Participants

Hannah True; Manager of Finance and Corporate Strategy; Highwoods Properties Inc

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, Investor Relations Contact; Highwoods Properties Inc

Andrew Berger; Analyst; Bank of America

Georgie Deinkov; Analyst; Mizuho

Young Ku; Analyst; Wells Fargo Securities

Michael Griffin; Analyst; Citigroup Inc

Robert Stevenson; Analyst; Janney Montgomery Scott LLC

Peter Abramowitz; Analyst; Jefferies

Dylan Burzinsk; Analyst; Green Street Advisors LLC

Michael Lewis; Analyst; Truist Securities

Omotayo Okusanya; Analyst; Deutsche Bank

Presentation

Operator

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

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, but you have not received yesterday's earning release or supplemental. Thgey're both available on the Investors section of our website at highwoods.com.
On today's call, I'll review will include non-GAAP measures such as FFO, NOI and EBITDA. The release and supplemental included 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.

Theodore Klinck

Thanks, Hannah. 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 beginning of the year, we've increased the midpoint of our FFO outlook by $0.03, even with so in $80 million of non-core properties and absorbing the impact of higher than expected interest rates, neither of which were included in our original outlook.
Further, our disciplined in our ongoing efforts to further improve for high quality BBD portfolio continue to pay off in the form of resilient cash flows. Second, we saw a 909,000 square feet of second gen-leases, including over 3,50,000 square-feet of new leases.
The third consecutive quarter of strong new leasing volume. This is a testament to our Sunbelt markets are BBD locations for high quality asset base and our talented team. Our leasing pipeline continues to be robust, which makes us optimistic for sustained 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 5.8x 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%, does not 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 has not 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 is possible 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 are now 34% leased and have healthy interest from additional prospects.
At our $200 million, 422,000 square foot Granite Park 6 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 leased rate to 26%.
We still have seven quarters to go before pro forma stabilization at both GlenLake Three and Granite Park 6 and remain confident in the long-term outlook for both developments. Staying in Dallas, activity is steady at our 642,000 square foot, $460 million, 2 3Springs project in Uptown that we are 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 are developing in a 50-50 joint venture with Bromley in the Westshore BBD, continues to generate strong interest.
Midtown East is the only office project currently under construction in the entire market. We are 16% pre-leased two years before scheduled stabilization and have a pipeline of additional prospects. As mentioned earlier this year, we do not 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 benefitting 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 non-core assets early in the quarter to bring our year-to-date total to $80 million. We are prepping additional properties to bring to market and have included up to an additional $150 million of non-core dispositions in our outlook. While we do not have any acquisitions included in our 2024 outlook, we are having conversations with owners and lenders of Wish List properties in our markets.
While we are comfortable being patient, we do believe compelling investments 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 are 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 have been successful monetizing non-core 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 Leary

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 will 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 are 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 prioritize 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 are delivering is providing the lifestyle our customers prioritize to recruit, retain and return their talent to the office.
Before I walk through the markets, it is worth noting that Virgina, North Carolina, Texas, Georgia and Florida, five or our core six states, came in one-through-five in CNBC’s recent annual rankings of the -- best states for business. Our sixth state, Tennessee, was close by in eighth. While Elon Musk may dominate the headlines with his announced HQ 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 its 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 are 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 Nashville market posted positive net absorption for the fifth consecutive quarter. 68% percent 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 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 are benefitting from the long-term attractiveness of our SunBelt BBDs and the elevation of a new commute-worthy bar of workplace experience. Providing this across a variety of price points gives us a unique value proposition. Brendan?

Brendan Maiorana

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 obligation 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 $1.0 million non-recurring charge recorded as a reduction to “rental and other revenues” that also relates to prior years.
The net impact is a $4.8 million benefit from these non-recurring items, $2.5 million of which were anticipated in our prior outlook. In other words, these non-recurring 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 a 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 leased 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 leased rate assumes we end up cancelling the 110,000 square foot signed-but-not-yet-commenced lease at the former Tivity building in Nashville that Ted mentioned.
Typically, our leased rate ranges between100 basis points to 200 basis points above our actual occupancy rate. This current spread illustrates the strong demand we are 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 have updated our 2024 FFO outlook to $3.54 to $3.62 per share, which implies a $0.045 increase at the mid-point compared our prior outlook. As I mentioned, $0.02 of this increase is attributable to the additional unexpected upside from the non-recurring 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 are not assured yet. Same property cash NOI, which does not include the $5.8 million of prior year tax refunds that were booked in other income, does include the $1.0 million non-recurring 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 2.0%. 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 do not expect any significant non-recurring 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 have encountered so far this summer, we certainly expect lower margins in 3Q compared to the full year. Third, because the GlenLake Three and Granite Park 6 developments were completed in the third quarter last year, GAAP requires us to cease 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 are 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.

