Cousins Properties Inc (CUZ) 2013 Q2 法說會逐字稿

Good day and welcome to the Cousins Properties second-quarter conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Tripp Sullivan of Corporate Communications.

Thank you. Certain matters the Company will be discussing today are forward-looking statements within the meaning of federal securities laws. For example, the Company may provide estimates about expected operating income from properties as well as certain categories of expenses, along with expectations regarding leasing activity, development, acquisition, financing, and disposition opportunities.

The Company will also provide information about the Texas acquisition, including matters related to the consummation of the acquisition, the financing of the acquisition, and the effects of acquisition, including its impact on accretion and leverage. Such forward-looking statements are subject to uncertainties and risk and actual results may differ materially from these statements.

Please refer to the Company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2012, and its current report on Form 8-K filed on July 29, 2013, for additional information regarding certain risks and uncertainties.

Also, certain items the Company may refer to today are considered non-GAAP financial measures within the meaning of Regulation G, as promulgated by the SEC. For these items, the comparable GAAP measures and related reconciliations may be found through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of its website at www.CousinsProperties.com.

Now I will turn it over to Larry Gellerstedt.

Good morning, everyone. I'm here with Gregg Adzema, our Chief Financial Officer, and Colin Connolly, our Chief Investment Officer. Thank you for joining us on such short notice. We have a lot of exciting things to discuss today and we look forward to getting everyone up to speed on all fronts.

As I'm sure you will understand, we are under fairly high time constraints today and I will ask during the Q&A that people limit their questions to one question and one follow-up so that we can try to get to everybody and maintain our schedule.

It was another solid quarter, highlighted by the 816 acquisition and the commencement of Colorado tower in Austin. We were also pleased with our leasing progress, particularly at Promenade and 2100 Ross. Our portfolio, which finished the quarter at 90% occupied, up from 87% one year ago, continues to benefit from a sustained run of positive leasing momentum.

Our same-property net operating income, which increased 5.5% over the prior year in the office portfolio, is perhaps the best reflection of this progress. I will briefly provide some additional color on leasing and investment activity, as well as our dispositions in the process. I will then finish with an overview of the strategy and why the Texas office portfolio transaction presents such a compelling opportunity for Cousins.

Leasing activity in our Texas portfolio, our current Texas portfolio remains strong across the board while overall activity and deal terms continue to improve in Atlanta. Buckhead and North Point in Atlanta have been particularly vibrant year-to-date with Midtown not too far behind. Downtown, where activity is generally sluggish, remains the one exception.

To give some additional context on why we are focused on Texas -- I would like to give some additional context on why we are focused on Texas. First, we have had a very successful platform in Austin and Dallas for nearly 20 years, so we know the markets well. Perhaps even more important are the unrivaled economic and demographic tailwinds there.

One data point that probably best illustrates the momentum is since the beginning of 2009, 43% of the net job gains in the US have come from Texas, which is pretty remarkable considering the state has less than 7% of the overall US population. There are no signs that this momentum will slow anytime soon, with PPR projecting annual job growth of approximately 3% for Austin, Houston, and Dallas through 2017, compared to the projected national average of 1.9%.

Let's go back to our leasing progress. At Promenade, the team executed five leases in the second quarter, generating 114,000 square feet of incremental leasing activity. The building is now 87% leased, up from 58% at the time of the purchase in late 2011.

At 2100 Ross in Dallas, we have signed leases totaling more than 210,000 square feet since acquiring the tower less than a year ago. It's now 82% leased, up from 67% at the time of the purchase. Our mission isn't complete, but we certainly like the early results that we have at both of these assets.

As I mentioned, activity is generally encouraging across the portfolio. Just last week we signed a tenant for the entire 51,000 square feet at our Westside Parkway building, formerly known as Inhibitex. With the building now 100% leased, we are taking it to market and expect to have it full by year-end.

At ACSC and 191 Peachtree, our two downtown Atlanta assets, new leasing activity is a bit slower than the rest of the portfolio but we remain encouraged about the prospects over the next 12 to 18 months.

Moving on to investments. As we discussed on our last earnings call, we closed another value-add acquisition in the second quarter with the purchase of 816 Congress Ave. in Austin, Texas. We paid $101 million, approximately 30% below replacement cost, for this 434,000 square foot Class A tower located in the heart of the CBD just a couple of blocks from the Texas Capitol building.

