pool has expanded at all, and any particular markets where you're sensing more interest?
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Andrew, it's Ted. Yes, look, we don't have -- as you know, we've closed about $80 million so far this year, $60 million of which was this past quarter, actually happened very early in the second quarter. So we're hearing exactly what you just said. We don't have anything else out in the market right now to have any data points ourselves.
But certainly in conversations with brokers, we're hearing, A, there's a lot of money on the sidelines, and I think people are starting to think that we're hitting closer to the bottom on the capital markets. So there are a larger amount of bidders that are looking at assets now and making offers.
Andrew Berger -- Bank of America Merrill Lynch -- Analyst
Got it. Thank you very much. Congrats on the quarter.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Thank you.
Operator
Our next question is from Georgi Dinkov with Mizuho. Your line is now open.
Georgi Dinkov -- Mizuho Securities -- Analyst
Hi. Thank you for taking my question. Can you talk about mark-to-market, and where do you see that trending over the next few quarters?
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Sure. Look, this is Ted. I think mark-to-market, I think it's pretty flat. And I wouldn't expect that to change over the next couple of quarters.
As you know, we're still in facing a challenging leasing environment, a lot of headwinds. So I would think it's going to be bouncing around roughly where we are from a mark-to-market perspective.
Georgi Dinkov -- Mizuho Securities -- Analyst
Great. Thank you so much.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Thank you.
Operator
Our next question is from Young Ku with Wells Fargo. Your line is now open.
Young Ku -- Wells Fargo Securities -- Analyst
Yes. Good morning out there. Just wanted to go back to your comment on the Tivity Bechtel lease. I'm not sure if that's going to be impacting the commencement time line, but any details would be helpful.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Yes, I don't think it's going to change a whole lot. As you know, they were going to be moving in -- in fact, in terms of rent, and Brendan can jump in here in a second. So we've got great prospects on that. As we called out building out Cool Springs V, but we've got a lot of prospects to backfill that.
And look, the reality with Landmark, it's a -- the activity we're seeing in that submarket is so good. When they came to us and said they continue to have challenges in their business and they're struggling and they're reevaluating their office needs, we just didn't think it made sense to saddle the customer the lease that clearly is not going to work for them long term. And then, just given the activity we're seeing on the space, we're trying to work out something with them right now that makes sense for both of us.
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Yes, Young, it's Brendan. Just maybe to just put it in terms of the context of expectations for this year and how we should think about that. We have assumed that -- we had assumed in our current outlook no revenue associated with the backfill user in that space throughout 2024. That also has been taken out of the occupancy numbers as well.
And I think, as I mentioned, it's also out of the lease rate. So even with all of that, I think we feel very good about the outlook. We still expect occupancy at year-end '24 to be in line with where we were previously, which excludes the backfill. And I wouldn't expect that there'd be a real meaningful impact, even in terms of near-term earnings impact.
So I think, ultimately, where we'll get to is we'll probably have a better long-term outlook for that building. I don't think there will be much impact this year or next year. And we think it's beneficial for our existing customer, we think it's beneficial for future customers, and for long term will be beneficial for us as well.
Young Ku -- Wells Fargo Securities -- Analyst
Got it. And then, just want to go into guidance a little bit. So it looks like the core expectation is up $0.025. But when we look at your assumptions, they really didn't change much.
So I was wondering if you can go -- if you can talk about the ins and outs.
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Yes, good question. So on same property, we didn't change those assumptions. We did take the $1 million charge related to prior years into same property. So that number, but for that, we probably would have raised the same property outlook.
The straight-line numbers, we didn't change, but we have worked with a number of users where we're providing a little bit of short-term kind of free rent in exchange for lease extensions. So that's had a little bit of a negative impact on the cash NOI. We've offset that with just better activity elsewhere throughout the same-store portfolio. So all of those things at the base level allowed us to kind of keep same-property outlook unchanged even though there were some headwinds within those numbers.
And then, everything else to us feels like it is trending in the right direction, even with the raise on FFO.
Young Ku -- Wells Fargo Securities -- Analyst
Got it. Thanks, Brendan.
Operator
We have a question from Michael Griffin with Citigroup. Your line is now open.
Michael Griffin -- Citi -- Analyst
Great. Thanks. First question was just on kind of the leasing environment and expectations there. It seems like particularly new leasing has been pretty solid this first half of the year.
