Cousins Properties Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Cousins Properties 4th Quarter Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. As a reminder, this call is being recorded on Thursday, February 8, 2024. I would now like to turn the conference over to Operator, please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Cousins Properties 4th Quarter Earnings Conference Call. With me today are Colin Connolly, our President and Chief Executive Officer Richard Hixson, our Executive Vice President of Operations and Greg Adzema, our Chief Financial Officer. The press release and supplemental package were distributed yesterday afternoon as well as furnished on Form 8 ks. In the supplemental package, company has reconciled all non GAAP financial measures to the most directly comparable GAAP measures in accordance to the Reg G requirements.

Speaker 1

If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website, cusmans.com. Please be aware that certain matters discussed today may constitute forward looking statements within the meaning of federal securities laws, Actual results may differ materially from these statements due to various risks and uncertainties and other factors, including the risk factors set forth in our annual report Form 10 ks and our other SEC filings. The company does not undertake any duty to update any forward looking statements, whether as a result of new information, future events or otherwise. The full declaration regarding forward looking statements is available in the supplemental package posted yesterday, and a detailed discussion of the potential risk is contained in our filings with the SEC. With that, I'll turn the call over to Colin Collins.

Speaker 2

Thank you, Pam, and good morning, everyone. We had a strong Q4 at Cousins. On the earnings front, the team delivered $0.65 per share in FFO and same property net operating income increased 3.5% on a cash basis. We leased 453,000 square feet during the quarter with a positive cash rent roll up. For the year, we leased approximately 1,700,000 square feet with a 5.8% cash rent roll up.

Speaker 2

New and expansion leases accounted for 52% of our overall leasing activity during the year. Our weighted average in place gross rent at year end 2023 was $46.95 per square foot, which is a 25% increase over year end 2019. These are terrific results. I will start with a few observations on market fundamentals. First, the return to work and lifestyle office properties is accelerating.

Speaker 2

Our properties are full of professionals whose lifestyle is centered around collaborating in the office with their teams, at least most of the time. As a result, our parking garages are filling up and demand for our space is increasing despite higher professional layoffs. 2nd, there is little to no customer or capital demand for old and tall CBD towers or suburban commodity properties. Many of these buildings will stagnate until they are repurposed or torn down. The process has already begun.

Speaker 2

3rd, new supply is shutting in. The math for new development just does not work in today's higher interest rate environment. Thus, the supply of office properties across the United States is likely to contract just as demand begins to improve. The same process played out not that long ago in the retail sector. Remember when retail was dead Until it wasn't, market forces are now rebalancing the office market in a similar manner.

Speaker 2

In our view, a shortage of lifestyle office properties in the Sunbelt is not far off. Turning to the Capital Markets, asset level debt and equity for office is far less available and significantly more expensive today. The investment sales market has temporarily frozen as private players adjust to higher cap rates. Conversely, the public markets show signs of improvement. Coupons in the unsecured debt market Along with implied cap rates and discounts to NAVs for office REITs, they've all tightened in recent months.

Speaker 2

Valuations in the public and private market for office now appear to be converging. A similar dynamic occurred after the global financial crisis and proved to be an attractive investment environment for REITs. In the short term, the narrative for the office sector is likely to get worse before it gets better. Media will focus on high vacancy rates in accelerating loan defaults. And this reporting will not be wrong.

Speaker 2

However, as I said last quarter, It will be an overgeneralization that conflates commodity office with lifestyle office. At Cousins, our priority is to drive long term earnings growth while maintaining a strong balance sheet. We have pursued that goal over the last 12 years by aggressively executing an intentional strategy to build the leading Sunbelt lifestyle office REIT, which will benefit from ongoing regional migration and flight to quality trends. And we remain extremely well positioned for an eventual churn in this cycle. Today, We own the premier lifestyle office portfolio in the Sunbelt.

Speaker 2

Our lease expirations through 2025 are among the lowest in the sector. Our balance sheet is undoubtedly the best in class. Net debt to EBITDA of 5.1 times is the lowest in the office sector. To be clear, the disruption from the COVID pandemic and the impact of higher interest rates have been setbacks. However, our strategy has proved resilient.

Speaker 2

Surprising to many, our property Net operating income was 23% higher in 2023 compared to 2019. Our 2024 guidance includes FFO that is flat year over year. We hope to outperform this and return to growth in the coming years. Let me highlight the building blocks. First, we intend to drive occupancy back over 90% in the intermediate term from 87.6% at year end 2023.

