Highwoods Properties (HIW) Q4 2021 Earnings Call Transcript

Highwoods Properties (HIW -1.16%)
Q4 2021 Earnings Call
Feb 09, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Highwoods Properties earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator instructions] As a reminder, this conference is being recorded Wednesday, February 9, 2022.

It is now my pleasure to turn the conference over to Hannah True. Please go ahead, Ms. True.

Hannah True -- Investor Relations

Thank you, operator, and good morning, everyone. My name is Hannah True, and I work with Brendan on the finance and investor relations team here at Highwoods. Participating on the call this morning are Ted Klinck, our chief executive officer; Brian Leary, our chief operating officer; and Brendan Maiorana, our chief financial officer. For your convenience, today's prepared remarks have been posted on the Web.

If you have not received yesterday's earnings release or supplemental, they're both available on the Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI, and EBATDAre. 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, including the ongoing adverse effect of the COVID-19 pandemic on our financial condition and operating results.

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 now turn the call over to Ted.

Ted Klinck -- President, Chief Executive Officer, and Director

Thanks, Hannah, and good morning, everyone. I'd like to start off by welcoming Hannah to our call today. It's great to have you with us. Our fourth quarter was representative of our execution throughout all of 2021 as we delivered strong financial results, solid leasing metrics, and strengthening cash flows, all while improving the quality, the resiliency of our portfolio, protecting our fortress balance sheet, and laying the groundwork for additional long-term growth.

Are simple and straightforward investment strategy is to generate attractive and sustainable returns over the long term by developing, acquiring, and owning a portfolio of high quality, differentiated office buildings in the best business districts, which we call BBDs. A core component of this strategy is to continuously strengthen the financial and operational performance, resiliency, and long-term growth prospects of our portfolio, and recycle out of properties that no longer meet our criteria. To this end, 2021, we acquired 800 million of high quality office buildings in Raleigh and Charlotte, completed 350 million of 92% leased office development, acquired approximately 100 million of land for future development in three BBDs, and sold 385 million of non-core properties. In addition, since our last call, we've announced 174 million of development that has a combined 36% pre-released even before putting the first shovel in the ground.

Since the beginning of 2019, we have acquired 3.1 million square feet of best-in-class office assets for a total investment of 1.3 billion, delivered 1.4 million square feet of highly leased office development for a total investment of nearly 600 million, and sold 6.7 million square feet of non-core properties for $1 billion. Because of these continuous and meaningful improvements, our portfolio is even more resilient and better poised for long-term growth. Plus our cash flows have continued to strengthen, as evidenced by 15% higher average in-place office rents and a meaningful reduction in our capex spend over these three years. During the same period, we've grown core FFO 9% and our dividend, 8% while maintaining a strong balance sheet and investing in the building blocks for additional long-term growth.

Turning to our results. We delivered FFO of $1.06 per share in the fourth quarter, which includes $0.09 of land sale gains. Even when we exclude these land sale gains, our full year FFO was $3.77 per share, $0.01 above the high end of our revised outlook in October and $0.19 above the midpoint of our original outlook last February. In addition to FFO, our operations were also healthy.

Same-property cash NOI growth was solid at plus 3.2% for the quarter and plus 5.5% for the year. We leased 884,000 square feet of second-gen space, including 284,000 square feet of new leases and 47,000 square feet of net expansions. Rent spreads were a positive 3.2% and on a cash basis and plus 11.6% on a GAAP basis. We also signed 158,000 square feet of first gen leases since our last call.

Solid leasing activity helped drive year-end occupancy up to 91.2%. Similar to last quarter, utilization across our portfolio hovers around 40%. We anticipate more customers returning to the office later in the first quarter and during the spring months. Utilization tends to be higher in our suburban buildings and among smaller customers.

Despite overall utilization continuing to be significantly below pre-pandemic levels, we are encouraged by the strong customer and prospect interest we're seeing across our portfolio, which translate into healthy leasing in the fourth quarter. Turning to investments. In the quarter, we sold 1 million square feet of non-core assets for $191 million that were a combined 77.5% occupied. These sales helped bring our debt-to-EBITDA ratio down to 5.4 times.

We have sold over 350 million of non-core properties since the middle of last year, with another 150 million to 200 million to go to return our balance sheet to pre-PAC acquisition metrics. On the acquisition front, competition for high quality properties in our markets, BBD, has continued to increase since the beginning of the pandemic. Institutional investors, both foreign and domestic, recognize the excellent long-term value of assets located in the best submarkets across our footprint. We will continue to be disciplined with our capital allocation as we seek to acquire office assets that would further strengthen our performance, resiliency, and long-term growth prospects.

Are $283 million development pipeline is 51%, pre-leased. Leasing was healthy for are completed, but not yet stabilized developments. As you may remember, we started both Virginia Springs II in Midtown West, fully speck in 2019. At our Virginia Springs II project in Nashville's Brentwood BBD, we're now 90% leased and have healthy interest in the balance of the space.

At Midtown West in Tampa, our 150,000 square foot $71 million property is 65% leased, and we have solid interest from additional prospects. During the quarter, we announced the 218,000 square foot $95 million GlenLake III office and the medi retail project in Raleigh is currently 15% pre-leased. We have just broken ground on this property, which will be LEED and Fitwel certified. We have 732,000 square feet of in-service product in GlenLake that are a combined 97% occupied.

GlenLake III, which is scheduled to be completed in late 2023 and stabilized in early 2026, will provide growth opportunities for existing customers and new users. After year end, we announced 135,000 square foot, 2827 Peachtree office development in a 50-50 joint venture with Brand Properties. This $79 million boutique office development has a healthy mix of onsite and nearby amenities, which have helped drive strong activity. The development is already 62% released and talks with prospects continue.

