Highwoods: The Rent Is Real, the Cash Is Still on Layaway

Highwoods: The Rent Is Real, the Cash Is Still on Layaway

Highwoods Properties just told the market something rare for an office REIT in this cycle: demand is outrunning supply badly enough that the company delivered the second-highest second-generation net effective rents in its history, with GAAP rent growth of 29% and cash rent growth of 4% on 1.2 million square feet. The occupancy gains are real — up 130 basis points since June, lease rate through 90.1%. Ted Klinck's framing was blunt: “Demand for high quality office space continues to be strong while supply continues to shrink. A powerful combination.” — Ted Klinck, Chief Executive Officer · 2026-10-28

And the stock? Flat over 90 days, 15% below its July high of $34.40, still 47.6% under its 2016 peak. That divergence is the whole story of this report. The operating business is inflecting; the equity is not, because the thing that connects the two — cash flow per share — is still being withheld.

The gap between GAAP and cash is the entire thesis

Same-property cash NOI grew 0.2%. Same-property GAAP NOI grew 4.1%. That nine-tenths-of-a-point gap is not noise; it is free rent and straight-line rent accruing on leases that have been signed but are not yet paying. Brendan Maiorana put a number on it: full-year straight-line guidance is in the mid-$40 million range versus a normal low-to-mid $20 million. Nearly double the usual non-cash rent build.

Anytime GAAP is higher than cash, that is a very strong indicator that cash NOI growth is set to increase meaningfully in future periods. We expect that will be the case as we go forward as a number of these leases that are under free rent today, that free rent burns off, and then they start cash paying.

The free rent keyword topped Highwoods' own keyword ranking last quarter and it deserves to again — it is the mechanical link between today's record market rent prints and tomorrow's cash flow. Management also disclosed a signed-not-commenced backlog of roughly 800,000 square feet, with a lease-to-occupied spread of 310 basis points versus a historical norm of 200 or less. That backlog is the visible part of the burn-off.

Here is where the story gets less comfortable. Leasing CapEx is the recurring villain of this call series, and management's forecast has now slipped twice. In October 2025, Maiorana warned of “higher leasing capital in not only just next year, but in '27 as well” — Brendan Maiorana, Executive Vice President, Chief Financial Officer · 2025-10-29. By February 2026 he had softened it: “it's likely that 2026 spend is probably gonna be a little bit lower than '25.” — Brendan Maiorana, Executive Vice President and Chief Financial Officer · 2026-02-11 Nine months later, year-to-date leasing capital is north of $140 million against $145 million for all of 2025 — so 2026 will almost certainly come in higher, not lower. The normalization target has been pushed to $110–120 million, and the year of clean free cash flow has moved to 2028: “My expectation in terms of 2027 is it'll be an okay year from a cash flow perspective, but certainly not back to what we think of as normalized levels. We think that's more likely in 2028 and thereafter.” — Brendan Maiorana, Chief Financial Officer · 2026-10-28

The balance sheet is doing the work in the meantime. Leverage fell from 6.7x debt-to-EBITDA at the start of the year to 6.1x, with $280 million of cash and nothing drawn on a $750 million revolver. Two JV mortgages — a $56 million secured loan at Midtown East and a $370 million delayed draw at 23 Springs — repatriated roughly $99 million back to the parent. The only maturity before Q1 2028 is the $286 million March 2027 bond, callable at par from December 1. Notably, the company sold 1.056 million shares forward through its ATM at $32.24 for $33.5 million net and has not settled them — that is deliberate dry powder, not a funding need.

Why Highwoods is pivoting from buying to building

The most important change this quarter is not in the operating numbers. It is in capital allocation. Highwoods closed nearly $600 million of best-in-class acquisitions in 2025. In 2026 it has bought nothing. Klinck was direct about why: “our return requirements have probably gone up a little bit, but not materially... Last year, we successfully bought about $600 million of assets. We just haven't found acquisitions that made our risk-return requirement this year, which is again, one of the reasons we're sort of shifting towards development.” — Ted Klinck, Chief Executive Officer · 2026-10-28

That is a rate story wearing a real-estate costume. With the 10-year moving against them, sellers' return requirement expectations and buyers' cost of capital stopped intersecting — Klinck noted some assets have simply been pulled from the market, and dispositions are taking longer to close as buyers line up the capital stack. The development announcement bucket of $100–400 million in the outlook is the answer: build at a spread to acquisition cap rates rather than buy at them. In Dallas, market rents of $85–100 net already clear the development hurdle; Charlotte needs $90–95 gross against high-$70s achieved today, roughly a 20% gap.

There is a genuine tension in that arithmetic. Development NOI takes two to four years to arrive, and the company is asking shareholders to accept negative carry on $386 million of dispositions — already $150 million more than the original 2026 target, with another $100–250 million at a low-to-mid-9s cap rate still to close. Management argues the spread compensates; Maiorana's defense is essentially that they raised FFO guidance anyway, so near-term dilution is affordable.

On the rate sensitivity itself, the numbers are unforgiving. Interest coverage has fallen from 7.3x at its 2017 peak to 3.5x, and quarterly interest expense has roughly doubled over ten years to $42 million — against FFO of $111 million, down 1% year over year. Liabilities to assets sit at 59%. Klinck conceded the trade-off: “the headwinds of the higher interest rates are somewhat offset by tailwinds of just the fundamentals.” — Ted Klinck, Chief Executive Officer · 2026-10-28

What to watch, and one narrative worth flagging

Two quarters ago, analysts were asking whether Sun Belt office was more exposed to AI displacement. Klinck said then he wasn't seeing it. This quarter Brian Leary quietly inverted the frame, citing ULI's emerging-trends report: “the number seven trend that they highlighted is AI and the human premium” — Brian Leary, Chief Operating Officer · 2026-10-28 — the argument that AI raises the value of getting people under one roof. In a market where the global AI data center trade is now a 30-day decliner and the rising rate environment is the top-of-mind macro keyword, that is a clever and not entirely unpersuasive reframing. It also remains unproven.

The real test is arithmetic, not narrative. Watch three things: whether the 800,000 square feet of signed-not-commenced space converts without new frictional vacancy; whether fourth-quarter leasing CapEx actually moderates from the $140 million pace; and whether any of the $100–400 million of development actually gets announced at the promised spread over cap rates. If all three land, 2028 free cash flow is a genuine step-change and the flat stock is a mispricing. If the CapEx estimate slips a third time, the market's skepticism — and a 15% drawdown from the July high — will look earned rather than lazy.