Speaker 2

As you know, the office business can be lumpy. So this metric will bounce around from quarter to quarter due to a large move out or a large commencement. However, on a multi year basis, we are optimistic that we can return Occupancy in our portfolio back to normalized levels. The return to office, Sunbelt migration, flight to quality And the flight to capital are all trends that will support our efforts. We have multiple competitive advantages and we plan to grow market share.

Speaker 2

2nd, we intend to allocate capital thoughtfully and accretively on a stabilized basis. We have a track record of identifying creative investment opportunities and funding them with the most efficient source of capital, Debt, Equity, Property Sales and JVs. As I mentioned earlier, valuations in the private and public markets appear to be converging. This creates a more compelling environment for Cousins. Near term, acquisitions appear more likely than development.

Speaker 2

We remain focused on Sunbelt properties that are or can be repositioned into lifestyle office. And while it's still early, We are in active discussions with several owners and lenders. Medium and longer term, the development of market leading lifestyle office and mixed projects will remain a key part of our growth strategy. Our current development and redevelopment projects will be meaningful contributors over the next few years and highlight the value of our development platform. Lastly, a decrease in interest rates would enhance our growth profile.

Speaker 2

While we obviously can't count on or control this, Hopefully, rates have peaked and begin to trend downwards sometime later this year. Any such movement would positively support asset values, transaction activity and our development efforts. In closing, we are realistic about the many competing forces in the market. However, we built Cousins to thrive during all market conditions. And today, we are in an advantageous position relative to other office companies.

Speaker 2

We are in the right Sunbelt markets. We own a trophy lifestyle portfolio with modest near term lease expirations. We have a fortress balance sheet with minimal near term debt maturities and we have a well covered dividend. I believe we have a unique opportunity and optionality in front of us. Before turning the call over to Richard, I want to thank our employees at Cousins who provide excellent service To our customers, their dedication, resilience and hard work continue to propel us forward.

Speaker 2

Thank you. Richard?

Speaker 3

Thanks, Colin. Good morning, everyone. Our operations team closed out 2023 with another solid quarter. This past year was marked by unprecedented economic uncertainty. So I'm very proud of our team for finishing the year strong.

Speaker 3

To start, I have an update on WeWork. As a reminder, we have 4 WeWork locations totaling 169,000 Square Feet in Atlanta and Charlotte and they represent 1.1% of our annualized rent at share. While WeWork has not formally rejected any of our leases, We are in active negotiations to modify our leases at Terminus and 120 West Trinity in Atlanta. As of today, we expect the size of both of those locations to be reduced by 1 third or about 26,000 square feet at share and for rent to be reduced. Regarding 725 Ponce in Atlanta, due to strong demand from multiple traditional office users, We have decided not to negotiate with WeWork at this location and expect the lease to be rejected.

Speaker 3

Lastly, we expect WeWork to accept the rail yard lease in Charlotte without modification. As a reminder, we are a 20% owner of 120 West Trinity And we have meaningful letters of credit supporting the leases at both 120 West Trinity and 725 Ponds. I would note our negotiations with WeWork are ongoing and have been very fluid today. On to results. For the 4th quarter, our total office portfolio weighted average occupancy end of period lease percentages were 87.6% 90.9%, respectively.

Speaker 3

Both metrics were down modestly sequentially and finished the year at or above where we stood in the Q1. Our 4th quarter numbers exclude Hayden Ferry 1 from the operating portfolio As it is now under a full building redevelopment, Hayden Ferry 1 was previously 100% leased and occupied by Silicon Valley Bank. So its removal was a partial driver of the sequential occupancy and lease decline. In the Q4, our team completed 39 office leases totaling 453,000 square feet with a weighted average lease term of 7.2 years. This was our 2nd highest quarterly square footage volume of 2023 and our total signed activity for the year was just under 1,700,000 square feet, Another fantastic year of leasing activity for Cousins.

Speaker 3

20 of our completed leases this quarter were new and expansion leases, representing just over 50% of our activity. Notably, in Nashville at our Newhall mixed use development, We completed 49,000 square feet of new office leasing this quarter. This brings the office portion of the adaptive reuse building to 88% and the overall project to 22% leased. We also remain encouraged by the pipeline, which includes approximately 150,000 square feet of office and retail prospects. We will also begin leasing the residential component of the project this spring.