Our land bank has never been more attractive. It can support 2.3 billion of future office and another almost 2 billion of adjacent mixed-use development via new apartments, shops, restaurants, and hotels. Now to our 2022 FFO outlook of $3.76 to $3.92 per share. We assume utilization of our portfolio will gradually increase throughout the rest of the year.

At the midpoint of our per share outlook, we project same-property operating expenses will be $0.10 higher than last year while parking revenues will improve by only $0.01. As we have long foreshadowed, as usage increases, opex will recover faster than parking revenues. And this is incorporated in our 0 to 2% same-property cash NOI growth outlook for 2022. As previously stated, we plan to sell 100 million to -- 150 million to 200 million of non-core assets to return our balance sheet metrics to pre-PAC acquisition levels.

We currently project the dilutive impact of these dispositions to be $0.04 to $0.08 per share. In addition, our outlook includes up to an additional $200 million of potential dispositions. The effect of which is not assumed in our 2022 FFO outlook, we have included a placeholder for acquisitions of 0 to 200 million. We also continue to have conversations with build-to-suit and anchor customers for additional developments in project 100 million to 250 million of development announcements, inclusive of the $79 million 2827 Peachtree development.

Before I turn the call over to Brian, I would likely -- I would like to briefly recap 2021. During the year, we generated 5% growth in core FFO, increased our dividend 4%, delivered 5.5% same-property cash NOI growth, signed 194 new second-gen leases, the most in any single year since 2006, totaling 1.1 million square feet, acquired 800 million of high quality office assets in Raleigh and Charlotte, completed 356 million of 92% leased office development, acquired 100 million of development land, and maintained a strong balance sheet with year-end leverage of 39%, and a debt-to-EBITDA ratio of 5.4 times. While we're pleased with our 2021 results, we're even more confident that we continue to have the building blocks in place to drive sustainable growth over the long term. In conclusion, while our high quality BBDs and buildings are the beneficiaries of a flight to quality, it is our humble, hard-working, talented teammates leasing, operating, and maintaining our portfolio as a single team, wearing the same Highwoods jersey that are our true trophy assets.

I would like to take time to thank the entire Highwoods team for their continued hard work and commitment throughout 2021. This type of dedication has put our company in a great position for years to come. Brian?

Brian Leary -- Executive Vice President and Chief Operating Officer

Thank you, Ted, and good morning, everyone. The positive metrics we've posted for the quarter and throughout the global pandemic are a testament to the simple strategy we execute every day. This strategy has positioned Highwoods to be the beneficiary of a great migration to our markets, a great acceleration to our BBDs, and a flight-to-quality buildings, all of which are both urban and suburban in nature. Most customers have plans to return to the office, are expanding more than they are contracting, and now see the workplace as a vital part of their ability to retain and recruit, but specifically return, talent to their organization.

Companies that create value through collaboration and culture have come to the clear conclusion that they are simply better together. We believe a workplace that attracts people and allows them to achieve together what they cannot apart will be full and command attractive economics. We're seeing this now throughout our portfolio, and it's evidenced in the results our team is producing. Occupancy increased 80 basis points from last quarter ending the year at 91.2%.

We expect occupancy to dip modestly in the first half of the year before increasing in the latter half. Our utilization currently remains below pre-pandemic levels. We project it will increase steadily throughout the year. We continue to see healthy tours in RFP activity, which is evident in the 884,000 square feet and 123 deals signed in the quarter, the highest quarterly deal count since 2016.

Of these 123 deals, 54 were new, totaling 284,000 square feet. Emblematic of our balanced portfolio, no one market disproportionately carried the load as five of our markets garnered eight or more new deals. In addition, we signed 158,000 square feet of first generation leases in the quarter for our developments in Nashville, Tampa, Raleigh, and Atlanta. Our markets are benefiting from what some have termed the Great Migration.

It has accelerated since the onset of the pandemic, is generating economic prosperity, and has started a flywheel of corporate expansions and relocations. These moves will have generational impacts to these talented individuals and organizations to plant roots in our markets. As a result of this momentum, we continue to see strong fundamentals throughout our footprint. Atlanta, Raleigh, Nashville, and Charlotte all posted positive net absorption for the quarter.

Unemployment rates are returning to near record lows and multiple markets have grown their officers in jobs since the start of the pandemic. Raleigh has been a clear winner coming out of the pandemic, where tens of thousands of tech and life science jobs have been announced and where we signed 220,000 square feet of leases for the quarter, ending the year 92.8% occupied. Witnessing this demand firsthand and recognizing we had little room for growth at our 732,000 square foot and 97% occupied GlenLake mixed-use development, we started construction in November on a new 218,000 square foot office building and a curated collection of shops and restaurants. This will complete GlenLake's live, work, play, master plan and serve as the latest product of our workplace-making efforts.

This $94.6 million investment is 15% pre-leased, will achieve LEED and Fitwel certifications upon completion, and will be home to McKim & Creed, a national engineering and surveying firm. While our friends in Tampa may have sent the title 10 banner up Interstate 75 to Atlanta, where the Braves and Dogs delivered a double dose of euphoria, Tampa has won Zillow's No. 1 spot as the nation's top housing market for 2022, where the market's office rents increased 7% and our team signed 219,000 square feet of leases for the quarter. Our Midtown West development, above an REI and adjacent to a new wholefoods, is now 64.5% leased and is busy with tours and inbound interest.

Speaking of Atlanta, the unemployment rate has dropped there below 2.5%. Cushman & Wakefield, [Inaudible] at an all time high, and our team signed 136,000 square feet of second generation leases in the quarter. Further, our $79 million 50-50 joint venture with Atlanta-based Brand Properties to develop 2827 Peachtree in Buckhead is 62% leased to multiple customers. This project will be completed in the third quarter of 2023 and is projected to stabilize in the first quarter of 2025.