Question and Answer Session

Operator

(Operator Instructions)Camille Bonnel, Bank of America. Your line is now open.

Andrew Berger

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 that.

Brendan Maiorana

Hey, Andrew, it's Brendan. Yeah, there is I mean, there's always a little bit of seasonality, but probably the biggest item that that was unusual in the first quarter that 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 know at a high 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 some savings. There's always a little bit of seasonality and 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

Got it. Thank you. And maybe switching gears to dispositions. Just curious if the buyer pool has expanded all and any particular markets where you're sensing more interest?

Theodore Klinck

Andrew, it's Ted. Yeah, we don't have as you know, we closed about $80 million so far, this year $60 million of which was this past quarter. Capex should actually happened very early in the second quarter. So we're here and exactly what you just said.
We don't have anything else out in the market right now to have any data points are self-serve only in conversations with brokers. We're hearing on 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 they're looking at assets to now and making offers

Andrew Berger

Got it. Thank you very much. Congrats on the quarter.

Operator

Thank you. Georgi Dinkov, Mizuho. your line is now open.

Georgie Deinkov

Hi, thank you for taking my question. Can you talk about mark to market? And what do you see that trending over the next few quarters?

Theodore Klinck

Sure. Look, this is Ted. I think, mark to market, I think it's pretty flat. And I would expect that the change over the next couple of quarters, as you know, that we're still in a facing a challenging leasing environment, a lot of headwinds. I would think it's going to be a bounce around roughly where we are from a mark-to-market perspective.

Georgie Deinkov

Great. Thank you so much.

Theodore Klinck

Thank you.

Operator

Young Ku, Wells Fargo. Your line is now open.

Young Ku

Good morning out there. Just wanted to go back to your comment on that activity backfill lease. I'm not sure if that's going to be impacting that commenced by the time line, but any details would be helpful.

Theodore Klinck

Yeah, I don't think it's going to change a whole lot. As you know, they are definitely moving, in fact, in terms of rent and Brian can jump in here in a second. So we've got great prospects on that as we call it, going up Cool Springs five. But we've got a lot of prospects to backfill that. If you look at is the reality with Landmark, it's a job we activity we're seeing in that submarket is so good when they came to us and you said they continue to have challenges in their business and they're struggling and re-evaluating their office needs.
We just didn't think it made sense to settle the customer, the lease that clearly is not going to work for them long term, just given the activity we're seeing on the space, we know we're trying to work out something with them right now that makes sense for both of us.

Brendan Maiorana

Yeah, Young, it's Brendan. Just to maybe to just put it in terms of the context of expectations for this year and how we should think about that on 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 leased rate. So even with all of that, I think we feel very good about the outlook. We still expect our occupancy I see at year end '24 to be in line with where we were previously, which excludes the backfill. And I wouldn't expect that there be a real meaningful impact on 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 I think that will be much impact of this year or next year. We think it's beneficial for us 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

Got it. Thanks, Brendan. And then just I want to go into guidance a little bit. So it looks like the core expectation and up $0.025 when we look at your assumption that 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

Yeah, good question off. So on same property, we didn't change those assumptions. We did take the million dollar charge related to prior years into same property on, 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 free rent in exchange for lease extensions.
So that's had a little bit of a negative impact on the cash [analy]. We've offset that was just better activity elsewhere throughout the same-store portfolio. So all of those things are at the base level allowed us to kind of keep same-property outlook unchanged, even though there were some as some headwinds within those numbers. And then everything else to us feels like it is on trending in the right direction, even with the with the raise on FFO.

Young Ku

Got it. Thanks, Brendan.

Operator

Michael Griffin, Citigroup. Your line is now open.

Michael Griffin

Great. Thanks. First question was just on how 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 a sense are these expansions?
I mean, our tenants are more willing to sign and commit to lease it and the environment kind of an improved at all. As we look toward back half of the year.