Speaker 3

Our completed activity this quarter also included 2 important renewals with Wells Fargo at both Terminus and North Park in Atlanta combining for 105,000 square feet of renewed space. We also added a full floor to Apache's long term headquarters lease at BriarLake Plaza. Overall, I'm very pleased with the diversity of our leasing activity both from a market and industry perspective. Regarding lease economics, our average net rent this quarter came in at $33.53 and $35.15 for the full year. This quarter average leasing concessions defined as the sum of free rent and tenant improvements were $8.42 which is within 5% of our 8 quarter run rate.

Speaker 3

As a result, Average net effective rent this quarter came in at $22.46 and was $24.56 for the full year. For some perspective, our average net effective rent in 2023 was the highest in our history with the exception of only 2021, which included the full building lease for Domain 9 in Austin. Finally, 2nd generation cash rents increased again in the 4th quarter at just under 1%. Some of our lease metrics this quarter were softer compared to recent quarters, and we attribute this to the geographic mix of completed leasing activity. In short, our leasing this quarter was in buildings where net rents are generally lower than our average.

Speaker 3

For example, excluding our activity with Apache at BriarLake And Wells Fargo and North Park, 2nd generation cash rents increased 5.3%. With regard to our leasing pipeline, I'm pleased to report that we have already completed about 200,000 square feet of leasing in the Q1, of which about 70% are new and expansion leases. Our overall leasing pipeline is healthy And we are encouraged by the trends we are seeing to begin the year, especially in the early stage pipeline and our tour activity. For instance, over the last couple of months, we have toured 8 prospects representing over 400,000 square feet of aggregate demand at Hayden Ferry 1 in Phoenix. As always, early stage demand can take multiple quarters to translate into signed leasing activity.

Speaker 3

I also want to note that because we have so few expirations through 2026 and therefore likely lower renewal volume to complete, This could translate into lower total volume. As I just mentioned, our overall operating portfolio continues to enjoy some of the lowest near term expirations and the entire office sector. As of the end of 2023, we only had 19.4% of our annual contractual rent expiring through 2026, including a very low 4.3% in 2024. However, as is always the case, we do have some expirations that we expect to be move outs that are worth noting. As discussed on our last call, at the end of August of this year, we expect Accruent to vacate 104,000 Square Feet at Domain 4 in Austin.

Speaker 3

This also happens to be our only expiration greater than 100,000 square feet in 2024. As a reminder, Domain 4 is a 157,000 square foot single story office building on prime developable land adjacent to the main retail and entertainment corridor of the domain. As a result, we will almost certainly limit future leasing in this building to short term as is deals in order to maintain our optionality on this land. Looking to 2025, we only have 2 customers expiring that are greater than 100,000 square feet. The first I will discuss is Bank of America at 5th Third Center in Charlotte, currently leasing 317,000 Square Feet through the end of July 2025.

Speaker 3

We have begun to discuss this exploration with Bank of America and they have shared that they would prefer to locate Charlotte corporate employees and properties owned by the bank where possible. Based on those discussions, we view the bank as a probable move out Upon expiration, though that date is still about 18 months from now, 5th Third Center has timeless architecture, A great presence directly on Tryon Street in Uptown Charlotte and excellent access and parking. Given its good bones, We are already working to finalize plans to re energize this property with amenities and upgrades similar to those we have successfully completed at projects across our Sunbelt portfolio. The other 2025 expiration of size is a 112,000 square foot customer in the domain expiring in September of 2025, nearly 2 years from now. Our Austin team has begun to engage with this customer and while very early, The team is encouraged.

Speaker 3

Finally, looking into 2026, we have even lower overall expirations than in 2025 and only 2 customers a little over 100,000 square feet each set to expire. We are already in discussions to potentially renew one of those customers early. In sum, even with the one larger than usual probable move out in 2025, which is about 1.5% of total portfolio occupancy and our expectations around WeWork, the tailwinds of current leasing demand, A low near term lease expiration profile and over 730,000 square feet of new and expansion leases signed but not yet commenced that represent true absorption. We expect to maintain our occupancy level through the end of 2024 and then hopefully begin to build occupancy by the end of 2025 and into 2026. Turning to some market level dynamics.

Speaker 3

The U. S. Continued to show some stabilization of office fundamentals, especially in the high quality segment and the return to office is accelerating by most metrics. Leasing activity also accelerated in the 4th quarter as larger lease deals began to return to the market. According to JLL, the fuel volume in 2023 in the Atlanta metro area totaled almost 8,800,000 square feet, above levels from 2019, 2020 2021.

