Welcome to the Highwoods Properties earnings call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session. At that time, if you have a question, please press 1 followed by 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Wednesday, October 26, 2022. I would now like to turn the conference over to Hannah True. Please go ahead.
Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; Brian Leary, our Chief Operating Officer; and Brendan Maiorana, our Chief Financial Officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they are both available on the Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI, and EBITDAre. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings.
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.
Thanks, Hannah, and good morning, everyone. We had another excellent quarter with strong financial results, robust leasing activity, and the third consecutive increase to our 2022 FFO outlook. Given continued investor uncertainty around the post-pandemic demand for office space, there are naturally questions about whether or not office landlords can sustain their operating performance. We have enjoyed consistent, healthy demand for office space across our Sunbelt portfolio for seven quarters in a row after only two quarters of below-average new leasing during the first pandemic year of 2020. Customers and prospects have been making decisions on leasing space, and we have been benefiting from the flight to quality to our high-quality portfolio.
In our portfolio, since the beginning of 2021, new customers, whether from organic growth, in-migration, or flight to quality, have generally offset those who downsize for work-from-home or hybrid work arrangements. Our portfolio occupancy has increased 40 basis points over those seven quarters. During this time, we've averaged 322,000 sq ft of second-gen new leases per quarter, 16% above our prior 10-year average. We've averaged 12.7% GAAP rent growth and 1.2% cash rent growth. We've averaged 5.9 years of term, in line with our long-term average, and we've averaged net effective rents 1.5% higher than our average from 2018 and 2019. While our second-gen leasing performance has been strong and consistent, the third quarter was especially noteworthy.
New leasing volume of 518,000 sq ft was our highest since 2014. Economics were robust on total volume, more than 1 million sq ft, with an average term of 7.4 years, 1.5 years more than both our 5-quarter and 10-year averages, and net effective rents 22% above our 5-quarter average. We believe this performance validates our strategy of owning high-quality workplaces in the most dynamic and vibrant CBDs of our growing Sunbelt markets. With this strategy, we have consistently delivered solid metrics throughout the ups and downs of many business cycles and periods of changing office use patterns. While we don't have a crystal ball, there are obvious headwinds facing the U.S. and global economy.
To mitigate the impact of these potential headwinds, we bolstered our liquidity and proactively addressed our largest pending lease expirations, including substantially backfilling our largest 2023 lease expiration. This de-risks our forward leasing plan and leaves us with no remaining expirations representing more than 1% of revenues until late 2024. Turning to investments, in the middle of August, we completed the previously announced acquisition of 650 at Legacy Union in Uptown Charlotte for $203 million. We're seeing excellent activity at the recently completed building, which is 80% leased, and we're confident in the long-term outlook. With this acquisition, in less than three years since we entered the market, Charlotte now accounts for over 10% of our NOI. Occupancy in the rest of our Charlotte assets is 98%.
During the quarter, we also sold a mixed-use land parcel in Richmond in our Innsbrook BBD for $23 million, recognizing a $9 million FFO gain. This sale will facilitate the development of retail, residential, and hotel uses adjacent to our 1.6 million sq ft in Innsbrook. Importantly, the value of our existing and future office will be significantly enhanced by a growing amenity base. As we have mentioned previously, our land bank has never been more attractive, with a full build-out of nearly $4 billion. The vast majority of this is master-planned for mixed-use development, including office, and is adjacent to existing or future Highwoods assets. We announced a 100% leased boutique office building at Morrocroft in Charlotte's SouthPark BBD. Our team creatively manufactured this opportunity to build a $12 million high-quality project on a surface parking lot that had previously not been considered for development.
This quarter, we placed Virginia Springs II in Nashville in service, 100% leased. This $38 million development encompasses 111,000 sq ft and was started in late 2019 on a fully spec basis. The ability to deliver this project on time, on budget, and 100% leased at its scheduled stabilization date despite the pandemic is a testament to our development and leasing team and is a strong endorsement for the health of the Brentwood BBD. Our current development pipeline is $533 million at our share. Our Midtown West project in Tampa is now 92.5% leased and will move to our in-service portfolio next quarter, also in line with our original pro forma.
Our five in-process developments represent a total investment of $476 million at our share and are a combined 22% pre-leased. In Dallas, Granite Park Six, our 422,000 sq ft office development in the Frisco/Plano BBD, continues to have healthy leasing interest with more than three years until projected stabilization. In 23Springs, our 642,000 sq ft development in the Uptown BBD has a scheduled completion date in 1Q2025 and an estimated stabilization date in 1Q2028. We also have a strong pipeline of prospects for this project and continue to be confident about its long-term outlook. With rising interest rates and reduced debt availability, the investment sales market has slowed, to state the obvious.