Wrapping up in Nashville, where we ended the year 94.8% occupied, we made great progress on our Virginia Springs II development, which is now 90% leased, up from 59% last quarter. The most significant addition to our land inventory in 2021 was the acquisition of the remaining 77 acres of Ovation. In total, a 145-acre mixed-use development already home to the Highwoods-developed Mars Petcare North American headquarters and which is currently entitled for an additional 1.2 million square feet of office, 480,000 square feet of shops and restaurants, 950 residential units, and 450 hotel rooms. The opportunity inherent in Ovation is a perfect example of our workplace-making efforts.

Where appropriate, we'll utilize our mixed-use land bank to induce those vertical uses complementary to creating the best possible addresses to conduct business. In conclusion, thank you to the amazing women and men of Highwoods Properties, who have put their customers first and allowed us to achieve great things together. Now I hand it off to Brendan.

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Thanks, Brian. In the fourth quarter, we delivered net income of $124.9 million, or $1.19 a share, and FFO of $113.5 million, or $1.06 a share. As Ted mentioned, the only significant unusual item in the fourth quarter were land sale gains of $0.09. Excluding the fourth quarter land sale gains, our 2021 FFO per share was $3.77, a penny above the high end of our revised outlook of $3.73 to 3.76.

The better-than-expected FFO in the fourth quarter, which was primarily driven by higher occupancy and lower operating expenses, was consistent with the rest of the year as our FFO of $3.77 a share was $0.19 higher than the original midpoint of the outlook we provided last February. The upside for the full year was driven by $0.08 from operations due to lower anticipated opex, recovering parking revenues, and higher occupancy, $0.05 from higher-than-anticipated NOI from development, the majority of which was from the early delivery of Asurion's headquarters, and $0.06 from the net impact of the PAC acquisition, partially offset by the acceleration of $353 million of non-core dispositions. Our balance sheet is in excellent shape. We ended the year with debt-to-EBITDAre of 5.4 times, down from 5.6 at the end of the third quarter.

Last April, when we announced the acquisition from PAC, we stated our plan was to return our balance sheet to pre-acquisition metrics by midyear 2022. We're on pace to meet this target with a plan to sell another 150 million to 200 million of non-core properties in the first half of this year. We sold 353 million of non-core properties since the announcement of the PAC acquisition. These sales had an average in-place occupancy of 80% and had a projected cap rate of less than 6% on a GAAP basis and in the low 5s on a cash basis.

The remaining 150 million to 200 million of dispositions are likely to have higher average cap rates, most likely in the low 7s on a GAAP and cash basis. During the fourth quarter, we issued a modest amount of shares on our ATM program at an average price of $46.75 a share for net proceeds of $7.2 million, consistent with our ATM activity in the second and third quarters. ATM issuances remain one of the tools we believe are an efficient and measured way to fund incremental investments, particularly our development pipeline, on a leverage neutral basis. As Ted mentioned, our FFO for 2022 is $3.76 to $3.92 a share.

As disclosed in last night's release, this includes $0.04 to $0.08 of dilution from planned dispositions and the anticipated headwind of $0.08 to $0.12 of higher opex net of anticipated recoveries. The higher projected opex has also reduced our outlook for same-property cash NOI growth by 200 to 300 basis points. Excluding this impact, we would be in line with our long-term average. Some of the major drivers of the year to year changes in our FFO growth outlook at the midpoint of the range are $0.10 of lower FFO due to higher opex net of recoveries, $0.10 of higher revenue on the in-service portfolio, $0.06 of lower FFO due to first half 2022 planned dispositions, $0.04 of higher FFO due to the net impact of a full year of the PAC acquisition, partially offset by a full year impact from 2021 dispositions, and $0.09 of higher FFO due to the full year impact of the $285 million Asurion build-to-suit.

These items add up to $0.07 per share of year-over-year growth, which equates to the midpoint of our 2022 FFO outlook. I'd like to take a moment to recap the financial impact from the PAC acquisition and accelerated non-core dispositions. We stated we expected our plan to be approximately FFO neutral upon completion with growth over the long run. We now expect it will be modestly accretive to our preannouncement FFO run rate.

Our 2021 FFO benefited by a net $0.06 from the $683 million PAC acquisition and $353 million of dispositions. And we project this investment activity will add an additional $0.04 to our 2022 FFO for a total of $0.10 of accretion. Offsetting this will be the estimated $0.06 dilutive impact at the midpoint from our planned $150 million to $200 million of dispositions in 2022. All-in, on an annualized basis, we now expect the PAC acquisition and the corresponding non-core dispositions to be about $0.02 to $0.03 accretive to our preannouncement FFO run rate with no change to the aforementioned improvement in our long-term growth rate.

Finally, as Ted mentioned, over the past three years, we have been very active on the capital recycling front, having sold a billion dollars of non-core properties, acquiring $1.3 billion of high quality, resilient properties with healthy long-term growth prospects, delivering 600 million of highly leased office developments and adding over 100 million of development land. Over the same timeframe, we've increased average in-place office rents 15%, averaged 3.5% same-property cash NOI growth, increased FFO 9% and our dividend 8%, all while maintaining a fortress balance sheet. Plus, as we have long highlighted, our cash flows continue to strengthen, increasing more than 30% over the last three years, resulting in higher dividend coverage on our growing distributions. Our growth may not always be linear quarter to quarter or year to year, but regardless of the short-term impact, we will follow our investment strategy as we believe it will continue to improve the quality, resiliency and growth outlook of our portfolio over the long run.

Operator, we are now ready for questions.

Questions & Answers:

Operator

[Operator instructions] That first question comes from Blaine Heck, Wells Fargo. Please go ahead.