Partly due to unstable sponsorship, the building lost key tenants in recent years and is currently just 75% leased. The CBD submarket is 90% leased with strong momentum, so we will have the benefit of a rising tide as we work to stabilize the building. We are just getting going on this asset, but we feel very good about our prospects.

On the development front, the groundbreaking Colorado Tower, our 371,000 square foot Class A office development in downtown Austin, was a great success. And as expected, the pipeline of prospects has increased a good bit since the formal announcement, and we expect to have some good news to share on the leasing front in the upcoming months. This will be the first high-rise tower built in Austin since we developed Frost Bank Tower in 2003.

Emory Point continues to exceed expectations on both the retail and apartment components of the project. Gregg will provide some details on our progress in his remarks. Phase 2, which is expected to comprise 315 additional apartment units and 40,000 square feet of retail, is on track for an early fall commencement.

Regarding dispositions, the Avenue Murfreesboro and Tiffany Springs are proceeding on schedule and we hope to have both deals closed by the end of the third quarter. We are also in process with negotiating terms for our two retail joint ventures with Prudential and expect to be in a position to fully exit by the end of the quarter as well.

Before moving to the Texas portfolio acquisition, I am going to provide a quick reminder of our strategic plan and where we are in the execution process. It's a key part of understanding why this transaction is so compelling.

At the beginning of 2012, we presented a straightforward vision for Cousins that concentrated on three things -- simple platform, trophy assets, and opportunistic investments. The implementation of this vision was intended to streamline our business model, tighten our focus where we are strongest, and most importantly, maximize our ability to generate attractive returns for our shareholders.

I am pleased to report we've made significant progress on all fronts. Our portfolio is increasingly comprised of Class A trophy assets that are well-placed within high-growth Sunbelt markets where our expertise and long-term relationships are competitive advantages. Further playing to our strengths, we are using this stable platform to seek additional returns through opportunistic investments.

Over the last two years we've executed four compelling acquisitions, representing over 3.3 million square feet of trophy office space and more than $520 million in investment activity. We have also delivered two development projects, Mahan Village and Emory Point, and commenced a third, Colorado Tower, collectively representing over $220 million of total investment.

As we continue to execute the strategy, we remain primarily focus on capturing NOI embedded within our portfolio, executing our opportunistic investment opportunities, and maintaining a strong balance sheet. We believe that the first two items, embedded NOI and new investments, should drive significant future NAV growth. The third objective ensures a stable base, something we view as critical in generating strong long-term returns.

Our planned acquisition of Crescent's Texas office portfolio provides a very compelling and transformative next step in executing our strategic vision. In summary, we have entered into a contract to acquire Greenway Plaza, a 10-building, 4.4 million square foot office portfolio in Houston, and 777 Main St., a 980,000 square foot, Class A office tower in Fort Worth, Texas, for a total purchase price of approximately $1.1 billion in cash from a joint venture which is then operated by Crescent Properties.

We expect to fund the transaction on a leverage-neutral basis through proceeds from a common stock issuance, as well as the sale of non-core assets and mortgage financing. The acquisition is anticipated to close by mid-September of this year.

This transaction provides an outstanding fit on many levels -- high-quality urban office assets in very attractive Sunbelt markets; a rare combination of an attractive in-place yield, embedded NOI growth, and fugitive element potential; and not only do we expect this transaction to be accretive, we are able to expand our Texas platform and provide substantial geographic diversification at a significant discount to replacement cost.

We also attain notable benefits of scale, including a considerable improvement in our G&A expense ratios. This is an attractive opportunity on many levels and we are very excited about what it means for Cousins and the continued execution of our strategy.

I'm now going to hand it over to Gregg for an overview of the second-quarter financials and some additional information on the pending acquisitions. And then Colin Connolly, our Chief Investment Officer, will then provide more detailed overview of Greenway Plaza and 777 Main St. Then we will open it up for questions. Gregg?

Thanks, Larry. Good morning, everyone. Overall, we had solid and productive second quarter.

From an earnings perspective, FFO was $0.12 per share. $0.14 per share after adjusting for the $2.7 million non-cash cost associated with the early redemption of our 7 3/4% Series A cumulative preferred stock that I spoke of in the last quarterly conference call.

Beyond earnings, I think the primary theme of the quarter can be wrapped up in three positive events. First, we achieved same-property net operating income growth of 4.7% during the second quarter compared to the same period last year. It was 5.6% on a cash basis and the most encouraging part was that this growth was driven by our office portfolio where the same property cash NOI growth was 6%.