Fortunately, our balance sheet is in excellent shape with low leverage and no debt maturities until 2025. We have existing liquidity to complete our development pipeline while maintaining ample dry powder even without assuming any additional asset sales. Early in the third quarter, we announced our plan to exit Pittsburgh, albeit with no preset timetable. While we are now preparing these assets for sale, given the uncertainty in the investment sales market and our strong balance sheet, we can afford to be patient. Over the long run, operating with low leverage enables us to be opportunistic in seeking investments that improve the quality of our portfolio and increase our long-term growth rate, all the while staying true to our mantra of being disciplined allocators of our shareholders' capital.
Turning to our results, during the third quarter, we delivered FFO of $1.04 per share, which included $0.07 per share of net land sale gains. The strong performance in the quarter gives us confidence to increase our 2022 FFO outlook again this quarter, the third consecutive increase since we first announced our outlook in February, even with $0.01-$0.02 per share of higher anticipated interest expense in the fourth quarter. The new range implies a midpoint of $4.03 per share, up 3.5% from last year on an apples-to-apples basis, excluding land sales. In addition to healthy FFO growth, as we've often said and can be seen clearly in our financial results, we continue to generate stronger cash flows.
To summarize, our markets, BBDs, and portfolio have been resilient and continue to perform well, as evidenced by our robust third-quarter leasing and the de-risking of our forward lease expirations. Our attractive development pipeline has seen strong prospect activity and is well-positioned to deliver future growth in NOI, FFO, and cash flow. Our land bank has never been more attractive and provides a pipeline of future growth opportunities. Finally, our balance sheet is well-positioned to allow us to capitalize on new investment opportunities. This powerful combination, together with our track record of delivering consistent and compounding growth in earnings, cash flow, and dividends while maintaining low financial leverage, makes us confident that we are uniquely positioned to grow, and we firmly believe the best days for Highwoods are ahead of us. Brian?
Thank you, Ted, and good morning, everyone. Our team delivered strong financial and operating results in the third quarter as we continue to provide our customers with the high-quality and commute-worthy workplaces they need to retain, recruit, and return talent. While we believe these metrics are definitive measures of past performance—seven quarters in a row, as Ted highlighted—what conclusions can we draw about the future of work and the value proposition our BBD workplaces make, both in urban and suburban locations, presenting to those who value culture, creativity, and collaboration, whether it be five days a week or via some hybrid model? We can confidently conclude that the flight to quality is first and foremost a flight to quality of life.
This is first apparent in the acceleration of the great migration to the shorter commute, lower cost of living, open for business, and temperate climate of our Sun Belt markets. It is seconded by millennials discovering the benefits of homeownership. Now the largest cohort of home buyers, whom the National Association of Realtors notes are choosing the suburbs as their destination over 85% of the time. Being students of history, we believe the geography and influences of household formation are a powerful leading indicator that has shaped economic activity and consumer decision-making for generations. Our balanced BBD portfolio is well-served by both trends as our assets are in walkable, amenity-rich, mixed-use environments that deliver the best formula for a commute-worthy workplace experience.
In Nashville, where we signed 380,000 sq ft and ended the quarter over 95% occupied, the team has been hard at work Highwood-tizing our high-quality assets in Brentwood and in Cool Springs, where a new central park with its food and beverage options, playground, and live music venue led to our backfilling substantially all of our largest 2023 lease expiration. We also placed into service our 100% leased Virginia Springs Two development in Brentwood, which we announced in 2019 as a 100% spec development and which delivered and stabilized on time and on budget without missing a beat throughout the pandemic. Cushman & Wakefield noted the national market at large posted positive net absorption for the quarter and increased rents 4% year-over-year.
While Nashville and Tennessee deserve to be at the top of many rankings, it is the great state of North Carolina, where we generate over a third of our NOI, that is CNBC's number one state for business in 2022. Additionally, Raleigh's number one ranking by Bankrate as the best place to live in the United States and the over $3 billion in annual R&D dollars deployed by its universities continue to drive growth for the Triangle region. The market posted positive net absorption for the fourth consecutive quarter, and market rents increased 5% year-over-year per Avison Young. We signed 186,000 sq ft of leases in Raleigh and ended the quarter 91.4% occupied.
Down the interstate in Charlotte, JLL reported that market rents are up 4.5% year-over-year, and the market realized positive net absorption for the second consecutive quarter. We ended the quarter 94.3% occupied. With the acquisition of a 367,000 sq ft 650 at Legacy Union, we now own 2 million sq ft of the most compelling and commute-worthy buildings or development sites in all three of our targeted Charlotte BBDs: Uptown, the South End, and SouthPark. Notably in Uptown, we are honored to have been chosen as the new home for the Atlantic Coast Conference's headquarters and the University of North Carolina's Kenan-Flagler Business School's new Charlotte campus—two tremendous additions to our Legacy Union customer base.