Blaine Heck -- Wells Fargo Securities -- Analyst

Great, thanks. Good morning, everyone, and thanks for all the detail. Brendan, can you talk a little bit about the operating expense guidance and what's driving that increase this year? And maybe also remind us of the proportion of leases outstanding that are in a net lease structure versus some variation of gross leases in which you're not getting fully reimbursed for those expenses.

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Yeah. Good morning, Blaine, thanks for that question. So just first that the easy answer on the triple net versus full service, so we've got about 25% of the portfolio that has triple net leases. The remainder is full service gross leases.

And the full service gross is where there's movement in terms of operating expenses. So I'm going to try to be as concise on this sort of complicated and complex answer as I can. So first, what we expect in terms of operating expenses is really to be in a pretty let's call it "normalized" opex environment for most of 2022. I think opex will probably be a little bit lower in the first quarter than normal and then will be back to normal in the second, third and fourth quarters.

With the thought being, we expect the vast majority of customers to be back in their space by the second quarter. And while that may not be their full teams, it's difficult to heat and cool half a suite. So we think we'll be incurring a full load of opex for the vast majority of the portfolio over the majority of the year. And operating expenses were low in 2020 and 2021 as utilization was low across the portfolio, and that benefited us.

And so for a number of our leases, our operating expenses that were incurred were below the base year expense stop and so that accrued to our benefit. As expenses return back to normal and increase, we don't receive recoveries until we get back to that base year expense stop. And so as expenses increase in '22, we think the vast majority of our leases will be at or above those expense stops but we won't receive the recoveries until we get to those levels. So we think that it will be an impact in terms of '22 because expenses will increase and we won't receive recovery on all of those leases where we're below the base stop in '21.

But as we get in -- beyond '22, we don't think this is likely to be a major issue going forward. So I think if expenses continue to increase in '23, we ought to be protected there. And so it does hamper FFO growth for this year, as we disclosed in last night's outlook, by $0.08 to $0.12 and does, as I think I mentioned in the prepared remarks, impact same-property growth as well by probably around 200 to 300 basis points to our projection for this year. But I would say outside of that, all the other major trends, I think, feel normal to us.

And from a revenue standpoint, I think this year is pretty normal in terms of same property. So we do have a little bit of average occupancy growth that we expect in same property. So outside of absorbing higher opex in '22, I think our same-property growth would be right in line with that long term average of, call it, between 3% and 3.5%.

Blaine Heck -- Wells Fargo Securities -- Analyst

OK, that's very helpful. And just to be clear, I guess, we're talking about you should be able to kind of phase out this added opex burden as leases expire and this shouldn't be kind of a multi-year headwind for you all. It should kind of normalize next year, as you explained. Is that correct?

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Yeah, that's right. I would say as leases expire. So what I would pay attention to, to just determine whether or not there's any issue with respect to opex increases over time is probably looking at rent spreads. So when we calculate and provide rent spreads, which I think we're, what, plus 3.2% this quarter, what we do is we take the operating expenses.

And if we're getting $2 of recovery, let's call it, in a lease, we add that to the expiring rent. So if the expiring rent on the base rent is $35 and we're getting $2 of recovery, we would say that the expiring rent is $37. And then we would compare the new rent to that. So if we were absorbing anything in terms of higher opex, you would see that show up in the rent spreads.

And as you can see, our rent spreads have held up reasonably well, so it hasn't been an issue thus far. To the extent going forward, I think I would pay attention to those rent spreads to make sure that they're holding up in line with historical norms.

Blaine Heck -- Wells Fargo Securities -- Analyst

Got it. That's very helpful. Second question for you, and then I'll turn it back over. Can you give us any color around your expectations for AFFO or SAT during the year in 2022? Is there any reason we should expect growth in AFFO or SAT to be materially different from AFFO growth that you're expecting?

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

So I mean, cash flow is always more volatile than FFO. So I would say that, I mean, there always tends to be a little bit more variability from year to year. But in general, sort of the major movers between what's going to move cash flow versus what's going to move FFO are probably two main line items. So there's the level of non-cash rent, and we disclose that amount, and that ought to be relatively consistent, I think, between '21 and '22.

And then there's the amount of capex, both leasing and building capex. In '21, and we probably had leasing capex that was a little bit lower than what it otherwise would be. In some of that, there tends to be a lag. So I think we reported $79 million of leasing capex that we spent during '21, and we committed $91 million of capex during the year.

I would say the amount of commitments in terms of that leasing capex is probably a better gauge of what we are likely to spend on a go-forward basis. So that means that maybe there's a little bit more leasing capex that we would incur I'd say on a normalized basis, but it is hard to tell kind of year to year. But regardless of that, as Ted mentioned, our cash flow is up over 30% over the past few years. So even with a $10 million or $12 million increase in leasing capex, it still means that cash flow would be very healthy.

And I think because of that strong cash flow, that was part of the reason why we increased the dividend a couple of quarters ago by over 4%.

Blaine Heck -- Wells Fargo Securities -- Analyst

Great. Very helpful. Thanks, everyone.

Operator

The next question comes from Jamie Feldman, Bank of America. Please go ahead.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Great. Thanks, and good morning. Just a quick follow up on the last question, so you talked about the $91 million committed in '21, I mean, do you think there's a catch-up also that you'll have to spend in '22 that would take it above the $91 million?

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Yeah, it's a good question, Jamie. It is hard to -- I mean, that's hard to -- I would say that it's hard to predict. I don't -- I wouldn't say that it's particularly likely. It certainly could happen.

I mean, there's always a little bit of a backlog of leases that are committed to and then the spend comes later. I think we feel like the backlog is pretty stable. So I think from this point, if we continue to commit leasing capital, that is in that range of, call it, $20 million or so a quarter, then I think that number will be pretty stable. But it is hard to kind of predict on a quarter to quarter or a year-to-year basis, but I wouldn't think there's any major drivers that are going to cause it to be substantially higher than the commitment levels.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK, thank you. And then I know you gave quarter guidance, but then you also talked about potential dispositions, potential acquisitions. If you hit those ranges, how should we think about what that could do to earnings? And then I know you had -- during the call, you guys talked about how your guidance has gone up from kind of initial guidance over the years. What are the upside and downside drivers for guidance here?