Next, as Larry previously discussed, we acquired 816 Congress in the Austin, Texas, CBD during the second quarter. Not only was this a strategic fit for us, we funded this acquisition predominantly with a common equity offering in April. During this offering we also raise additional capital to redeem our Series A preferred stock that I referred to earlier.

In total, we raised $165 million in new equity. These transactions allowed us to both grow the Company and improve the balance sheet at the same time.

Finally, we commenced construction of Colorado Tower, also in the Austin CBD, during the second quarter. After initially having the landowner as a potential partner, we were able to agree on a ground lease purchase option structure that allowed us to develop this asset as a 100% owner. This means we will develop this asset on balance sheet without third-party construction debt. It's a much simpler approach that provides us with all the economics of the deal.

With that, let me move on to providing an update on the embedded NOI associated with our big five assets. As a quick reminder, back in the summer of 2012 we identified three large assets in our portfolio that had significant upside potential due to existing vacancies. Those assets were 191 Peachtree, Promenade, and the American Cancer Society Center.

Upon the purchase of 2100 Ross during the third quarter of 2012 we expanded this list to four assets, and when we purchased 816 Congress during the second quarter of this year, we moved the number up to the current five. We estimated that bringing these five assets to 90% occupancy would generate approximately $14.5 million in embedded NOI.

As of June 30, we have signed net new leases representing about $9.3 million of this $14.5 million total. That $9.3 million is up 60% from the $5.8 million new leases we reported just three months ago. The amount of revenues we are realizing on these leases remained around $2 million during the quarter, reflecting some minor move-ins and move-outs.

Bottom line, what this means is that we have executed leases in hand of $7.3 million in incremental NOI that is not yet running through our income statement.

Looking forward, we will add 777 Main to this portfolio of assets with embedded NOI potential, creating the big six. We will provide specifics on the impact of this addition on our next quarterly conference call. Overall, we are clearly making progress with unlocking NOI in our value-add portfolio, but the story is actually much bigger than that.

While we are consistently eating away at the embedded NOI within these assets, we have also consistently replenished the pool with additional properties. We believe this provides opportunities for continued future earnings growth.

With that, I would like to update our guidance for 2013. Before starting, I want to remind everyone that we only provide data for specific property assets where historical performance may not exist or may not be a reasonable guidepost for future performance. We also provide guidance on fee income as well as G&A expenses when necessary.

At 2100 Ross in Dallas, in order to accommodate our recently announced 90,000 square foot lease with Netherland Sewell, we approached another tenant in the building who had some unused space and proposed an early termination. We received a $1.9 million fee associated with this early termination in the second quarter.

Until Netherland Sewell moves in during the fall of 2014, quarterly NOI at this property will decline as a result of this temporary vacancy. The new number at 2100 Ross will range between $800,000 and $900,000 in quarterly NOI for the final two quarters of 2013.

The only other property guidance I would like to provide is at Emory Point, where our recently completed first phase continues its lease up. The retail component of the property, which represents about 20% of the total NOI, is rapidly approaching stabilization at 82% leased and 80% occupied at quarter end.

The apartments, the other component of the property, enjoyed a very strong three months, leasing 133 apartments during the second quarter and increasing the leased percentage from 45% to 75%. Subsequent to quarter end, we have signed an additional 30 leases, bringing the apartments to 82% leased. As the year progresses, the NOI will continue to increase and by the fourth quarter we expect between $1.1 million and $1.2 million combined quarterly NOI from Emory Point.

That's all the guidance we are providing at this time. Again, other than these specific instances, historical performance or previous guidance is a reasonable guidepost for future cash flows.

So moving on to the discussion of our second-quarter financial highlights, I would like to review our financing strategy for the Texas acquisition. Overall, our financing plan is straightforward, leverage-neutral, and accretive to FFO. Our current debt to total market capitalization is approximately 30% and the financing plan we are pursuing keeps it there.

We will fund the acquisition with a combination of common equity, secured debt, and asset sales. In an effort to make the financing plan as transparent as possible, I would like to walk you through each significant assumption within the plan. Hopefully, this provides you with the data that you need to determine the financial implications of the sources and uses we've identified.

First, on the sources side of the ledger, we intend to raise approximately $700 million of new common equity through a follow-on offering. This assumes the exercise of the 15% overlapping. This $735 number and the sources and uses schedule that was posted on our website assumes 69 million shares at last Friday's closing share price of $10.65 per share.

Next, we intend to obtain secured mortgage debt on two office assets in our existing portfolio, Promenade in Atlanta and Post Oak Central in Houston. Both assets are stabilized. Promenade is currently 87% leased, while Post Oak Central is currently 93% leased.