Speaker 3

According to Cushman and Wakefield, demand remains strong for the highest quality and best located space in Midtown, which is up 19.2% quarter over quarter. Further, sublease activity or sublease availability in Atlanta dipped In the final 3 months of 2023, down by 5% from the 3rd quarter, our Atlanta team signed a solid 217,000 square feet of leases in 4th quarter spanning all of our submarkets. In Austin, the office market concluded the year with positive momentum Surrounding leasing activity seeing the strongest quarterly level since Q2 2022 at 1,300,000 Square Feet per JLL. Additionally, Diverging from its upward trend since early 2022, sublease availability remained stable quarter over quarter in Austin. At the end of the Q4, our Austin portfolio was 94.4% leased with relatively little immediate availability.

Speaker 3

As always, I want to thank our talented operations team whose hard work made 2023 a successful year. We look forward to a productive 2024 together. Greg?

Speaker 4

Thanks, Richard. Good morning, everyone. I'll begin my remarks by providing a brief overview of our results as well as some details on our same property performance. Then I'll move on to our development pipeline followed by a quick discussion of our balance sheet before closing my remarks by providing some color around our initial 2024 earnings guidance. As Colin stated upfront, our 4th quarter earnings were solid and the operating metrics behind them remain strong.

Speaker 4

2nd generation cash leasing spreads were positive for the 39th straight quarter. That's almost 10 uninterrupted years of rent growth. Leasing velocity remained consistent with pre COVID levels and same property year over year cash NOI increased. It was a very clean quarter. There were no unusual or non recurring items of note.

Speaker 4

Subsequent to quarter end, we entered into a floating to fixed interest rate swap on the remaining $200,000,000 of our $400,000,000 term loan maturing in March of 'twenty five. The swap fixed is SOFR at 4.67 percent through the initial maturity date. For the full year, We reported FFO of $2.62 per share. This is up from our original 'twenty three guidance with a midpoint of $2.58 per share, despite a $0.01 per share negative impact from the SVB bankruptcy earlier in the year. This outperformance versus our original forecast was primarily driven at the properties.

Speaker 4

Full year same property NOI was a solid 4 point percent on a cash basis, which was our best performance since 2019. Digging a little deeper into our same property performance during the Q4, cash NOI increased 3.5% compared to last year. Cash revenues increased 60 basis points while expenses decreased 4.6%. Consistent with last quarter, these numbers were impacted by property Taxes. In addition to our regular appeals of tax assessments, our portfolio also benefited during the second half of the year From the well publicized tax cuts that were recently approved by Texas voters, the majority of our tax savings was in Austin, which is largely a triple net market And therefore, lower property taxes reduced both revenues and expenses during the quarter.

Speaker 4

Before moving on, I also wanted to point out the continued positive trend in parking revenues we saw during the Q4. Overall, Total parking revenues increased another 3% over the prior quarter and were up 15% for all of 2024 compared to 23. Turning to our development efforts, the current development pipeline is comprised of a 50% interest in Newhall in Nashville and 100% of Domain 9 in Austin. Our share of the remaining estimated development costs for these two projects is $70,000,000 which will be funded by a combination of our Newhall construction loan and our operating cash flow. Looking at our balance sheet, net debt to EBITDA is an industry leading 5.1 times.

Speaker 4

We have no significant debt maturities until July of 'twenty five. Our liquidity position remains strong with only $185,000,000 outstanding on our $1,000,000,000 credit and our dividend remains well covered with an FAD payout ratio of 72% in 2023. As a quick reminder, our current common dividend is over 10% higher than it was pre COVID. We are in a very small number of office REITs that have actually increased their dividend since 2019. I'll close by providing our initial 2024 guidance.

Speaker 4

We currently anticipate full year 'twenty four FFO between $2.57 a share $2.67 a share with a midpoint of 2.62 Our guidance is very clean. There are no significant one time non recurring items, including unusual term fees. There are no property acquisitions, property dispositions, development starts or capital market transactions. If any of these do take place, we'll update our earnings guidance accordingly. As Richard discussed earlier, we're in active negotiations with WeWork.