In SouthPark, we re-envisioned and rezoned Morrocroft this quarter, and this workplace creation is paying off with the announcement of a new $12 million, 100% pre-leased boutique office building. Four Morrocroft will be delivered in 2024, along with new food and beverage options for the whole of Morrocroft, on land not previously envisioned or permitted for development. We've had a busy 3 years, considering that at this time in 2019, we owned no assets in Charlotte. Looking to model our Charlotte growth and success in our newest market of Dallas, Texas, the region's continued performance provides positive tailwinds for our prospects there. Dallas has once again seen population and job growth quarter-over-quarter, now topping 8 million residents and over 4 million people employed, both all-time highs. Per Moody's Analytics, office-using jobs grew 8.3% year-over-year with 93,000 new positions .
With even the most conservative office density calculation, job growth like this produces real demand for office space across the market. As a reminder, we are under construction in partnership with NAIOP Developer of the Year and Dallas-based Granite Properties on the 422,000 sq ft Granite Park Six in Plano and the 642,000 sq ft 23Springs development in Uptown. In summary, we believe the best and brightest are better together. We are hearing this from our customers, and our continued performance bears this out. While office buildings are built out of concrete, steel, and glass—the most solid of materials—talent now has the opportunity to be much more fluid with how it engages with the physical workplace and work week. We are focused on making our portfolio the most talent-supportive and commute-worthy it can be.
We believe doing so will create great value for our customers, Highwoods, and in turn, our shareholders. Brendan?
Thanks, Brian, and good morning, everyone. In the third quarter, we reported net income of $38.3 million or $0.36 per share and FFO of $111.6 million or $1.04 per share. The quarter included net land sale gains of $0.07, which were not included in our prior FFO outlook. Adjusting for the quarter-to-quarter fluctuations in land sale gains, term fees, and credit reserves, the major drivers of the change from the second quarter to the third quarter were lower operating margins in Q3, as we expected, a full quarter impact of the Q2 dispositions, and higher average interest rates. These were partially offset by the contribution from the mid-quarter acquisition of 650 at Legacy Union in Charlotte.
As expected, same-property cash NOI growth was negative in the quarter due to higher OpEx and straight-line rent. GAAP NOI growth was positive, and as we've stated before, when GAAP NOI growth is higher than cash NOI growth, it's often a forward indicator of an upward-sloping future cash NOI trend. At the onset of the pandemic, our parking revenues and operating expenses fell sharply. Having slowly normalized over the past couple of years, we now believe Q4 2022 will be a good representation of stabilized levels of OpEx and parking on a go-forward basis. Our updated FFO outlook of $4.02-$4.04 per share for the full year makes it three quarters of consecutive increases since we provided our original outlook in February.
This includes $0.07 per share of net land sale gains in the third quarter, which were not included in the prior outlook, but also includes $0.01-$0.02 per share of higher anticipated interest expense in the fourth quarter, driven by higher projected SOFR rates and the early repayment of our January 2023 bonds, which is offset by higher projected NOI. Excluding the third quarter land sale gains, the midpoint of the outlook is essentially unchanged from our prior outlook. The other line items in our outlook were largely unchanged, other than some minor adjustments to G&A and straight-line rent. Ted mentioned that core FFO, which excludes land sale gains, is projected to be up 3.5% year-over-year at the midpoint of our updated 2022 outlook.
This annual growth matches our compound annual growth rate since 2019 and is close to the 3.9% annual growth we've delivered since 2010. In addition, our cash flows have continued to strengthen at a faster pace than FFO during the past few years. Now, to our balance sheet. During the third quarter, we closed a $150 million delayed-draw unsecured bank term loan, which we used to help fund the acquisition of 650 at Legacy Union. This loan is scheduled to mature in May 2027 and bears interest at SOFR plus 105 basis points, the same spread as the term loan we obtained in May.
Early in October, we obtained an additional $200 million unsecured bank term loan with the same SOFR borrowing spread and a maturity date in the fourth quarter of 2025. We used the proceeds from this term loan, plus cash on hand and borrowings under our revolving credit facility, to repay, without penalty, a $250 million, 3.75% unsecured bond that was originally scheduled to mature in January 2023. We now have no debt maturities until the fourth quarter of 2025. We have approximately $360 million remaining to fund our share of the current development pipeline. We have construction loans in place at our Dallas JVs that will account for $190 million of this future spending, leaving only $170 million remaining from additional sources.
Our revolver balance, adjusted for the early bond repayment, is approximately $160 million, leaving us nearly $600 million of additional capacity. Our debt-to-EBITDA ratio ticked up this quarter to 5.6 times with our acquisition and the funding of our initial investment into our Dallas JVs and without meaningful disposition proceeds. To be clear, our plan is to fund our business on a leverage-neutral basis over the long term, which means we'll likely sell assets once the investment sales market stabilizes. Our low leverage affords us the flexibility to fully fund our development expenditures without the prerequisite of selling any assets or raising equity and still maintain low overall leverage. We estimate our net debt-to-EBITDA ratio will remain under 6 times without any dispositions or equity issuances.