We have essentially completed our repositioning efforts at Promenade and are, therefore, pursuing longer-term bid on this asset, somewhere between nine to 12 years. At Post Oak Central, we anticipate some significant value creation opportunities just a few years out and are, therefore, pursuing shorter-term debt on this asset, probably between five and seven years. We intend to raise approximately $270 million for these two financings.

Third, we have identified approximately $240 million in non-core assets that we intend to sell. Net of debt we expect to raise approximately $190 million in proceeds from these sales. In total, if we achieved $190 million in proceeds, we will have sold these assets at a 6.5% GAAP yield using second-quarter 2013 annualized NOI.

To the extent we raise fewer proceeds than anticipated from these capital sources, or the timing of these capital sources extends beyond closing, we have a fully committed $950 million term loan in place with a $150 million accordion. The rate on this loan is similar to our existing unsecured credit facility, currently at LIBOR plus 150 basis points.

These capital sources will be used to fund the $1.1 billion purchase price of the portfolio, as well as pay the fees associated with all the transactions involved in the acquisition. We intend to match fund the acquisition as closely as reasonably possible.

To the extent we raise excess capital, it will be used for general corporate purposes, but that is not our intent. The potential excess capital is reflected as cash on the sources and uses table.

Finally, I would like to point out that we expect to absorb this portfolio with no required increase in our G&A expenses. By increasing our asset base by approximately 50% with no corresponding increase in G&A, we have reduced the ratio of our G&A expenses to our undepreciated assets from 1.13% to 0.77%. This is a significant improvement and I believe places us more in line with our peers in the office space.

One last point. You may have seen our announcement yesterday regarding the launch of our proposed common equity offering. As I am sure you understand, since we're in the midst of the offering process, we cannot comment further on the potential offering during the Q&A portion of our call. But we are happy to address other questions you may have regarding the second-quarter results or the Texas acquisition.

With that, let me turn the call over to Colin for a more detailed property and market level overview.

Thank you, Gregg, and thank you all for participating in today's call.

Greenway Plaza consists of 10 office buildings and a small retail component that all-in totals 4.4 million square feet over 52 acres. It is a very unique asset in that it is effectively a stand-alone submarket centrally located between Houston's other leading urban submarkets, which are the central business district to the east and the Galleria to the west.

The property also benefits from its close proximity to River Oaks, which is one of Houston's most affluent residential neighborhoods and home to many of the city's corporate decision-makers. Greenway Plaza was one of Houston's first mixed-use projects and today it blends a cohesive, campus-like feel with the market-leading amenities and conveniences that tenants expect in an urban setting.

The project is currently 92% leased to a high-quality roster of large corporate users from primarily the energy sector as well as financial services firms and other leading real estate companies. Occidental and Invesco, both A rated by S&P, anchor the portfolio and account for approximately 26% of the total rentable square footage. Both tenants have more than 10 years of remaining lease term with Occidental's next expiration in 2026 and Invesco's in 2023.

Across the entire Greenway portfolio there's approximately 6.4 years of weighted average lease term, which offers a nice balance of stability and some near-term opportunity to roll up in-place rents, which are approximately 19% below market in our estimation. On a go-forward basis, we believe that Greenway Plaza will continue to benefit from a loyal customer base that has a demonstrated legacy of organic growth. As an example, Occidental, Invesco, and Transocean have all been tenants of Greenway since the 1980s and collectively have grown by almost 1.4 million square feet over that time.

Moving on to valuation, we have allocated a purchase price of $950 million, or $219 a square foot, to Greenway Plaza, which equates to a 7.6% in-place NOI yield on a GAAP basis, assuming only contractual rents. Said differently, this yield does not include any new speculative leasing.

Based on contractual rents, again not including any speculative leasing and assuming all year-one lease expirations go dark, the cash NOI yield is 6.3%. I would view this as merely a starting point for your analysis as we see meaningful near-term upside.

As I mentioned previously, the existing occupied space has in-place rents that are approximately 19% below market with several of the largest tenants having contractual rent escalations to market in the not-too-distant future. Lastly, based on the current leasing pipeline and overall strength of the Houston market, we are confident that we can drive additional occupancy and further enhance NOI on both a cash and GAAP basis.