Speaker 4

While nothing's finalized, our guidance is consistent with the expectations Richard outlined. We have conservatively assumed a February 1 effective date for all of these potential outcomes. Our guidance does not include any payments of our unsecured claim in the SVB bankruptcy case, which we currently estimate will be approximately $10,000,000 The exact amount and timing of recovery against this claim is not yet known, But unsecured SVB bonds are currently trading around $0.55 to $0.60 in the dollar. So we do anticipate there will eventually be significant value in this claim. There's no impact on our 'twenty four guidance from the potential Bank of America lease expiration at 5th Third Center that Richard discussed earlier in the call.

Speaker 4

And while we're not providing guidance beyond 24 at this time, we anticipate the negative impact of this probable expiration on 2526 numbers will be more than offset by the stabilization of several developments and redevelopments during that period. Bottom line, our 4th quarter results were solid, driven by strong same property performance. Our best in class leverage and liquidity position remains intact and our dividend remains well covered. Our 2024 earnings guidance is flat with 23 numbers as anticipated higher interest expense and WeWork losses are offset by forecasted increase in NOI from our existing properties as well as our new developments and redevelopment deliveries. With that, let me turn the call back over to the operator.

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer Your first question comes from Jay Paskett from Evercore ISI. Your line is now open. Hi, good morning. Thanks for taking my question.

Operator

I was wondering if you could just

Speaker 5

be a little more specific on the timing for getting back to that occupancy to 90%. I know you kind of defined it as the intermediate term, but any more color there would be great.

Speaker 2

Yes, good morning. As we don't provide A forward earnings guidance, we're not going to provide forward occupancy specific forward occupancy guidance. But again, I think Richard walked through The building blocks of kind of the ins and the outs there and as I said, we do feel very comfortable over a multi year process that will drive earnings back up over 90%.

Operator

That's helpful. Thank you. And then just on a

Speaker 3

more broader view, I was wondering

Speaker 5

if you guys provide any commentary on your markets, which ones you're most excited about and which ones you're cautious as we head into 2024?

Speaker 2

Yes. It again, I'd say broadly speaking, the Sunbelt continues to perform very well, Specifically looking at our markets and I think where we've seen the strongest leasing activity to date It's certainly been here in Atlanta, which benefits from very diversified customer base. And so we have a lot of great space here and we've had a lot of success leasing it up. And so a couple other Of our markets of note that have been, I'd say, highly active has been the Tampa market continues to performed very well. It's probably the lowest vacancy rate market within our footprint today.

Speaker 2

And then out in Phoenix, we've got a lot of activity looking at Phoenix today and I'd attribute some of that to the overall market, but also very specifically to I think what's a really exciting repositioning project we're doing out at Hayden Ferry.

Speaker 5

Great. Thanks. That's all for me.

Operator

Your next question comes from Blaine Heck from Wells Fargo, your line is now open.

Speaker 5

Great, thanks. Good morning. The commentary on quarter to date leasing activity was But just thinking about your overall leasing pipeline, can you just talk about how much of the activity you guys are engaged in today is driven by tenants that have lease expirations and are either renewing or relocating at the same square footage or downsizing versus tenants that are either adding demand that's new to the market or expanding within the market and maybe how those proportions might be trending? Hey,

Speaker 3

Boyd. Yes, this is Richard. Yes, I'd say if we look back to 2023 is a bit of a proxy. We're still showing that of the customers we renew, they're net expanding rather than contracting. There's certainly a dynamic that's generally based on industry, maybe tech, a little bit of financial services where there is Generally some reduction in space on average when a customer is renewing.

Speaker 3

But we feel like, again, overall, we're in An optimistic position and stance when looking at our pipeline and looking at the product we have to lease and that We're actually seeing as well some interesting inbound activity or new to market activity in certain markets. I wouldn't call it robust full blown major primary headquarters leasing, though there's a little bit of that brewing. But we are seeing some interesting regional headquarters that are moving into particular markets, whether they be Tampa In Phoenix, as Colin mentioned, also here in Atlanta for certain. But we feel like there are Good optimistic things happening in the early stage pipeline.