In summary, our balance sheet is in excellent shape with limited debt maturities and ample dry powder, giving us plenty of flexibility with our financing plans over the next several years and allowing us to be opportunistic with new investments. Operator, we are now ready for questions.
Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Again, to register a question, please press the one followed by the four. Our first question comes from the line of Blaine Heck with Wells Fargo. Please go ahead.
Great. Thanks. Good morning out there. You guys had a very strong quarter from a new leasing perspective. Can you just talk generally about the types of tenants that are most active in your markets from a size and industry perspective?
Sure, Blaine, it's Ted. I'll start; maybe Brian can chime in. We had a very active quarter. In terms of our new leasing, you know, we signed 36 new customers into our portfolio that we'll be bringing in over the next several months. This was really led by financial services, which saw the most activity, followed closely by healthcare and then technology in terms of count. Those have been the most active.
After that, it's pretty diversified among several different categories.
Great. That's helpful, Ted. Thanks. Can you just talk about your asset recycling initiatives? You know, you talked about this a little bit in the prepared remarks, but I guess, how should we be thinking about the timing and pricing on Pittsburgh sales, given that the transactional market seems to have ground to a halt here? How does that impact your willingness to invest incremental dollars in acquisitions or development?
Sure. Great question. I think in terms of the dispositions, I think you hit it on the head. You know, just given the dislocation in the capital markets, I don't think we expect much in the way of dispositions in the near term. You know, as I mentioned in my prepared remarks, we are prepping assets for sale, but we can afford to wait until the capital markets do come back. As that relates to acquisitions, look, I think, you know, I think we've proven over the years we're pretty good stewards of our shareholders' capital and are pretty conservative investors. You know, Brendan and his team stress-test the balance sheet all the time.
Even when you factor in our development spend that we have coming up in the next several quarters, we do have some dry powder to be opportunistic in this environment, but we remain disciplined. Any acquisition we make would have to be highly selective and strategic. It would probably have to be one of the best assets in the best sub-markets of one of our high-growth markets. We would look at replacement cost and the stabilized yield. Hopefully, we could acquire an asset with below-market rents that we can grow over time. It would have to be a highly strategic acquisition for us to make a move.
Great. Very helpful. Last one for me. Same-store NOI was negative this quarter for the first time since 2018, I think. Can you just talk about the drivers behind some of that weakness and maybe expand on how we should think about the trend looking forward?
Yeah. Good morning, Blaine. It's Brendan. I'll take that. That's right, it was negative this quarter. That was as expected, and as I think you saw in others, we did maintain our outlook on same store for the year. Certainly, Q3 was as we expected. A lot of the reason for that is what we described at the beginning of the year, where expenses were higher. If you look at page 15 of the supplemental, that gives our same property breakdown. Overall operating expenses were up $6.4 million year-over-year in the third quarter. You don't have this detail, but recoveries did help offset some of that increased expense.
Net of recovery, expenses were up $4 million, which is a big headwind on a NOI base of, call it, $115 million for the quarter. That was a big headwind. As we've talked about, we think that headwind probably dissipates sometime over the next few quarters, because as expenses continue to move up, we're going to get back to the normalized expense levels where we were pre-COVID, which means our recovery rates will be much higher on any future increases in expenses. We think that line item, that headwind, will dissipate sometime over the next couple of quarters. Then the other impact, which is really timing related, is straight-line rent was much higher this quarter than it had been, so that was a headwind of about $1.5 million.
That's a timing issue. That, you know, can either be a headwind or a tailwind, but balances out over time. We think that also gets better over the next couple of quarters. If I normalize for both kinds of higher expenses, net of recovery, and the impact of higher straight-line rent, we think if we look at the core of what's going on with the same store, those trends are very positive, and that's very much in the long-term range of where we've grown at about positive 2.5%-3% a year.
Super helpful. Thanks, guys.
Our next question comes from Jeff Spector with Bank of America. Please proceed.
Great. Thank you. Two follow-up questions to that conversation. Brendan, how does that tie into cash leasing spreads, your last comments? You know, how should we think about cash leasing spreads over the next, let's say, year or two?
Yeah, Jeff, good question. In general, I would just say for the average across our portfolio, our average in-place annual rent escalators are about 2.5%. It's maybe been a little bit better than that on leases that we've signed over the past several quarters, but let's call it on average about 2.5%. Our cash re-leasing spreads have been just a little bit lower than that. They've been positive, but just a little bit lower than that over the past several quarters, let's say, since the onset of COVID. That means probably on a same-property basis, our top line is going to grow in the mid-2s. I think that that's a pretty good gauge going forward on a cash basis.
Cash rent spreads—it's difficult to say where they would be. We don't guide to that number because it can vary based on the leases that get signed. We've been pretty consistently signing levels in the very low positive single digits, and that's probably a reasonable guidepost of where we think we'll be as we go forward over the next several quarters.