Can you give us a sense, are these expansions, I mean, are tenants more willing to sign and commit to leases? And has the environment kind of improved at all as we look toward the back half of the year?
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Michael, it's Ted. I'll start, and if Brian wants to jump in. Look, as you saw, we've had our third straight very strong leasing quarter in a row. And I can tell you our leasing team, they're laser-focused on capturing every deal we can get.
And what's interesting is the summer slowdown really didn't happen this year with -- in most of our markets, maybe in a couple of them. But in general, our leasing folks are really busy. Our pipelines, as slow it's been in quite some time. I think I maybe mentioned last quarter that we are starting to see larger deals, and I'll define larger in full floor two-floor deals, for 25,000 to 50,000 feet.
We're seeing some of those get done as well. And look, I do think we're also benefiting and we continue to benefit from some of the distress in the market, some of the buildings that don't have capital to invest, we're gaining market share. So I do think there's a bifurcation there in the market. But in general, our activity is very good.
Our pipeline is full. I'm pretty optimistic that the second half of the year is going to continue to be pretty strong.
Brian M. Leary -- Executive Vice President, Chief Operating Officer
Michael, I might clip on this. Brian. The three years of kicking the can and kind of coming to consensus around return to work, we're seeing that kind of come to roost. We even, we forwarded internal email to a 185,000-person company who the CEO is like, look, we're better together, we're back this fall, I look forward to seeing you.
That's the short version. So I think I think those -- the bigger companies that have kind of delayed making those decisions can now have conviction around making decisions. I think we still are generally expanding more than contracting. The bigger ones are more rightsizing in general.
We're seeing that across, whether it's in our portfolio outside of the portfolio in the markets. But it does feel busy for sure.
Michael Griffin -- Citi -- Analyst
And Brian, to that, and have large space requirements picked up across your markets? Or is it still kind of that small- to medium-sized tenant that you're seeing mostly?
Brian M. Leary -- Executive Vice President, Chief Operating Officer
Great question. It's interesting, I have it kind of here in my notes when I talk about the market. It's interesting, I think inbounds -- kind of code-named inbounds has sort of been quiet with the run-up in interest rates where everyone was kind of waiting to see what happens. They have returned.
So the economic developers and the chambers of commerce is now have the kind of the code names back. What's interesting, they are multi-market and they're multi-markets within our markets. So we'll see the same code name show up in one city or the other. So that has definitely picked up, and some of those are larger, right? I mean, you're even seeing, not in our portfolio, but a new to market in Nashville, Oracle announced their headquarters, is relocating from Texas to Nashville, and then they went ahead and expanded and renewed kind of where they're at.
So the pipeline of new inbounds is showing up. And to your question about size, Nashville code name 500,000 square feet is probably the biggest one we've seen. To Ted's point, two floors, three floors. They're more in the radar now, which is good to see.
Michael Griffin -- Citi -- Analyst
Great. That's helpful. And then, just one more I'd be curious to get your thoughts, Ted, you mentioned in your prepared remarks that there are select acquisition opportunities that you're looking to see. I mean, when you're underwriting these prospects, are these high-quality buildings that might have poor capital structures where you could contribute equity or maybe assume the mortgage? And then, can you give us any sense on kind of what hurdle rates or IRRs you're underwriting to on potential acquisitions?
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Sure. So yes, look, on the acquisitions, you're starting to see a few things trade largely -- you need seller financing to get the higher quality and the larger deals done. So what we're looking at is it's sort of a combination of both, right? It's high-quality assets, assets that are in our submarkets that have good bones and we think you can get a very attractive risk-adjusted yield. Now, what is that yield? I think it varies based on the profile of the asset.
So a core building is going to underwrite to a lower required yield than a large value-add asset, right? They might be 80% leased today, going to 70%, or maybe even lower than that. So we're sort of all over the board, but certainly, they're double digits, Michael. But again, number of distressed deals is growing, and there's a lot of deals that are out there right now, but it's just hard to get them to figure out because the lenders are moving really slow. And then, the owners, in some cases, are trying to protect their equity if there is any left.
So everything we're looking at is it's not easy right now, but we're going to remain patient, and I think those opportunities will be there.
Michael Griffin -- Citi -- Analyst
Great. That's it for me. Thanks for the time.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Thanks, Michael.
Operator
Our next question is from Rob Stevenson with Janney. Your line is now open.