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Yeah, I'll take that, and then maybe Ted or Brian will add in. So I think in terms of the acquisition, so we put the range in there for the $150 million to $200 million of the first half '22 dispositions that we project. And then the remaining acquisitions or dispositions, we didn't put that effect into guidance. We put the $0.04 to $0.08 range in for the first half disposition.

So if we're at $200 million of dispositions and they happened earlier in the first half of the year, then obviously that's going to be probably be closer to the $0.08 of dilution if we are at $150 million of those dispositions and they're, call it, toward the latter part of the second quarter, will probably be more in the $0.04 range. On the remainder, I think that's just hard to tell, right? I mean, that's just -- it depends on the cap rates that we sell, it depends on what we would buy, depends on timing, all that kind of stuff. So I don't know, Ted, you might want to provide color in terms of what we're looking at.

Ted Klinck -- President, Chief Executive Officer, and Director

Look, as Brendan mentioned, we left a placeholder of 0 to $200 million both on additional dispositions on top of the remaining $150 million to $200 million and then 0 to $200 million on acquisitions as well. So it's just a matter of what hits, really. I mean, we're looking at the acquisitions that are in the market. We're underwriting several things right now, but who knows if we're going to be successful or not.

So I would think if we get -- if we're successful on acquisition, we'll match that with a disposition or whatever. So the timing and if we're successful, it's just hard to tell at this point.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. Thank you. And then Brian had mentioned a pretty competitive acquisition market. Can you maybe talk about asset values in your market with cap rates and maybe some movement to just kind of how they've move just to give us a better sense of what the investment market looks like?

Ted Klinck -- President, Chief Executive Officer, and Director

Sure. Anything high quality asset with long weighted average lease term, high credit, and certainly the new buildings, the cap rates are pre- or below pandemic levels. So sub -- in that five range, we said -- we've had several trades in our markets in the fours, as well for some single-tenant buildings. So incredibly competitive, both from domestic capital sources and international capital as well or in our markets.

So anything of high quality is going to be very hard. On the value-add side, I think the the pool is not quite as deep, but it's still there. It's still deep enough to make a market and I think we've seen that on our own dispositions as well as value-add transactions that we're chasing in the market. I do think buyers are becoming more comfortable with the underlying fundamentals and markets, so they're able to underwrite vacancy maybe a little bit more aggressive.

So it's just competitive all the way around out there right now, Jamie.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. Thanks. And then last for me. Can you just talk about your thoughts on retention? I know you said that occupancy is going to be dipping early in the year and then recover.

How are you thinking about the expiration schedule and retention ratio?

Ted Klinck -- President, Chief Executive Officer, and Director

Sure, I can start then either Brian or Brendan can jump in. I think from our expiration schedule, I do think our retention might be a little bit lower this year than historically but the nice thing is we don't have a lot of large expirations this year. I think I've talked about on prior calls, really nothing above 100,000 square feet expiring this year. Our largest is 62,000 feet in December, then we've got 50,000 square feet in May.

Both are known for vacates but we've got a strong prospect to backfill both of those with not a lot of downtime. Then after that, it's a 44,000 square foot expiration in Pittsburgh that we know to vacate that we don't have any strong prospects at this point. So in general, just lower expiration schedule. Our -- I think our retention ratio is a little bit lower, but not way off historical levels.

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Yeah. And Jamie, the only thing I would just add to that is, I mean, normally we typically have a seasonal dip with respect to occupancy in the first quarter, just because we have a lot of leases that expire at the end of the year and then invariably some of those are not going to renew. So we have a normal seasonal dip of typically 40 to 50 basis points in the first quarter or first half of the year and then tend to build back up in the back half of the year. That is -- our 2022 plan is consistent with that seasonal pattern or normal pattern.

And we do expect occupancy by the end of '22 to be a little bit higher than where we ended '21. So we think all those trends are positive for us in terms of what's happening from a leasing perspective throughout the portfolio.

Brian Leary -- Executive Vice President and Chief Operating Officer

Jamie, Brian here. Just a follow on to both what Ted and Brendan just said. We're highly focused and arguably aggressive on retention looking into the future. So you may have noticed in the past quarter's term was a little shorter, but we're actually talking to a number of customers that are renewing years in advance now.

It's only maybe a three-year extension, so we're getting them picking up in '23 or '24 and they're pushing out three or four years and so that is pulling down that term but we're being direct with them. A lot of them are excited about coming back into the space and want to reposition their space, want to upgrade their space as they bring people back, and they're seeing the space as an opportunity to recruit folks and return them. So it's also another kind of nuance that's coming out of some of our focus on renewals.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

That's a good point. So did that show up in your 4Q leasing value? [Inaudible]

Brian Leary -- Executive Vice President and Chief Operating Officer

Yeah, I mean it, it does. It -- primarily on that shorter term that you're seeing is being driven partly by that. It's not a -- it was about 20% or so of that kind of approach, but it's something we're going to continue to do. We found some good success with it and we're going to continue to maintain those conversations with our customers going forward.

We're not going to apologize for kind of extending someone out years ahead and keeping them in the space. It's kind of a bad joke among the leasing team. When I have or have the leasing call, I say to them I feel much more confident about renewing someone who is in the portfolio than is not. So we're taking that approach.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. And then the Pittsburgh moveout, when does that hit?

Ted Klinck -- President, Chief Executive Officer, and Director

That is in September this year.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. All right. Great. Thanks for all the color.

Ted Klinck -- President, Chief Executive Officer, and Director

Thank you, Jamie.