Speaker 5

Very helpful, Richard. Thanks for that. And then just my second question, you guys are sitting just above 5 times on a debt to EBITDA basis right around your kind of targeted long term leverage goal. You just talk about how much dry powder you think you have for opportunistic investments, where you'd be comfortable bringing that leverage up to you for the right opportunity, Just how much investment capacity that affords you and also how you think about using equity or OP units in a deal

Speaker 2

Yes, Blaine. We've got significant capacity and That leverage low leverage profile I think oftentimes is painted with a kind of a defensive posture and it is defensive and it's certainly been provided a lot of over the last several years, but we really do think about our balance sheet and that low leverage from an offensive perspective. And in years past, we've done some of our, I'd say, most interesting transactions in times of dislocation and have moved leverage up, I think in the past as high as 5.5 times or even in the high fives, But then made it a priority to bring that leverage back down as we could. Today, if the right opportunities come along, we'll certainly take advantage of those. But really Our willingness to do so is going to be a function of opportunities that have got product that fit with our lifestyle office characteristics and are we able to do a transaction that will drive earnings and provide accretion.

Speaker 2

And so we look at that In totality and we look at that in terms of what our sources of funding might be, whether that is debt or equity or property sales and think about that holistically. But it's focused on investing in high quality lifestyle office and doing it in such a way that will provide accretion to our shareholders when stabilized.

Speaker 5

Great. Very helpful. Thanks, guys.

Operator

Your next question comes from Camille Baunal from Bank of America, your line is now open.

Speaker 6

Good morning. Your portfolio has such a wide healthy spread between leased and occupied Space, can you quantify how much of this is commencing in 2024? And from a timing perspective, Are the commencements pretty even throughout the year or back half weighted?

Speaker 3

Hi, Camille. It's Richard. So Of that $730,000 that I had in my prepared remarks, about $650,000 a little over that $1,000 are in 2024 and that is weighted kind of early 2Q.

Speaker 6

Appreciate the details. And the color also on the lower leasing spreads in the 4th quarter. As we look forward, can you provide any details around the mark to market across leases rolling over the year?

Speaker 2

Yes. Hey, Camille, it's Colin. As Richard mentioned, the mix This past quarter impacted those leasing spreads as we look forward over the course of the year. I guess I'd narrow our focus to the late stage pipeline that we've got and where we've got very specific visibility and our hope is that we'll continue to drive positive rent roll ups.

Speaker 6

Okay. And if I can sneak one more in, just more broadly in the submarkets where You're seeing positive net absorption. Can you talk to the type of pricing power landlords or yourself have? Is there a possibility for office rents in your market to continue to grow even with the challenges for the industry?

Speaker 2

Well, I think today it is still I think the market generally still favors the tenant. But I think when you really narrow your focus down into lifestyle office properties today, As I mentioned, there are a lot of market forces at play. We do see the overall supply of office in the United States coming down in real time And without any meaningful new construction and demand beginning to return, we can see that pendulum swinging in the not Too distant future for the best quality product. And so overall, while today I think rents are generally flat Over the course of the next 12 months, 24 months, I think that as I said, I think the market could shift and bring back pricing power to owners of lifestyle office like Cousins.

Speaker 6

Thank you.

Operator

Your next question comes from Tony Palome from JPMorgan. Your line is now open.

Speaker 7

Okay, thanks. First one, just for Richard, I just want to clarify and make sure I caught your comments right. So you think Occupancy at the end of 2024 in your guidance is better apples to apples than where you ended 2023, is that right?

Speaker 3

Generally in line.

Speaker 7

Okay. In line. All right. And then, Collyn, you talked about just Playing offense and you have the balance sheet capacity. Can you maybe talk to what you think deals that start to emerge look like economically in terms of where you think maybe either cap rates or IRRs or whether you're going in as a debt investment, like what this might look like as it unfolds?

Speaker 2

Yes, Tony, great question. As I've mentioned, we do think the we are seeing an increasing amount of interesting opportunities that we think are increasingly becoming more actionable. We've been very patient over the last 12, 24 months. And I think we'll ultimately be rewarded for that patience I think ultimately as we invest, the cap rates will be higher and the IRRs will be higher than they were 24 months ago. I think ultimately, how those pencil out, as I said, it's less of a function of a specific Cap rate as it is holistically as we look at again investing in lifestyle office properties and funding it With the most efficient source of capital that's ultimately going to drive accretion and stabilization for our shareholders.

Speaker 2

So those metrics, It's hard to specify specific cap rate. That's not really ultimately what's driving, will drive our investment.

Speaker 7

Okay. And if I just sneak one more in, just on Newhall, I think in the past you talked about That being product that once completed can maybe drive a bit more traffic because of just the nature of it and how unique it is. Wondering if you can comment on what that looks like now and just anything if anything shifted either on the demand side in that market Or just if there's any competitive supply that's getting in the way?