Rob Stevenson -- Analyst
Hi. Good morning, guys. Brendan, what's the magnitude of the projected property tax savings in the back half of the year? Trying to get a feel if this is up to $0.01 or more than that? And is that a onetime thing or is that expected to recur and 2025 and beyond given your comments about no significant nonrecurring items in the second half-year?
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Yes, Rob, it's about $0.01, could be maybe $0.01 of upside with, I would call it, a roughly about $0.01 of downside if none of that was realized. And the vast majority of that would be recurring, so related to this year, and would recur thereafter.
Rob Stevenson -- Analyst
OK. And then, how material is the additional interest expense on GlenLake and Granite Park that you can't capitalize? Trying to get a sense of the headwind there.
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Yes. So I'm going to try to walk through this with you and for your benefit and everybody else on the line. And if you've got follow-ups offline, I'm happy to take that. Because I want to put this in context because I know it's challenging a little bit to kind of model.
If you look at what we have spent to date on those two projects, it's about $150 million at our share. They are, in occupancy, they're about 20% commenced occupancy. So you've got 80% of the capital that is being capitalized from an interest expense standpoint. So that 80% of that $150 million is $120 million.
If you look at that and you just put a 5% capitalization rate on that that annualizes to about $6 million a year or about $1.5 million on a quarterly basis that we will stop capitalizing interest midway through the third quarter and then have no capitalization of that interest in the fourth quarter. In addition to that, you've got operating expenses that are capitalized on uncommenced occupancy at those -- at that -- at those two buildings. And that has about a $0.5 million impact when you think about that on 2Q compared to a 4Q run rate without any of that -- without any of those expenses capitalized. So what that means is it's about a $2 million impact on a quarterly basis.
But what happens is now we have very little NOI that's being generated out of those assets as it stands today. And we have no interest capitalization, at least as of kind of mid-third quarter. So as those buildings lease up, all of that falls to the bottom line. So there's significant upside relative to kind of the back half '24 run rate as those assets lease up.
So that's going to create a lot of growth potential. Now, there's execution and we need to get some additional leases done, but that creates a lot of upside. That is also a very similar dynamic to two buildings that we have that are vacant in our operating portfolio. So 2500 Century Center and Cool Springs V.
Both of those buildings are generating negative NOI this year in 2024. We haven't taken those buildings out of service, which means at -- and there's significant leasing at both of those assets. So they will generate positive NOI. So not only will we not have the negative drag next year, they will generate positive NOI.
So there's a lot of upside in those two assets as well. And that creates a little bit of volatility in our numbers because we don't take those buildings out of service, but it drives a lot of upside as they come online. And so, you're sort of seeing the confluence of kind of those two assets that are in service and the two development properties all hit kind of late this year, which we're taking that kind of headwind. But it also means there's a significant amount of upside as those properties come online.
The two operating assets will be online early in '25. And then, as we lease up GlenLake Three and Granite Park Six, that will drive a lot of growth later in '25 and into 2026.
Rob Stevenson -- Analyst
OK. That's extremely helpful. And then, the last one for me. Ted, how are you looking at these dispositions? Has the pricing for assets improved as we get closer to the rate cuts? Are these going to be pretty similar pricing to the year-to-date sales? How would you characterize that?
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Yes, Rob. Again, we don't have anything in the market right now. But what we're hearing is, again, there's more capital looking to come back. The debt markets, while they're still challenging, CMBS is coming back.
I think there's a hope that interest rate cut might be coming in September, and I think that's going to help. So all these things, hopefully, are going to be come Labor Day or the back half of the year going to enable more things to start trading. Obviously, smaller deals is what we've been selling. They're easier to get done than larger deals.
So certainly, I would expect pricing is going to get better is my view, just given the amount of capital that's out there, if interest rates come down, all those things should be good for asset pricing. Now, in terms of what we're going to sell, obviously, we sold some quasi-medical buildings in the first half of the year. So I would expect the yields on the dispositions going forward are going to be a little bit higher than what we have achieved earlier this year. But still, again, we're hopeful the price is going to improve for our next wave of assets.
Rob Stevenson -- Analyst
What are you going to use the proceeds for? I mean, is that just to fund the remaining on the development commitment or is that earmarked for something else? Because you guys don't have any near-term debt maturities.