Operator

Thank you. The next question comes from Rob Stevenson of Janney. Please go ahead.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Good morning, guys. Can you talk about where parking revenues were in fourth quarter '21 versus '19? And then also how much additional expenses are there as that ramps back up? In other words, for each million dollars of incremental parking revenues that come in the door? How much incremental expenses do you have associated with that?

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Hey, Rob, it's Brendan. So, yeah, I would say parking revenues were kind of running probably about a million a quarter below where we thought we would be at the onset of the pandemic on a same-property basis. So it's certainly gotten better. We've improved from the depths of 2020, but not all the way back there.

So there's probably another $4 million or so to go. And I think the vast majority of that revenue line is going to fall to the NOI line. So there's not a lot of incremental cost associated with additional revenue.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. So you're basically down about $0.04 a share, given your shares outstanding, in rough numbers in terms of parking revenue still on an annual basis?

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Yeah, that's right.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. And then how significant is the amount of your space that existing tenants currently look to sublease at this point?

Brian Leary -- Executive Vice President and Chief Operating Officer

Hey, Rob, Brian. I got my finger stuck on the mute button. Couple of things. Just from a broad perspective, sublet space is down across our markets.

There is one single user in Tampa kind of a university -- medical university that has gone remote in the near term. And so that is kind of made the biggest move on our numbers, but it's still trending down. So I would say we're down probably across our total market, about 4%. And then within Highwoods, it's -- just slightly ticked up.

So in terms of a percent, Brendan, what's your kind of your number on that one? It's still a very small amount within the portfolio and holding steady, and we're seeing good movements. We're seeing Atlanta going down. We're seeing most of them across the board -- again, Tampa was the one spot where we had it go up.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK, so you wouldn't say that it's an overhang on your leasing existing vacancy at this point to be competitive with tenants trying to sublease space at a lower -- possibly a lower rate than what you're offering?

Brian Leary -- Executive Vice President and Chief Operating Officer

No, we're not.

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

I mean, it's in the -- I mean, we'll call it probably 5%, maybe a little bit less in terms of just kind of overall space that would be available for sublet. So it's a very small portion of the portfolio.

Ted Klinck -- President, Chief Executive Officer, and Director

And Rob, just to jump in, a lot of the subway space has pretty short term on it. So it's just not necessarily competitive with a lot of our vacant space. It's just hard for owners once you get below two years to sublease their space. So we do have some that's some longer term of that would be competitive.

And we've lost a couple of deals over the last couple of years, probably less than a handful but most of the subway space just isn't competitive or vacant space.

Brian Leary -- Executive Vice President and Chief Operating Officer

The last thing on that is typically you might have to write a check as kind of the lessor for sublease and deal. And so a lot of the folks who are putting space on the market don't want to necessarily write a check to move someone in there either. So that's kind of one of the things we're seeing in the sublet market.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. And then how much of the $150 million to $200 million of first half dispositions do you guys already either have under contract or letter of intent at this point? I mean, what's the likelihood that, that is sort of more first quarter weighted than second quarter weighted in terms of the $0.04 to $0.08 of dilution?

Ted Klinck -- President, Chief Executive Officer, and Director

Yeah. So we don't have any of it under contract yet. We do have some out in the market and we're talking with potential buyers on some of it, but none of it is under contract. But we do feel comfortable we're going to hit that $150 million to $200 million by midyear.

And we'll have probably just about everything out in the market in the next few weeks of what we plan to sell. So we still feel comfortable we'll get a bit -- likely going to be toward the back half of the second quarter.

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

And I just remember, Rob, I mean, we thought -- what we said for 2021 was $250 million to $300 million of dispositions that we expected there. We ended up doing $353 million. So we were, at the midpoint, $75 million, $80 million ahead of our '21 plan. So the 2022 plan was probably to have a fair portion of that $75 million to $80 million kind of occur in the middle to early part of the first quarter.

We accelerated that into into '21 and so the '22 stuff is naturally just going to hit a little bit later in that first half of the year.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. And then one quick one. Are there any incremental mark retirement costs in 2022? Was that all taken in 2021?

Ted Klinck -- President, Chief Executive Officer, and Director

No. Zero.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. Thanks, guys. Appreciate the time.

Ted Klinck -- President, Chief Executive Officer, and Director

Thank you.

Operator

Thank you, that question is from Emmanuel Korchman of Citi. Please go ahead.

Emmanuel Korchman -- Citi -- Analyst

Hey, good morning, everyone. Brian, maybe this is a follow up to your earlier comment. Just if we think about the differentiation of quality and the different demands from tenants for that difference in quality, how does that get defined in your markets? Is it location? Is it age of asset? Is amenity? I assume you'll say all of that. So help us figure out like as we think about quality, how your tenants think about it.

And second to that, what happens to the not prime products in these markets? Is it just more capital is pumped in to make it prime product or is a conversion of use the more likely path?

Brian Leary -- Executive Vice President and Chief Operating Officer

Great. Great question, and thanks for asking it. First, I think that from a quality standpoint, right now it's convenience and amenity, right? And so I do believe what we've heard in talking to customers is that they do -- they want to get back in the office. Now they're all coming back at different times.

And depending on how big they are multi city or multinational, they're a little more conservative because when they move, there's a ripple effect across there. But the small or medium size are back in. Those that believe in space, they all see it as a competitive advantage to bringing their talent in. And so as I mentioned on kind of my remarks, we absolutely believe it's both urban and suburban.

And so, you are seeing our suburban offices, as Ted noted, they are fuller than the high rises in central business district just because there's so much more convenient, they have access to fresh light and park space, and things like that. So it is a little bit of all of the above. I hate to say that. Obviously the buildings tell a story of health and wellness, LEED certification, Fitwel is what we're doing on the new development.