Thank you. Very helpful. Then, you know, just given the conversation around the balance sheet, Brendan, can you provide an update on what you're seeing in the capital markets? How are your most recent conversations going with your bankers?
Yeah, good question. As you know, we just closed the term loan in October, which was a three-year term loan including the one-year extension. We were very pleased to get that done. We think that worked really well for us. That was something that made a lot of sense for us to do because it provides us that flexibility. That is a short-term increase to liquidity, which if you think about the plan that we have, which is ultimately to sell assets, that gives us flexibility with those asset proceeds to pay down some of the short-term variable rate debt that we have. We were pleased to get that done. We really don't have a lot of need for financing going forward.
You know, I think it's no surprise that capital is less available now, but we feel like we're in great shape given we've got about $600 million available on our line of credit, and we have no maturities until 2025. We don't have a lot of need to raise capital at this point.
Okay. Thank you. Last for me, just, Ted, on your opening remarks, I just want to confirm, just given all the concerns investors have, analysts have, you know, over potential, you know, weakness in the economy, maybe we're seeing signposts of that now. Just to confirm, are you seeing any signposts into October of tenants slowing or changing leasing decisions over a concern of a slowing economy, you know, this quarter or in 2023?
Sure. Look, I think we're off to a really good start this quarter from a leasing volume standpoint. You know, I think tour activity still remains very strong. Now, having said that, look, we've had a few decisions put on hold, right? A couple of deals that we thought we were going to make. Even last quarter, we had a few. This quarter, we're hearing about a couple that, they're not saying they're not going to do the deal, but they're just putting a little bit of a pause, whether that's a 30- or 60-day pause. I attribute that to, you know, potential headwinds that are out there. In terms of just leasing that we see coming through our funnel, it's continued the third quarter.
The first month of this quarter, October, has continued the momentum we had last quarter.
Thank you.
Thank you.
Our next question comes from the line of Michael Griffin with Citi. Please proceed.
Thanks. Maybe to expand on that leasing question asked earlier. Have you noticed a difference in terms of what tenants are asking for and what they're looking for now, relative to recently?
Hey, Michael, Brian here. Let me go ahead and take this one. In general, yes, I would say that they are across the board, highly focused on whatever real estate decision and investment they're making, typically in negotiations with us and securing a lease, with being kind of a competitive edge to get their talent back to work. It is a deliberate move to make sure they have the most compelling, commute-worthy kind of component of the workplace to give people a reason to come back. They're leaning in on that. They're leaning on amenity. They're leaning in with us as a kind of partner to realize additional building amenities. We've had some great success. Take Nashville, for example, where we just backfilled our largest 2023 expiration.
We backfilled that into a collection of really kind of three and a half buildings. One building is kind of two buildings, almost connected. We're completely repositioning that place with a new park and a playground and food and beverage and all these things that we think are about making it commute-worthy, and the market's responding. It's a very collaborative kind of conversation and effort that we're having with these customers to help them continue to retain, recruit, and return their talent. It's a little different, not saying that people aren't out to get a deal because everyone's smart and savvy, and they're well-informed and well-consulted.
As you may have heard on calls, it feels like years ago, when you look at what a typical company is going to spend every year, 1% will be on their utilities, 9% will be on their real estate, and 90% will be on their people. They're realizing that they need their 90% in because their 90% is more productive when they're together. That's kind of a universal chorus we've heard.
Gotcha. That's definitely helpful. Maybe a question now just on sort of capital allocation, just given the changing, you know, backdrop and macroeconomic sentiment. How does this change your strategies around, you know, external growth, including development funding going forward? Brendan, I know you mentioned about $170 million left to fund for development. Just kind of how should we be thinking about that?
Hey, Michael, this is Ted. Let me start out in terms of capital allocation. I talked a little bit about acquisitions. Obviously, it has to be something pretty special for us on that side, and we'd have to be very comfortable with the pricing and all that. You know, with respect to development, look, I think the bar for development is higher today. You know, we announced last night that we did the $12 million build-to-suit in Charlotte, a little boutique building that we're really excited about. We got that out of, basically, we're building it on a parking lot, so we had no basis to the land, which gave us about a 50 basis point lift in the development yield. That was very attractive to us.
We have a handful of other discussions going on with potential prospects, and every deal is different, right? We take a pretty measured approach. We look at the market, the sub-market, and what others are developing. Key for us is really stress testing our underwriting to see what yields would look like, assuming lower rents, longer lease-up times, higher TI, and more concession packages. We want to know, or we want to go into any development with our eyes wide open. I would say the bar is certainly higher today.