Theodore Klinck

Hi Michael, it's Ted, I'll start and Brian wants to jump in. As you saw, we've had our service straight very strong leasing quarter in a row. And I can tell you our leasing teams are laser focused on capturing every deal we can get.
And what's interesting is a summer slowdown really didn't happen this year with most of our markets, maybe in a couple of them. But in general are leasing folks are really busy our pipelines as full as it's been in quite some time. I think I maybe I mentioned last quarter that we are starting to see larger deals and I'll define larger and a full floor to floor deals or 25,000 to 50,000 feet.
We're seeing some of those get done as well. So you know, and I look, I do think we're also benefiting and we continue to benefit from some of the distress in the market. Some. We have buildings that don't have capital to invest where we're gaining market share. So I do think there's a bifurcation there in the market. So but in general in our activity is very good.
Our pipeline's full. I'm pretty optimistic that the second half of the year is going to continue to be pretty strong.

Brian Leary

Hi Michael, it's Brian, the three years of kicking the can and just kind of consensus around return to work on. We're seeing that kind of come to roost. And we even were forwarded internal e-mail to 185,000 person company with the studios like look, we're better together as far forward to seeing you. That's the short version.
So I think and does 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. And 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

And Brian to that and have large space requirements picked up across your markets? Or is it still kind of that small to medium-size size tenant that you are seeing?

Brian Leary

Great, question. And it's interesting to have it kind of hear. And when I talk about the market, you know, it's interesting, some inbounds kind of a code name in balance and sort of been quiet with the run-up in interest rates or 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 a code names back. What's interesting there, multi market, and they're multi-markets within our markets. So we'll see the same code name show up in one city, the other so that that has definitely picked up.
And some of those are our larger, right. I mean, you're even seeing not in our portfolio, but a huge market. And National Oracle announced their headquarters is relocating from Texas to national, and then they went ahead and expanded and renewed kind of where they're at. So with a pipeline of new within bounds is showing up.
And do you have a question about size? Nashville, codename 500,000 square feet is probably the biggest one. We've seen much head-point [2.4, 3.4] They're more on the radar now, which is good to see.

Michael Griffin

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 structure 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, your underwriting to on potential acquisitions?

Theodore Klinck

Sure. So yeah, look on the acquisitions, you're starting to see a few things trade largely, you need seller financing to get to get the higher quality and the larger deals done. So what we're looking at is it sort of combination of both right is high-quality assets, assets that are in our submarkets that have good bones, but we think you can get a very attractive risk-adjusted yields.
And what is that yield? I think it varies based on the profile of the assets. So in our core building is going to underwrite to a lower our required yield and a large value add asset, right? That might be 80% leased today go into 70% or and maybe even lower than that. So we're sort of all over the board, but certainly they're double digits.
Michael and down, but again noted the number of distressed deals. It's 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 to the lenders are moving really slow. And then the owners, in some cases trying to protect their equity if there is any less.
So everything we're looking at is that it's now not easy right now, but that we're going to remain patient. And I think there's opportunities will be there.

Michael Griffin

Great. That's it for me, thanks for the time.

Theodore Klinck

Thanks, Michael.

Operator

Rob Stevenson, Janney. Your line is now open.

Robert Stevenson

Hi, good morning, guys. Brian, what's the magnitude of the projected property tax savings the back half of the year, trying to get a feel if this is up to a penny or more than that, it is that a one-time thing or is that expected to recur in 2025 and beyond? Given your comments about no significant nonrecurring items in the second half year?

Brian Leary

Yeah, Rob, it's about a penny could be maybe a penny and a half of upside with that with I would call it a roughly about a penny of downside. If none of that was it was realized and the vast majority of that would be recurring. So related to related to this year and would recur thereafter.

Robert Stevenson

Okay. And then how material is the additional interest expense on cloud-like and Granite Park? You can't capitalize trying to get a sense of the headwind there.

Brian Leary

Yeah, it's so I'm going to trial 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. So 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 an occupancy there, about 20% commenced occupancy. So you got the 80% of the capital that is being, capitalized from an interest expense standpoint.
So that 80% of that [$150 million] at $120 million. If you look at that and you just put a 5% capitalization rate on that on that annualizes to about $6 million a year or about $1.5 on a quarterly basis that we will stop capitalizing interest midway through the third quarter.
And I have no capitalization of that interest in the fourth quarter. In addition to that, you've got operating expenses that are capitalized on commenced occupancy at those two buildings, and that has about $0.5 million impact from 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 $2 million impact on a quarterly basis. But what happens is now we have very little at Ally that's being generated out of those assets as it stands today. By 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 of '24 run rate as those assets lease up. So that's going to create a lot of growth potential. So 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 that are on vacant in our operating portfolio. So 2500 Century Center and Cool Springs, five. Both of those buildings are generating negative NOI this year or 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 a 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.