Food and beverage is a big driver. Making sure that's convenient and access to the outdoors is something that we're also focused on. The last thing I'll add to the quality component is having a bit of flexibility built into either a building or a park or kind of adjacent from a portfolio standpoint. And so we've talked about our spec sheet program before.

We've talked about kind of co-working before. We do see users coming back and wanting to be able to flex in and out of their space, primarily for larger gatherings, town halls, things like that. And so we're seeing more requests for that as we bring people back. Ted, did I leave anything out on that maybe?

Ted Klinck -- President, Chief Executive Officer, and Director

The only thing I would add is I think we're also seeing a migration of quality owners. Long-term owners who are willing to reinvest in their assets. And they're not necessarily the quality, not necessarily the newest and shiniest assets either. It's buildings that are in great locations, and I think we're -- this flight to quality is really playing out.

We're seeing in our portfolio, Manny, I think, last quarter I mentioned it on summarized in my prepared remarks. Last quarter we signed -- last year, 2021, we signed 194 new leases, highest we've done since 2006. And you add that -- add to that, we signed 18 in our development portfolio or development projects, 18 leases as well. And so 212 new customers to Highwood who want to come into our portfolio.

So I think we're benefiting from a flight to quality.

Emmanuel Korchman -- Citi -- Analyst

And then I'll remind you of the second part of the question is what happens to the non-quality assets, whether it be the ones that get vacated or the ones that have been vacant?

Ted Klinck -- President, Chief Executive Officer, and Director

Yeah, look, I think it's going to be a conversion in some cases. I think you've probably seen there's been a few big buildings that have sold and been converted to -- or going to be converted to industrial. I think you're going to see some multi-family conversions, maybe some hotel conversions over time as well. So I think it all depends on where the lower quality product is located and what the highest and best use is going forward.

Brian Leary -- Executive Vice President and Chief Operating Officer

One last little thing, Manny, on that is you're also seeing kind of a densification in addition of mix of uses around some of these assets. So in many cases, they're well located but might have either age or a kind of a mousetrap is a little different than what you might build more recently. And so we're seeing surface parking lot converted into structured parking. With multifamily, you're seeing retail added.

And that seems to be kind of doubling down on place and location, location, location is still a pretty strong amenity.

Emmanuel Korchman -- Citi -- Analyst

Thanks, everyone.

Operator

Thank you. The next question comes from Dave Rodgers of Baird. Please go ahead.

Dave Rodgers -- Robert W. Baird and Company -- Analyst

Yeah, good morning, everybody. Ted and Brian, I think early on in the prepared comments, you said 40% utilization driven by smaller and suburban tenants. I was curious. Two questions.

One on the vacancy thing is that also being driven by BBD or suburban? Is there a clear distinction between where the new leasing is happening or is it following really the utilization? And I guess the second question is on RFP and tour activity that you mentioned is up. How does that compare to pre-pandemic levels, Brian?

Brian Leary -- Executive Vice President and Chief Operating Officer

Great, great questions. First on the urban/suburban. Now, as there's a little bit of a footnote on my answer is that a good deal of the leasing activity has been suburban, actually greatly so, but that's also where we had the ability to do that lease. And so a lot of our -- the urban was had a higher occupancy too.

So you had that kind of corporate occupancy in the urban locations that was a bit of a ballast, if you will. And we were able to do a good deal of suburban. And so that's -- I think that's part of it. Ted, do you want to kind of staple on to that.

No? No?

Ted Klinck -- President, Chief Executive Officer, and Director

No, I think that's it. I think we can only lease the space we have vacant. So it's been heavily suburban side in the past 12 -- we don't have, as a company, a lot of large vacancies either. So it has been a lot of small, small customers this past year, which obviously goes to the 194.

A lot of those were smaller customers, but I think that pretty much covers it.

Dave Rodgers -- Robert W. Baird and Company -- Analyst

All right. That's fair. And then the RFP and tour activity maybe versus pre-pandemic levels on a like-for-like basis. How does that compare?

Brian Leary -- Executive Vice President and Chief Operating Officer

Sure. Absolutely. Thanks for the reminder. I knew there was a second part to that.

So since you -- let's all go back to the first week of March of 2020. It felt like the economy was hitting on all cylinders and things were going well. So I think we had a good amount then. But at the same time, I feel like -- it sure feels like right now the RFP and tours equal that.

And let me tell you why, because I think a lot of customers are now viewing their workplace that has to be a tool. It has to be part of their competitive advantage to not only retain and recruit talent, but to return that talent. So they've made the decision that we have got to upgrade our workplace, story in our workplace from an asset standpoint. And so we're getting inbounds for folks that would probably lean in.

Before they might have just wanted to be a tenant in someone else's building. They're leaning in to create a workplace. And what's interesting is that to build a new building today with escalations, inflation, some guys -- podium parking, it is not inexpensive. And so what you're seeing is customers issue an RFPs, engaging in a process, whittling it down with clear visibility in the price -- the rent premiums that are going to need to be paid to achieve this workplace.

And I know I'm going to be kind of labeled as a broken record, but it's bearing fruit in the whole kind of a cliche of the 1-9-90, right. Customers that don't build gigantic power plants and things like that. 1% of their annual revenues is on utilities, 9% on real estate, 90% is on people. They're realizing how important the 9% can be to bring back their 90% and make them collaborative and to continue that culture.

So we're seeing now we don't have any do announcer, but we're seeing that, that price to pay the premium for a great workplace is something that these companies are bearing. So I'd say we're right on it right now. It feels very similar. Now are we getting exercised and what will happen by the end of year? Time will tell.

It'll be interesting to ask the same question at the end of the year and see which ones came to roost.

Dave Rodgers -- Robert W. Baird and Company -- Analyst

Thanks for that color. Brian, I really appreciate it. And then, Ted, maybe just last for you on the disposition. It's been asked a couple of times, but I guess I wanted to get better color.