Yeah, Michael, I'll just, you know, just from a balance sheet perspective, without, you know, without regard for the merits of any additional investment, I think when we look at our balance sheet and stress test that, as I mentioned just in the prepared remarks, we don't think that we will be above 6x based on 6x debt-to-EBITDA based on the planned development spending that we have going forward. That's even without getting the corresponding NOI in the door from the development properties that are on the development pipeline as it stands right now. I think we feel good about where we are from a balance sheet perspective, one, because overall leverage, whether it's leverage as a percent of assets or debt-to-EBITDA, those are both low.
As I mentioned earlier, we just don't have any debt maturities until late 2025, with a lot of capacity available on our line. I think we're in good shape from a balance sheet perspective, so we do feel like we've got dry powder if there is some additional investment opportunity that we believe is compelling.
Okay. That's it for me. Thanks for your time.
Our next question comes from the line of Robert Stevenson with Janney Montgomery Scott. Please proceed.
Regarding sublease space in your markets, is it stable, increasing, or decreasing? How rational are some of the competitors that may have large vacancy issues, which you don't, in terms of pricing concessions, lease length, and similar factors?
Hey, Rob, it's Ted. Maybe I'll start, and then Brian can jump in. Look, sublease space, it's still elevated, I think, in most of our markets. That's what happens, you know, happened during the pandemic, and that's what happens when the economy slows. You know, some of the sublease space is definitely competitive. We've lost, you know, probably a handful of deals maybe over the last year or so to competing sublease space. You've got to remember that not all sublease space is competitive. Some of it is short-term in nature. TIs may or may not be provided. Renewal options are not going to be available, so it's not ideal. It's not the ideal situation for a lot of companies. Also, a lot of it is lower-quality assets and lower-quality submarkets as well.
While it's elevated, we compete with some of it, but not all sublease space.
Okay. Thoughts on using some of that dry powder you've been talking about to potentially buy back stock if it stays in the mid- to high 20s?
Sure. Rob, that's something certainly the last few quarters we've talked to our board about virtually every quarter. You know, just an overall statement, we want to protect our strong balance sheet and really don't want to lever up to buy our stock. It's certainly compelling. You know, we understand the question. But given the capital markets today, maintaining liquidity is pretty important as well. It's something we contemplate, it's something we think about. We obviously look at it with respect to our development spend and uses of capital as well. It's definitely not off the table, but it's not something that we necessarily think we're going to be doing at this point.
I mean, I guess the other question would wind up being how high of a cap rate would you have to buy something at to make it more attractive than buying your own portfolio of BBD assets back at the implied cap rate that you're currently at?
Right. No, that's it. It's a math exercise, right? To a certain degree. We're looking at it in the long term as well, what our long-term uses are. Again, it's something that we can contemplate but not necessarily want to lever up to do. Certainly, at a compelling valuation, it's something we think about.
Okay. Last one for me. Brendan, what are your thoughts on swaps or anything else regarding the variable rate portion of the debt? I know it's not huge in terms of the overall debt position, but how are you thinking about that, and what's the pricing on that versus the risk-reward type of situation for you guys?
Yeah, good question, Rob. It's probably not something that's front-burner for us as it stands now because again, just, you know, the plan is to have disposition proceeds come in the door and fund kind of our investment activities on a leverage-neutral basis over time. If we swap some of that floating-rate exposure to fixed, that hampers our ability to then freely use those disposition proceeds to pay down that debt. It does reduce the flexibility that we have. I think that is probably something that we will continue to look at, but is, I would say, not front-burner. I will mention that we do have interest rate caps on the construction loans for the Dallas JVs that are in place. We haven't drawn on those loans yet.
We're still funding the equity piece, but we do have some protection with respect to rising SOFR rates there with the interest rate caps that we have on those Dallas JVs.
Okay. That's helpful. Thank you, guys. I appreciate the time.
Our next question comes from Ronald Kamdem with Morgan Stanley. Please proceed.
Ted, just a couple of quick ones. Going back to the dispositions, I know you guys touched on Pittsburgh a little bit. Maybe can you talk a little bit more about what the environment's like and potential sales there? Thanks.
Sure. You know, there's just not a lot of visibility in the transaction market today, Ron. I think most people are in price discovery mode. We are seeing a couple of deals get done, having said that. We've seen a couple of assets that are tied up and either have closed or recently closed that are very high quality at, you know, a little bit of a discount, roughly 10% or so. In general, just given the illiquidity or the lack of liquidity in the debt markets, it's really impacted the transaction environment. As I said, you know, we've got several assets that are teed up for dispositions, but we're in no hurry. We're not forced to sell anything in this environment, so we can afford to be patient.
Great. My last one was just on the leasing. Obviously, a pretty good leasing quarter. Maybe can you update us, if you haven't already, on some of the larger lease expirations and the activity that you're seeing in those spaces? Thanks.