Two more topics I would like to touch on with respect to Greenway Plaza. I think it's important to point out that Greenway benefits from several sources of material other income, which include a long-term, after-hours parking agreement with the adjacent Lakewood Church, chilled water services to an adjacent hotel and residential condominium, and ground leases with a bank and leading Houston restaurant. Backing out the value of these revenue streams, the valuation of the office buildings is approximately $204 a square foot, which represents a substantial discount to replacement cost and we believe positions us well to compete aggressively in the leasing market.

Lastly, I want to highlight some of the development and redevelopment potential at Greenway Plaza. Our team has identified four development sites within the existing footprint that can accommodate approximately 2 million square feet over time. We do not have any specific plans relating to new development at this point and no value is ascribed, but our team is excited about the long-term possibilities for Cousins at Greenway Plaza.

Turning to 777 Main, this asset is a 980,000 square foot Class A trophy office tower well located within the central business district for Fort Worth, Texas. The property is situated in close proximity to Sundance Square, which is a 35-block commercial, residential, entertainment, and retail district that has transformed the Fort Worth CBD into a highly successful mixed-use urban environment. Sundance Square is home to the world-renowned Bass Performance Hall, over 500,000 square feet of retail space, and an influx of urban residential properties.

777 is currently 91% leased with 5.1 years of weighted average lease term. And like Greenway, the customer base primarily comprises energy-related users, such as Frac Tech Services and XTO, the natural gas subsidiary of Exxon Mobil, which together account for 19% of the property's rentable area.

Jacobs Engineering plans to downsize from 330,000 square feet to 67,000 square feet at their expiration in November 2013. And after accounting for several Jacobs' subtenants that have signed direct leases that will go into effect, we project occupancy to fall to 72% by December 2013.

The strong historical performance at both 777 Main St. and the overall Fort Worth CBD, in conjunction with our recent success in the Dallas-Fort Worth MSA, gives us a lot of confidence in our ability to execute. 777 has averaged 96% occupancy over the last 10 years and Class A office space in the Fort Worth CBD as a whole has average 92% since 2004. I think it's important to note that Jacobs' decision to downsize was primarily driven by a corporate M&A event versus anything specific to the property, as Jacobs inherited this space as a part of their 2007 acquisition of Carter & Burgess.

Of the total purchase price, we allocated $160 million to 777, which equates to $162 a square foot and a 6.15% in-place yield on a GAAP basis, assuming only contractual rents and excluding the remaining $419,000 of contractual rent associated with the Jacobs go-dark space and all other year-one expiration. We made this exclusion relating to the Jacobs space in an effort to provide a clean go-forward starting point.

On a cash basis, again assuming no speculative leasing at 72% occupancy, the NOI yield is approximately 4.6%. We obviously have a lot of confidence in our ability to execute new leasings and renewals that are greater than zero.

The asset and return profile of our investment in 777 is very similar to our recent successful acquisitions, including Promenade in Atlanta, which was 58% leased at closing in November 2011 compared to 87% today; 2100 Ross in Dallas, which was 67% leased at closing in August 2012 compared to 81% today; and more recently 816 Congress, which was 74% leased at closing in May 2013. We see tremendous opportunity at 777 Main to significantly grow NOI through the lease-up of vacant space, in addition to rolling up in-place rents which are approximately 15% below market in our estimation.

To provide a little color on the economics of the lease-up of vacant space, CoStar quotes Class A office rents in the Fort Worth CBD in the high $20 a square foot net of electric. In conclusion, the strategy on 777 is spot-on with our historical value-add strategy of purchasing trophy Class A office towers in urban submarkets at a substantial discounts to replacement cost.

I would like to take few moments now to step back and provide some color on the robust markets of Houston and Fort Worth. Not only do we believe that we are buying excellent real estate, we believe that Houston and Fort Worth are two of the strongest real estate markets in the country today. Both markets are huge beneficiaries of the US energy revolution, which has generated significant job growth.

Houston has added 270,000 jobs since 2009 and PPR projects annual job growth of 2.9% through 2017, which compares to the projected national average of 1.9%. Much of this job growth has centered around the oil and gas industry and a meaningful percentage of those jobs are well-paying engineering jobs that utilize significant office space. So with those strong economic tailwinds, it is no surprise that Houston's office market remains one of the healthiest in the country with occupancy approximately 90% and annual rent growth that has averaged 4.5% over the last four years.

Like Houston, the Dallas-Fort Worth MSA has been a national leader in job growth. In fact, Dallas-Fort Worth led the nation over the past year with a 3.9% job growth rate and PPR projects that this strong growth will continue with an average annual growth rate of 3.1% through 2017.