Speaker 2

No, it is the most unique Property, certainly in Nashville, the adaptive reuse component of it and then the mix of uses with the office, the multifamily and what will be really some compelling retail and food hall right along the banks of the Cumberland River. So we think that that will continue to drive strong demand and seeing that demand broad based across all industry types from professional services to marketing and advertising to legal, financial Services, we've seen very broad based interest and our I'd say really our goal is to drive to 50000 square feet of leasing a quarter and ultimately have a really attractive multi tenant, diversified rent roll at Newhall to complement the apartments in the retail.

Speaker 7

Great. Thank you.

Operator

Next question comes from John Kim from BMO Capital Markets.

Speaker 7

Thank you. Colin, on your opening remarks discussing older commodity assets being Repurposed. What are you seeing in your markets as far as what they're being repurposed into? Is it another type of office like medical or lifestyle or is it other asset types? And is there any opportunities for Cousins to participate in this?

Speaker 2

Yes. John, we are starting to see that actively play out and it's gosh, it's probably every week you see A media headline about a building that is being either torn down or repurposed. We could cite some very specific examples Across our markets, I'd say, if I had to characterize it today, you're seeing more suburban office, Commodity office product be purchased at very low basis and that product ultimately being torn down to be replaced with multifamily residential and mixed use type properties. And I'd say the larger older towers, In some cases, the cost to bring those buildings down is prohibitively expensive. And so there you're seeing Some of those assets trade at very low basis where developers are looking at converting that into either multifamily, some hospitality, some combination of both of those.

Speaker 2

I think from our perspective, we have looked at some, we'll continue to look at some of those and study. But again, I think our focus more broadly speaking is going to be an assets that we feel have a great deal of conviction that either already are or can be converted into lifestyle office.

Speaker 7

Okay, that's helpful. Thank you. My second question is just a clarification on Domain 4. Is your plan to place this asset into redevelopment once accruent leaves? Or are you looking to Execute short term leases, I think that was mentioned as an option and keep it as is until you form development plans.

Speaker 2

Yes, I think we're at a point where we're not ready to make that decision. As Richard mentioned, that accruent lease does expire later this year. There is one other customer in the building that's got an expiration a year or so later. And so our intention Is to definitely not sign any long term leases in the short term. If we can find customers who want space for a very short specific period, we're absolutely open to that and if we can drive Some NOI that way, we'll consider it.

Speaker 2

But I think we'll kind of continue to wait and see and make a decision on specifically what we do with that asset at a later date.

Speaker 7

Great. Thank you.

Operator

Your next question comes from Upal Rana from T Bank Capital Markets. Your line is now open.

Speaker 8

Great. Thank you. Just on the three leases with WeWork, they anticipate to reduce or cancel.

Speaker 3

What are your plans associated to that going forward? Yes.

Speaker 8

I'd be curious on any color there.

Speaker 2

What are our plans on the 3 WeWork leases?

Operator

Yes. With the once that's going to

Speaker 8

be reduced and potentially canceled?

Speaker 2

Well, again, I think With WeWork, again, there's 3 of the leases that Well, 1 in Charlotte that we don't believe will be modified. It's a very strong performer for them. 2, We are going to modify and those will shrink in space and have a reduced rent. And our hope and our view is those are in those two stores are in really strong buildings that we own today. Our customers view them as a nice amenity to have in the building and our hope is on the other side of the bankruptcy that WeWork emerges as a much stronger company with little to no debt and will be a terrific partner for us in those buildings.

Speaker 2

In the case of 725, Richard mentioned this earlier. From our perspective, there was just too much demand from traditional office users that were interested in that space to move forward with economics, restructured economics. So we've chosen to pass.

Speaker 3

Okay, got it. That was helpful.

Speaker 8

And then just on Newhall coming online in June, where are rents and sessions there today and where is the current development yield relative to when you originally started construction?

Operator

Yes,

Speaker 2

the Newhall continues to perform very well as we look at the net effect of rents Without being specific, I would say that the TIs are higher than we originally expected, but so are the rents. And so the net effective rents have been effectively flat to date. We'll as we move forward to finalize the project, we'll kind of continue to monitor that. And if we have to give more TIs to Stabilize that in a faster timeline, that's certainly something that we'll consider. But to date, the net effective rents have been effectively flat.

Speaker 2

The overall development yield, I'd say we certainly have had a would be lower than we started the project and I'd attribute it solely to higher cost of our interest expense. That's a floating rate loan And obviously that sulfur has moved and so the interest expense on that project has been higher than we originally anticipated.