Robert Stevenson

Okay, that's extremely helpful. Thank you for that detail. Then last one for me. Ted, how are you looking at these dispositions I think is a pricing for assets improved as we get closer to the rate cuts. These going to be pretty similar pricing to the year to date sales. How would you characterize that?

Theodore Klinck

Yeah, 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 just coming back, I think there's a hope that interest rate cut might become and in September, and I think that's going to help. So all these things, hopefully, you're going to be come Labor Day or the back half of the year going to enable more things to start trading.
I'm obviously smaller deals is what we've been selling. They're easier to get done the larger deals. But 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 clauses on medical buildings of 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 had had achieved earlier this year. But yeah, but still again, we're hopeful the price is going to improve for our next wave of assets.

Robert Stevenson

What are you going to use the proceeds for amid such as to fund the remaining on the development commitments? Or is that earmarked for something else? Because you guys don't have any near-term debt maturities?

Brendan Maiorana

Yeah, Rob. Obviously we've got a little bit of development spend to do their 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 pay down of a relatively high interest rate construction loan. So there will be uses of that capital amount. Of course, that's replenishing the dry powder to then hopefully be able to reinvest into investment opportunities.

Robert Stevenson

Okay, thanks, guys. Appreciate your time this morning.

Theodore Klinck

Thanks, Rob.

Operator

Peter Abramowitz, Jefferies. Your line is now open.

Peter Abramowitz

Thank you. Yes. Just wanted to take a step back Bren, you've made these comments around occupancy. I think this quarter and last quarter that your expectations around the recovery, once you clear those known move outs are probably higher than they were at this time a year ago, or what have you started this year?
I was just wondering if you kind of dig into that a little bit on the right, kind of what do you see is the long term like real potential for stabilized occupancy in the portfolio hovering around 80% today? And for the last couple of quarters, I think at peak before the pandemic was somewhere in that 93% range. Can you comment around kind of long-term potential. Where do you think you can really stabilized occupancy?

Brendan Maiorana

Hi, 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 that potential. And then maybe I'll let ted, Brian opine on where they see that stabilized levels.
But if you go back to the beginning of the year, the portfolio was around 89% occupied and leased 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.
At the same time, our leased rate has gone up to 91.3. And if you think about in the beginning of the year, we also had within that leased rate, the 110,000 square foot backfill user at close five that is now stripped out of the 91.3.
So I think that gives you some context in terms of just the good activity that we're seeing and how much net absorption and 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.
I'm kind of when we get to what we expect to be trough levels early in '25.

Theodore Klinck

And then the only thing I would add on stabilized occupancy. Look, I think you're right on we know pre-COVID, where in that 92 to 93 range, I don't see any reason why we can't get back to those levels.
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 in the flight to capital never in my career, but more important to be the way toward a well-capitalized landlord. So I think we're going to continue to gain market share.
The expense of others. So I look at do we go 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

That's helpful to. Thank you. And thank you. And then just one other on could you just comment any update and color on the role of distressed activities playing in the transaction market? As you look at deals?

Theodore Klinck

Yes, in terms of the distressed transactions out there, that your question? Peter?

Peter Abramowitz

Correct. Yeah.

Theodore Klinck

Yeah, look, there's definitely distressed transactions out there. There'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's 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. We've got owner, we've got a pretty well defined and vetted wish list of assets.
Not most of those are not distressed. A lot of them do the sellers do want to sell and cleared 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 it's just they're very difficult to get your hands on.

Michael Griffin

That's all for me. Thank you.

Operator

Thank you.
Dylan Robert Burzinsk, Green Street. Your line is now open.

Dylan Burzinsk

Hi guys, thanks for taking the question, just sort of curious, I know you guys are focused on prioritizing occupancy as you sort of work your way through some of that got moved out of, I guess just curious sort of what that means for net effective rents as they sort of think about projectory there?
I mean, it seems like face still holding steady, but I guess and I think from the concessions point of view, as things started to stabilize that there, are you continuing to see further pressure on that front?