Are you moving forward with the dispositions regardless or is it the acquisitions and the development that will drive the dispositions? I guess, I heard it two different ways in the call, and I was just kind of curious on kind of what comes first in the order of magnitude for your investment strategy right now for the additional sales.

Ted Klinck -- President, Chief Executive Officer, and Director

Yeah. So obviously, we're definitely moving forward with the $150 million to $200 million. So that'll get done just to finish up the Vortex transaction to match fund that. The remaining, 0, $200 million, look, I think that will likely be dependent on if we find investment opportunities, whether it be development or acquisitions.

Dave Rodgers -- Robert W. Baird and Company -- Analyst

OK. Thanks, everyone.

Ted Klinck -- President, Chief Executive Officer, and Director

Thanks, Dave.

Operator

Thank you. The next question comes from Ronald Kamdem of Morgan Stanley. Please go ahead.

Ronald Kamdem -- Morgan Stanley -- Analyst

Hey, I just wanted to follow up on the expenses question, maybe asking it a little bit of a different way, maybe a little bit more color on just what are the line items are that are driving it? And is it like cleaning utilities like things like that? And then is there -- is it sort of spread out across the portfolio or are there certain markets maybe that that have the lion's share of that, would be helpful? Thanks.

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Yeah. Hey, Ron. Good morning. So it's really -- I mean, I guess I would put it into -- let's just put it into maybe two main buckets, right? So there's taxes, which are -- we're certainly seeing those increases across a number of our municipalities.

So we're -- that's part of it. And then really, it's sort of just the building operating expenses, the day to day, right? And so most of the day to day stuff is increasing because our customers are coming back to the buildings. And so it's just sort of getting back to normal operations. There is some -- certainly inflation is higher now than it has been for a number of years.

So there's a little bit of inflationary pressure that's on there but the vast majority of the increase that we're absorbing, that we expect to absorb and not get recovery on, is really just getting those aspects, those at building operations kind of back to normalized levels.

Ronald Kamdem -- Morgan Stanley -- Analyst

Great. That's all my questions. Thank you so much.

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Yeah, thank you. Our final question comes from Daniel Ismail of Green Street. Please go ahead.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. Thank you. Ted, I believe you stated previously that the net effective rents across our markets are probably down around 5% to 10% from pre-COVID highs. I'm curious of your outlook for net effective rent growth in '22.

Are you anticipating a recovery to pre-COVID levels or is that still '22 time frame?

Ted Klinck -- President, Chief Executive Officer, and Director

Sure, Danny. You're right. I think we've said 5% to 10%. I think it's probably right at the -- maybe the lower end of that now, right, in the middle mid-single digits down.

Look, I do think it's going to come back, but it's going to take time. It's going to be varied by market. The market's competitive still, right? And that there's still pressure on TIs, both from a competitive standpoint, but then it just costs more on top of that and then free rent as well. So I think it's going to come back maybe differently or a different cadence by market.

Certainly, we're seeing already rent increases occurring in Nashville. That does come with corresponding increases in TIs, but I would hope we've hit the bottom and we're going to be starting our way back to get to pre-pandemic levels. But look, we're not there yet and there's -- again, there's increased pressure on costs.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. And then can you remind us what actually went on today in the portfolio? And then maybe what are you guys negotiating for contractual bonds for today's leases?

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Yeah. Danny, so we're in the mid-2s just kind of broadly across the portfolio. That's been very steady, I would say, throughout the pandemic. So it's -- it really didn't dip too much.

And actually this quarter, we were higher than that in terms of those leases signed. So I think we were at 2.7%, so a little bit higher than the average. So we've been successful kind of increasing those annual bumps a little bit, but that has certainly been helpful in terms of those net effects that we're able to keep capturing annual rent bumps across virtually all of our leases.

Daniel Ismail -- Green Street Advisors -- Analyst

And then, Brendan, maybe since I have you on, appreciate all the details on the operating expense side. Maybe just going back to the split between triple net [Inaudible] leases. Is there any interest in pivoting more toward triple net leases or is it beholden to market conventions that you guys are responding to?

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Yes. I mean, it depends. I mean I think we do often push for triple net leases and do get those often. The one thing I'd like to just mention is full-service leases have actually been beneficial to us over time because over time, we have typically been able to control expenses and often reduce expenses.

And those reduced expense levels accrue to our benefit. So it's only been we -- and I think that we have received a lot of benefit from lower operating expenses in '21, as opex was low and building utilization was low. And that helped offset a lot of the decline in parking revenue in both '20 and '21. Now as expenses kind of also come back up, then we are absorbing that increase but keep in mind, we got the benefit.

So we're really just getting back to kind of normal. So over time, full-service leases have actually worked well for us, because we've enjoyed the benefit of our control on opex. And I think if you look at our same property growth over time that we have had same property NOI growth that has outpaced our same-property revenue growth because we've been able to control those expenses. So we often -- I mean, we will push for triple net leases where we feel like we can get them.

But full-service leases for us typically are not problematic. And we are protected on increased expenses as long as those expenses are above the base year expense.

Operator

That was our final question. I'll turn the call back over for any closing remarks.

Ted Klinck -- President, Chief Executive Officer, and Director

I just want to thank everybody for being with us on the call this morning. Thank you for your interest in Highwoods. If you have any follow-up questions, please feel free to reach out. Thank you.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Hannah True -- Investor Relations

Ted Klinck -- President, Chief Executive Officer, and Director

Brian Leary -- Executive Vice President and Chief Operating Officer

Brendan Maiorana -- Executive Vice President and Chief Financial Officer

Blaine Heck -- Wells Fargo Securities -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Emmanuel Korchman -- Citi -- Analyst

Dave Rodgers -- Robert W. Baird and Company -- Analyst

Ronald Kamdem -- Morgan Stanley -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

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