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Yes, Rob. Yes, obviously, we've got a little bit of development spend to do. There's capital that's kind of, in general, I would say, available. I think we've found good uses of capital.
So if you just think about what we announced subsequent to quarter to quarter-end, right, we paid off a mortgage that we had coming due at a JV property with our partner. We paid down a relatively high interest rate construction loan. So there will be uses of that capital. And then, of course, that's replenishing the dry powder to then hopefully be able to reinvest into investment opportunities.
Rob Stevenson -- Analyst
OK. Thanks guys. Appreciate the time this morning.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Thanks, Rob.
Operator
Our next question is from Peter Abramowitz with Jefferies. Your line is now open.
Peter Abramowitz -- Jefferies -- Analyst
Thank you. Yes. Just wanted to take a step back. Brendan, you've made these comments around occupancy, I think, this quarter and last quarter, that your expectations around the recovery, once you've cleared those known move-outs, are probably higher than they were this time a year ago or when you started this year.
Just wondering if you could kind of dig into that a little bit. Wondering kind of what do you see as the long-term like real potential for your stabilized occupancy in the portfolio? You're hovering around 88% today and for the last couple of quarters. I think at peak before the pandemic was somewhere in that 93% range. Just wondering if you could comment around kind of long-term potential, where do you think you can really stabilize occupancy?
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Peter, thanks for the question. So I'm going to start and maybe give you some color as to why we're so encouraged in terms of the activity that we've seen and the potential, and then maybe I'll let Ted and Brian opine on where they see the stabilized levels. But if you go back to the beginning of the year, the portfolio was around 89% occupied and the lease rate was around 91%. So we were around 200 basis points higher on lease rate.
During that time, occupancy has come down a little bit, so we're down about 50 basis points. Yet at the same time, our lease rate has gone up to 91.3%. And if you think about in the beginning of the year, we also had within that lease rate the 110,000 square foot backfill user at Cool Springs V. That is now stripped out of the 91.3%.
So I think that gives you context in terms of just the good activity that we're seeing and how much net absorption we're driving on the operating portfolio. So that really makes us optimistic in terms of kind of that if we can sustain this level of leasing, that that's going to drive the recovery in occupancy kind of when we get to what we expect to be trough levels early in '25.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
And then, the only thing I would add on stabilized occupancy, look, I think you're right on pre-COVID we're in that 92% to 93% range. I don't see any reason why we can't get back to those levels. If you think about what we've done over the last several years, we've significantly improved our market selection, our portfolio quality, and I think the trends coming out of COVID, the flight to quality and the flight to capital. Never has it in my career, but more important, to be a landlord, a well-capitalized landlord.
So I think we're going to continue to gain market share at the expense of others. So look, it's going to take some time without a doubt, right? I mean, we've got to work through the next year or so. But I think we can get back to a stabilized in that 92% range, probably, in the next several years.
Peter Abramowitz -- Jefferies -- Analyst
That's helpful, Ted. Thank you, Brendan. And then, just one other one. Could you just comment any update and color on the role kind of distressed activities playing in the transaction market as you look at deals?
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Yes. In terms of the distressed transactions out there, is that your question, Peter?
Peter Abramowitz -- Jefferies -- Analyst
Correct. Yes.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Yes. Look, there's definitely distressed transactions -- that's taking a long time, right? It's just -- I think we're all -- we all get frustrated, but I continue to remind our team that, coming out of the GFC, it took four years or so coming out of the GFC for any distress of the highest quality buildings to come. And that's what we're looking for today. There's a fair amount of distress of the lower-quality assets today, and those are starting to trade a little bit and some price resets on those.
Those aren't the assets we want. The assets that we've got on our -- we've got a pretty well-defined vetted wish list of assets. Most of those are not distressed. A lot of them do -- the sellers do want to sell and clear it at some point, but it's just going to take some time.
So while there is a lot of distress out there, not as much for the assets we want, or if it is, it's just they're very difficult to get your hands on.
Peter Abramowitz -- Jefferies -- Analyst
That's all for me. Thank you.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Thank you.
Operator
Our next question is from Dylan Burzinski with Green Street. Your line is now open.
Dylan Burzinski -- Analyst
Hi, guys. Thanks for taking the question. Just sort of curious, I know you guys have been focused on prioritizing occupancy as you sort of work your way through some of the known move-outs. But I guess, just curious sort of what that means for net effective rents as we sort of think about the trajectory there.