Sure. So, going into next year, you know, we only have two leases greater than 100,000 sq ft. One of those is what we talked about: Tivity Health in Nashville that expires at the end of February 2023. As we mentioned in our prepared remarks, and Brian mentioned it, we've substantially backfilled that already, so we're excited about that. There will be some downtime, but we're excited about where we came out on that. The only other one is about a 137,000 sq ft customer in Raleigh that expires at the end of January. We're downsizing them. They went through a merger with another company, and they're going to be downsizing the Raleigh operation. We extended them.
We'll be downsizing them by about, I think, 75,000 sq ft, if I remember correctly. But we already have strong prospects for a vast majority of that, so we think the downtime's going to be pretty nominal on that. Other than that, we don't have anything below 100,000 sq ft in 2023.
Great. Thanks so much.
Thank you.
As a reminder to register for a question, please press one followed by four. Our next question comes from the line of David Rogers with Baird. Please proceed.
Yeah. Good morning, guys. My questions follow a little bit on the same line. Maybe, Brian, start with you. Can you talk about the tenor of discussions just on the renewals that you're having? It sounds like some new leases may be put on hold, but you had a great quarter. Curious about the renewals specifically, are people still typically looking to downsize a little bit more if they are staying with you? And then what's the downtime on Tivity?
Hey there. So Dave, quick, take the second one first. Downtime will be for most of the year as the building gets repositioned and we do the work outside. I think January 1st is when they're planning on moving, and they may get in a little earlier. Then back to your first question on renewals. You know, I think on the whole, we have more expansions than contractions. There's always kind of a one-off story of a merger and some other things and how folks are going to use space. We are the beneficiary of being in growth markets.
If you look at corporations and the mix that Ted highlighted—who is growing and who's doing the deals—professional services, financial services, and engineering firms, I think we're seeing the infrastructure bill now starting to get through the system and putting a lot of these folks to work. They are looking for some more TI, you know, to commit to longer terms. Look at that term we had this year. We're very happy with that. You know, we're optimistic that that will continue around that same area for the coming quarters because, again, these folks are committed to this space, the ones that are making the decisions. We still have a few that might kick the can on the renewal side.
Generally, it might be bigger organizations that are looking at, you know, a multiple-city, multiple-market kind of strategy. We've actually had a few that thought they wanted to downsize. They gave us the heads-up, got in, and then came back and said, "No, we're just going to keep the whole thing." Again, I think it comes back to the calculus of what percentage of their spend is really just on this real estate when they're really talking about getting their people back together.
Great. Maybe I don't know if this is for Brendan or Ted, but any comments on Asurion and the sublease there? Obviously, it doesn't affect you guys from a direct standpoint, but do you share in any sublease proceeds, and have you had discussions with them about how they plan to use the asset in the future?
Yeah. Really, they've announced publicly. I think they're putting roughly 90,000 sq ft on the sublease market. At the same time, I don't think they've totally decided what they're doing yet. I think those plans are still evolving. We really don't have a whole lot of details on it thus far. That's really not too different from Bridgestone down the street. You know, a couple quarters ago, Bridgestone announced they're putting a few floors on the sublease market as well, and I don't think they've been actively subleasing it despite the public announcement that they're going to do it. I think time will tell.
All right. Great. That's helpful. Maybe one more on the acquisition at 650 at Legacy Union. Can you talk about the opportunity there? It looks like it's got some opportunity for lease-up, maybe some rent roll. If you covered it earlier, I missed some of the early portion of the call. I apologize.
No, Dave, we didn't hit it earlier. It's Brian. One of the extra hats I get to wear is the Charlotte Market Leader. 650 has already improved with regard to its leasing from the moment we got it under contract. From under contract to close, it improved, and it's leasing up since we've closed. It's physically connected to our Bank of America tower, and they share kind of parking and some executive parking. It was a natural fit first and foremost. That is basically the epicenter for those that know Charlotte, the epicenter of where activity is in all of Charlotte. Basically, Uptown and South End has moved to the South Tryon, you know, formerly known as Stonewall intersection.
We feel pretty good about that pickup and the buildings filling up. In fact, I'll tell you a little story about the building. We had Robinhood in there with two floors, right? They put it on the sublease market, and they've already been filled back up. We're going direct with one of them for an extension too, as to who that would be. We think it's a great combination with the tower next door.
The only thing I would add is on the Bank of America building, which we bought in late 2019. I think when we bought it, it was roughly 90% leased, and then COVID hit. Leasing had been slow at Bank of America, you know, during the COVID period and coming out. I think, you know, Brian and the leasing team have had great success this year. I think Bank of America is close to 98% today. We're just seeing a lot of activity on that end of Charlotte, downtown Charlotte.
That's really helpful. I'll just ask one more, sorry, one obscure question for Brendan. I know you had talked about using Pittsburgh and really reallocating that to Dallas. I realize that's a big-picture comment, but if you were to actually use those funds, if Pittsburgh still had a gain going forward, could you use that gain to buy out your partner? Because you can't use it on the development. I'm trying to figure out if that's a one-for-one swap or if something else has to happen in that transition.