Theodore Klinck

Hey, Dylan, it's Ted. I'll start and Brian wants to jump in. Look, you're still see and I think it's stabilized and some of our best BBD days.
The Brentwood in Nashville, the South Park in Charlotte continue to be a 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 were generally holding face rent steady in some markets.
We're actually to grow and face rents for the TI pressure has not abated. For the most part. Free rent is still a very common. You are 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 get good credit, good term will spend more on TI. But it's I don't think we're seeing any signs of abating other than select submarkets. I do, markets are becoming more bifurcated with respect to markets and submarkets, you've got to really drill down.
That's the same thing on the vacancy as well. A lot of the market vacancies concentrated in just a few buildings here in there. We're actually not anticipating it to abate anytime soon either. I think we're still facing the same headwinds we faced.

Dylan Burzinsk

Appreciate that. And then going on going back to your comments on acquisitions. Doesn't sound like anything is imminent, but just curious how you guys think about the potential acquisition environment versus the balance sheet?
And just curious if you guys are willing to sort of lever up a little bit, it should at acquisition opportunities arise or there they are starting?

Theodore Klinck

I will start with it, and Brendan will jump in. And look, I think we're laser focused on continuing to build our dry powder and get a few more dispositions out the door that things don't happen in a linear fashion all the time here.
So we've 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 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 are a nice thing is our underwriting team. They're getting a lot of practice right now. We're getting a fair our reps in, but you know, but nothing imminent at this point.

Brendan Maiorana

Yeah, 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. But 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, it doesn't happen in a linear fashion.

Dylan Burzinsk

Appreciate the comments. Thanks, guys.

Brendan Maiorana

Thank you.

Operator

Michael Lewis, Truist. Your line is now open.

Michael Lewis

Actually, I was going to ask 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's up almost 30% year to date. Now. I was just wondering, you know, it's still below NAV significantly.
(Inaudible) Would you consider issuing stock even below any, out of fund and investment if it was accretive and it made sense and maybe it solved the issue of reach the goal of lowering your leverage as well?

Brendan Maiorana

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 non-core 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 in prior times, equity was a portion of that. So that's something that 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 non-core asset sale.
So that's 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 Lewis

Okay. And then my second question is related to the two JV loan paydowns from, I'm curious, kind of what options were available or what you consider it. 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 to you 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 one of your other answers you talked about maybe there's no better use of capital at least right at about a come around to paying those loans are down rather than doing the refinancing now?

Brendan Maiorana

Yeah. Good questions on. So each is a little bit different. So at M&O, we yes, as we disclosed last quarter, we've got a customer there that needed to expand. We couldn't accommodate them at the 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 given the pending vacancy. We are very confident in terms of that backfill and wanted to get those backfill users that on those strong prospects that we have Inc.
And therefore be able to go back to the lending community and get more loan to get more proceeds out of that one. So I think we want to kind of get that rent roll stabilize 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 right season first 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 6, that was more opportunistic, obviously, with where rates are in terms of so for and then the spread on that construction loan that's higher that to be clear, we didn't pay that down.
We just pay down the bank wants, but that loan is still outstanding. So we can still draw on that construction loan for future and 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 out and the 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 Klinck

And the only thing I would add is I think it's a testament to our the strength of our joint venture partner granted properties. And then they we are in lockstep an agreement on the strategy for both these assets and they were able to step up.
And right now, significant check alongside us to effectuate these paydowns.

Michael Lewis

Good to have options. Thank you.

Operator

Omotayo Okusanya, Deutsche Bank. Your line is now open.

Omotayo Okusanya

Hi, good morning everyone. Brendan, I was hoping you could go back to 2024 guidance. I guess I'm still trying to understand some of the overage that you talked about earlier on again, taking out the tax refund situation, this kind of a $0.02 increase on better NOI.
But again, none of your same-store numbers would change. I know that that's an 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 date is assisting? It's kind of coming from non-same store NOI?

Brendan Maiorana

Yeah, Tayo. So just, um, it is 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 $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 non-cash side.
I did mention, I think in response to a previous question, and 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 in the future years.
So it's a little bit of a cash hit in '24 for future bet for benefit in future years. So it's all in NOI, but there's a portion of it, which is GAAP NOI and not cash NOI, just we have gone to.

Omotayo Okusanya

Got you. Okay. That's helpful. Thank you.

Operator

No additional questions at this time. So I'll pass the call back to the management team for any closing remarks.

Theodore Klinck

Well, thanks, everyone, for joining the call today, and thanks for your interest in Highwoods. You have any follow-up questions, please feel free to reach out, and I look forward to seeing you soon.