I mean, it seems like base rents are still holding steady. But I guess from a concession point of view, have things started to stabilize there? Or are you continuing to see further pressure on that front?
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Dylan, it's Ted. I'll start, and if Brian wants to jump in. Look, you're still seeing -- I think it stabilized in some of our best BBDs, the Brentwood in Nashville, the South Park in Charlotte continue to be very strong markets for us. But in general, the general overall comment is there's still pressure on net effective rents.
And I think what we're seeing is exactly what you said. We're generally holding face rent steady. In some markets, we're actually growing face rents. But the TI pressure has not abated for the most part.
Free rent is still very common, typically a month or so per year of lease term. So it's still challenging on that front. The good thing is we're getting more term when we're spending more TI. So that is a trade-off.
And if we can get good credit, good term, we'll spend more on TI. But it's -- I don't think we're seeing any signs of it abating, other than select submarkets. I do think markets are becoming more bifurcated with respect to markets and submarkets. So you've got to really drill down.
That's the same thing on the vacancy as well. A lot of the market vacancy is concentrated in just a few buildings here and there. So we're actually not anticipating it to abate anytime soon either. I think we're still facing the same headwinds we faced.
Dylan Burzinski -- Analyst
Appreciate that. And then, going on -- going back to your comments on acquisitions. It doesn't sound like anything is imminent. But just curious sort of how you guys think about the potential acquisition environment versus the balance sheet.
And curious if you guys are willing to sort of lever up a little bit should acquisition opportunities arise further?
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Yes, I'll start, and if Brendan wants to jump in. Look, I think we're laser-focused on continuing to build our dry powder and get a few more dispositions out the door. Things don't happen in a linear fashion all the time, Peter. So we, as we've proven over the years, we've been able to flex our balance sheet if and when we need to.
But as you stated, really, there's nothing imminent from our standpoint. We're not afraid to do it if we need to. But right now, we're focused on the disposition side. And then, finding the right acquisition at the right price.
Again, our -- the nice thing is our underwriting team, they're getting a lot of practice right now. We're getting a fair amount of reps in. But nothing imminent at this point.
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Yes, Dylan, the only thing that I would add is I think we have a lot of arrows in the quiver with respect to kind of capital availability. And as Ted mentioned, we are focused on -- what I would say, over time, I think the bias is that leverage will move down rather than move up on a long-term basis. But as Ted said, that doesn't happen in a linear fashion.
Dylan Burzinski -- Analyst
Appreciate the comments. Thanks, guys.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Thank you.
Operator
We have a question from Michael Lewis with Truist. Your line is now open.
Michael R. Lewis -- Analyst
Thanks. Actually, I was going to ask that last question from kind of a different angle. And I was thinking about it, we had talked about this in the past as far as funding sources for acquisitions. Your stock is up almost 30% year-to-date now.
I was just wondering, it's still below NAV, significantly, I think, the consensus NAV. Would you consider issuing stock even below NAV now to fund an investment if it was accretive and if that made sense and maybe it solves the issue of -- or it reaches the goal of lowering your leverage as well?
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Michael, it's Brendan. We've had -- we think about all sort of sources of capital. I think what we've been very successful in terms of our investment program over the past several years has been monetizing noncore assets and recycling that capital into development and acquisitions. That has been accretive to our cash flow, has been largely balance sheet neutral, and has been a benefit in terms of overall portfolio quality.
So that model has worked well for us. In prior cycles and prior times, equity was a portion of that. So that's something that is certainly an option, but I think we've been very successful over the past five, six years of investing a lot of capital, doing it in a way that was balance sheet neutral, with just kind of using proceeds from noncore asset sales. So that kind of is, I would say, certainly first and foremost for us, but we'll think about other sources of capital if that makes sense as well.
Michael R. Lewis -- Analyst
OK. Great. And then, my second question is related to the two JV loan paydowns. I'm curious kind of what options were available or what you considered.
Is there any read-through to the refi market in terms of available capacity or proceeds or whether the pricing is prohibitively expensive? Or maybe how much of this is -- if you wait two, three, six months, maybe the Fed has multiple cuts coming up and you could do that refi more attractively later? Or even in one of your other answers you talked about, maybe there's no better use of capital, at least right now, in paying down those loans. So how did you kind of think about that and come around to paying those loans down rather than doing the refi now?