Speaker 8

Okay, great. Thank you. And if I can squeeze one more in. Richard, you mentioned Austin has been doing has been seeing some decent momentum here. Can you elaborate more on that?

Speaker 8

What's going on in the ground there? And what's really driving some of that momentum?

Speaker 3

Well, I guess to clarify that I think I'd call Austin still less active than our other markets at this point. We are seeing positive dynamics as in, I'd say, the sublease listings have stabilized. And that's been a big dynamic in Austin for a little while now. So that to me is a nice leading indicator of things starting to potentially stabilize and turn. But it is still more quiet, I'd say, than our other markets.

Operator

Okay, great. Thank you. Your next question comes from Dylan Boryzinski From Green Street, your line is now open.

Speaker 7

Hi, guys. Most of my questions have been asked. But I guess just going back to sort of As you guys are looking at acquisition opportunities, are there certain markets across your footprint that are currently more attractive than others? Whether it be because of just a better outlook for supply and demand or whether it be because pricing has sort of degraded a little bit more?

Speaker 2

Dylan, good morning. It I'd say we'll certainly would pursue opportunities In any of our markets, we've got great confidence in all of them. There are perhaps some are Today have more strength than others, most of that really driven by Supply and the time it will take to absorb some of the new supply in certain markets. But I'd say generally speaking as a company over time, We would like to see our investment grow in some of the cities beyond or to a greater percentage beyond Atlanta and Austin. And so we certainly have a lot of interest in markets like Charlotte and Nashville and Dallas and Tampa, Because we'd like to enhance that geographic diversification over time, but that doesn't mean if a really compelling opportunity emerges in Atlanta or Austin where we've got great expertise and great platforms, we'll absolutely pursue those.

Speaker 2

But I'd say over a longer period of time, I would like to see the geographic diversification enhanced just a

Speaker 7

That's helpful commentary. Appreciate it. Thanks.

Operator

Your next question comes from Peter Abramowitz from Jefferies. Your line is now open.

Speaker 9

Yes. One of the themes that's been emerging this quarter is either lenders or partners that are pretty willing to take on unfavorable terms Just to get out of office and trim their exposure there. So just curious if you've seen any signs of that in your markets and what's the role of distress overall in the transaction market right now?

Speaker 2

Yes. Good morning, Peter. I appreciate the question. It is the answer is yes. We are beginning to see that.

Speaker 2

I would say there's a couple different trends that are all kind of coming together, which is you are seeing lenders or and a lot of investors In real estate trying to diversify out of their office exposure and at the same time, You're starting to see catalysts for things to happen in that you've got a significant amount of debt maturities that are starting to occur in 2024. And you also have increased leasing activity, which requires capital to pay tenant improvements and leasing commissions. And so that forces a conversation as who is going to fund that. And so that's all ingredients to create transaction and investment opportunities. And as I mentioned, That's why we've got some confidence that over the course of this year, we're going to begin to see much more actionable investment opportunities for Cousins.

Speaker 5

Got it. Thanks, Colin.

Operator

Thank you. There are no further questions at this time. Mr. Connelly, please proceed with your closing remarks.

Speaker 2

Thank you all for joining us today and your continued interest in Cousins Properties. We look forward to hopefully seeing you soon, but please feel free to reach out to our team with any questions in the interim. Have a great day.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Delivered $0.65 per share FFO in Q4 with same‐property NOI up 3.5%, leasing 453,000 sq ft in Q4 and 1.7 M sq ft for 2023 at a 5.8% cash rent roll-up.
  • See accelerating return-to-office at lifestyle Sunbelt assets as supply contracts due to high rates, while older CBD towers and commodity properties stagnate or face repurposing.
  • Maintain a net debt to EBITDA of 5.1x (lowest in the office sector), strong liquidity (only $185 M drawn on $1 B credit line) and a well-covered dividend with a 72% FAD payout.
  • Pursuing accretive capital deployment with near-term focus on Sunbelt lifestyle office acquisitions and two development projects (Newhall and Domain 9) with $70 M remaining costs.
  • 2024 FFO guidance of $2.57–2.67 per share (flat vs. 2023), targeting >90% occupancy from 87.6%, with WeWork lease modifications and market trends factored in.
AI Generated. May Contain Errors.
Earnings Conference Call
Cousins Properties Q4 2023
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