Yeah, good question, Dave. No, that wouldn't be. We would have to deal with the gain from a tax. I'm assuming you're asking from a tax, you know, taxability standpoint, and given that our normalized taxable income is roughly in line with our $2 per share dividend, there's not a lot of natural room to absorb capital gains into the normal $2 per share annual dividend. But we do have tax strategies that are out there. I think even if we got proceeds from Pittsburgh, realized the capital gain there, I think we have enough strategies to be able to offset that.
Those aren't unlimited, but I think for the near term, we've got strategies where we'd be able to get disposition proceeds with capital gains and be able to generally freely use those dollars for reinvestment or debt reduction or what have you.
I appreciate that. All right. Thanks, everyone.
Our next question comes from Thomas Catherwood with BTIG. Please proceed.
Thank you. Hey, Brendan, looping back on operating expenses, I just want to try to put the pieces together here. Obviously, as we got into 2022 guidance, as you had talked about earlier, you had mentioned the expected increase in operating expenses. The first two quarters, we did not see that. It has obviously ramped, as you talked about, in the third quarter, and you expect that fourth-quarter run rate to kind of be the new normal going forward. Just by our back-of-the-envelope, it looks like that's another maybe 150 basis points increase in operating expense margin, which maybe is $2 million of OpEx before you hit your kind of your recovery limit or, you know, recovery ability, which should carry you into 2023. Kind of two parts then.
You know, what was the main reason for that lag in the operating expenses really ramping up in 2022? Math-wise, are we at least putting the pieces together in a logical and reasonable way?
Yeah. Thanks, Tom. I appreciate the question. For the first part of your question, you know, why didn't we see the sort of corresponding pickup kind of early in 2022? Why has it sort of taken until the third quarter? I would say there are a few different things that are going on, but I'll distill it down to utilization rates that have picked up kind of since the summer and, you know, even were a little bit higher post-Labor Day. That has driven operating expenses higher. Then certainly we've seen some inflationary pressure on operating expenses. The combination of those two items has largely driven operating expenses to a level where we feel like they are reasonably well normalized, as we kind of sit here.
Certainly, if inflation continues to be high, then that's likely to filter its way into operating expenses going forward. As I mentioned, we feel that on a go-forward basis, we're reasonably well protected because operating expenses are kind of getting back to pre-COVID levels, which means we're protected with expense stops for the most part across the vast majority of those buildings. That's why it's probably taken a little bit of time to kind of get back to where normalized levels are. Now, with respect to how that's going to play out in terms of operating margins going forward and then how you think about that on same-store, that's a little bit different.
I think from an operating margin perspective, it's probably fairly stable as we go forward from here, or at least in the fourth quarter. I think that is a fairly stable level. In terms of comparing year-over-year with recoveries and OpEx, there is the comparison to the prior year impact. That probably still becomes a little bit of a headwind. I would say OpEx net of recoveries is still probably a little bit of a headwind, albeit fairly modest in the first half of next year. There's the first quarter. That's probably the case, and then it should normalize over the next few quarters. Hopefully, that's helpful.
There's, you know, a lot of detail in there, but I do feel like we've kind of gotten to the point where operating expenses are roughly normalized and parking revenues are roughly normalized. We feel like we're in a pretty stable environment as we go forward from here.
Got it. I appreciate all those pieces and color, Brendan. Last one for me, this might be looking out a little bit further, but you placed the last 23Springs development into the stabilized portfolio this quarter. It's obviously fully leased up. The next kind of opportunity there is the YMCA site. What is the status on either entitling or rezoning that asset? What are your expectations of when you can, you know, start either marketing that or getting shovels into the ground over there?
Thomas, thank you for asking that question. Our leader in Nashville, Alex Chambers, is chomping at the bit to get going. It's in Brentwood, Tennessee, which is a very high-barrier-to-entry market. The BBD that we're in is even higher too, so we feel like we do have something unique in that YMCA site. We do have a little bit of a tail for the YMCA to finish up their operations there and to move to their new location. We are in design right now.
One of the great evolutions we've had in that master plan is that while we still have the three office buildings we master-planned going into the underwriting to purchase that, we have found the ability to add a strong retail component that is being met with a great response from the local market. We think that'll really add a differentiating mixed-use factor to that commute-worthy value proposition. We're working with the town of Brentwood right now. We're going to file the site plan this month and ideally be in a position to go as soon as we're ready next year. Thanks for the question.
Really appreciate that, Brian. That's it for me. Thanks, everyone.
There are no other questions. I'll turn the call back over for any closing remarks.
Thanks, everyone, for being on the call this morning. As always, if you have any follow-up questions, please feel free to reach out, and we look forward to seeing you all in a couple of weeks out in San Francisco. Thank you.
Thank you. That concludes the call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.