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Yes. Good questions. So each is a little bit different. So at M&O we -- as we disclosed last quarter, we've got a customer there that needed to expand, we couldn't accommodate them at M&O.
So they're moving down the street to 23 Springs. So the lender there, I think we -- was less willing to provide a higher loan to value or the V was a little bit lower the pending vacancy. We are very confident in terms of that backfill and wanted to get those backfill users that those strong prospects that we have inked, and therefore, be able to go back to the lending community and get more get more proceeds out of that one. So I think we want to kind of get that rent roll stabilized before reintroducing that to the mortgage market, and then get what we view as an attractive terms on a potential loan.
So that was the reason for sort of not doing a refi as it stands right now. So I would call that one a little bit more temporary. And then, I think at Granite Park Six, that was more opportunistic. Obviously, with where rates are in terms of SOFR and then the spread on that construction loan, that's higher.
Now, to be clear, we didn't pay that down. We just paid down the balance, but that loan is still outstanding. So we can still draw on that construction loan for future proceeds if we choose to do that. But given the capital that we have and that our partner has, that just made financial sense given the high interest rate on that one now.
And same kind of thing as we get that building stabilized, I think we will go to the mortgage market, and that will be a good source of proceeds for us and our partner.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
The only thing I would add is I think it's a testament to our -- the strength of our joint venture partner, Granite Properties. I mean, we were in lockstep and agreement on the strategy for both these assets, and they were able to step up and write a pretty significant check alongside us to effectuate these paydowns.
Michael R. Lewis -- Analyst
Good to have options. Thank you.
Operator
We have a question from Omotayo Okusanya with Deutsche Bank. Your line is now open.
Omotayo Okusanya -- Analyst
Yes. Good morning, everyone. Brendan, I was hoping you could go back to 2024 guidance. I guess, still trying to understand some of the overage that you talked about earlier on, again, taking out the tax refund situation, this kind of $0.02 increase on better NOI.
But again, none of your same-store numbers really changed. I know there's a kind of additional $1 million charge now that's in the numbers. But could you kind of walk us through exactly what that NOI increase at the end of the day is, especially if it's kind of coming from non-same-store NOI?
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Yes, Tayo. So just, it -- what I would say is the NOI increase, it is same-store. We guide to cash same-property NOI growth. I would say some of that benefit is -- there is some cash benefit overall, but that was largely offset by the $1 million charge, which was not in our prior outlook, and is flowing through same-store.
The remainder of the $0.025 of upside is probably more on the noncash side. I did mention, I think, in response to a previous question, we have done some lease extensions with some users that carried some proactive free rent into '24, which we didn't previously forecast. But those are good economic deals for us, which pushes those lease extensions out much into future years. So it's a little bit of a cash hit in '24 for future -- for benefit in future years.
So it's all in NOI, but there is a portion of it which is GAAP NOI and not cash NOI, which is what we guide to.
Omotayo Okusanya -- Analyst
Gotcha. OK, that's helpful. Thank you.
Operator
We have no additional questions at this time. So I'll pass the call back to the management team for any closing remarks.
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Well, thanks, everyone, for joining the call today, and thanks for your interest in Highwoods. If you have any follow-up questions, please feel free to reach out, and I look forward to seeing you soon. Thank you.
Duration: 0 minutes
Call participants:
Hannah True -- Manager, Finance and Coporate Strategy
Theodore J. Klinck -- President, Chief Executive Officer, and Director
Brian M. Leary -- Executive Vice President, Chief Operating Officer
Brendan Maiorana -- Executive Vice President, Chief Financial Officer
Andrew Berger -- Bank of America Merrill Lynch -- Analyst
Ted Klinck -- President, Chief Executive Officer, and Director
Georgi Dinkov -- Mizuho Securities -- Analyst
Young Ku -- Wells Fargo Securities -- Analyst
Michael Griffin -- Citi -- Analyst
Brian Leary -- Executive Vice President, Chief Operating Officer
Rob Stevenson -- Analyst
Peter Abramowitz -- Jefferies -- Analyst
Dylan Burzinski -- Analyst
Michael R. Lewis -- Analyst
Michael Lewis -- Analyst
Omotayo Okusanya -- Analyst
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Highwoods Properties (HIW) Q2 2024 Earnings Call Transcript was originally published by The Motley Fool