Fort Worth is often overshadowed on a national basis by its neighboring sister city of Dallas, but the economic climate in Fort Worth is equally strong. Fort Worth literally sits on top of the Barnett Shale, which is a major natural gas reservoir. Advances in hydraulic fracking and horizontal drilling led to substantial development of the Barnett Shale starting in 2001.

These technological innovations have provided a significant economic stimulus to the area and created over 100,000 jobs. In total, Fort Worth's office employment has grown by 10.1% on a cumulative basis since 2008. Given the city's strong economic fundamentals, Fort Worth's 4.7 million square foot Class A CBD inventory has thrived and is currently greater than 90% leased.

While the Dallas-Fort Worth MSA is often characterized as a volatile low barrier to entry market, Fort Worth CBD has maintained occupancy over 90% since 2008 and has significant outperformed the overall Dallas-Fort Worth MSA.

At that point I would like to turn it back over to Larry.

Okay, so we will open it up for questions and we will let the operator start letting them come through.

(Operator Instructions) Brendan Maiorana, Wells Fargo.

Thanks, good morning. Colin, you were good enough to give some of the yields on a GAAP and cash basis.

Looking at Greenway Plaza, I was just kind of interested in the outlook of how quickly you guys think you can sort of get or where you think you can get cash yields over the next few years, because if I look at it looks like the occupancy is fairly high at 92%. I think you mentioned there are some large tenants that have some steps in rents, but it doesn't look like there's a huge amount of roll in the near term.

So where do you think you would kind of get that cash yield over the next, say, three years or so?

Brendan, it's Colin. Again, appreciate your participation this morning. I don't know that we can get into the specifics of what our projected yields are over the coming years.

I guess I would try to provide a little bit of color and visibility to you. As I mentioned, there are several very significant tenants within the portfolio that do have contractual step-ups in their rent to market that will kick in over the next few years. So you really don't actually even need expirations to get a pretty meaningful pickup in yield.

But, again, there are also some near-term expirations, none of the largest tenants, but we feel that those are below market. Then again I think we've got confidence in strength of the Houston market and our ability to work with those existing tenants to move them up to market as well.

Again, the building is 92% leased. As we are seeing in Houston today and certainly with our Post Oak investment, we do believe we have got the ability to drive occupancy further from where it is today.

Okay, that's helpful. Then maybe just to follow up on that, can you provide a sense of, again at Greenway, any near-term or longer-term costs that you think may need to go into that asset to bring it up to kind of the way that Cousins typically likes to run their assets?

Sure. I think we were -- we've tracked these Greenway assets for quite some time. As I think we actually got under the hood here we were pleased and not at all surprised at the condition that they were in, which is in very, very good shape.

These assets have obviously been owned by the joint venture between Crescent Real Estate and Barclays for the last several years. Again, very well-capitalized owner. Prior to that they were in the public arena owned by Crescent Real Estate Equities, which was one of our competitive REITs.

So they have been owned for quite some time by very large institutional-oriented owners. As our team spent significant time in these assets, I think our view is the condition today, the systems, the back of the house, they are very similar to our existing portfolio and how we manage and take care of our assets.

Okay, thanks. I will get back in line.

Dave Rodgers, Baird.

Good morning, guys. Thanks for taking the question. I guess maybe, Larry, talk a little bit maybe about how the Crescent transaction came about. Maybe any of the trigger points that were out there, the negotiations, and any remaining hurdles. And then, if you could, maybe give a little more detail on your two and your four rollovers at Greenway. Thanks.

Dave, thanks. This has really been a fantastic transaction for us and the history of it is really fairly interesting. So we in 2008/2009, some of you may remember, Cousins Properties was hired by at that time Morgan Stanley, who was an owner of Crescent after it went private, to do evaluations of the entire portfolio.

And so during that process we really got a very deep look at every asset, both in the office portfolio as well as the other diversified holdings that Crescent had. And so we have been tracking these assets. As a matter of fact, it's interesting that a couple of the assets that were in that portfolio that Crescent spun out before this acquisition, we have actually acquired, meaning 816 Congress and Post Oak. So we got to know those assets well during that process.

This process was really not a widely marketed process. Barclays and Crescent, given the size of the transaction and their desire for speed and certainty and no one could make an offer with any financing contingencies, it was a very limited pool and it was a very relatively short process, which we were pleased with on both fronts. At the end of the day certainty to close certainly was as important as price, as well as I think in this case Crescent is a first-class operation. They really manage their assets well and take care of their customers well.

We were -- a very important part of this transaction, from our perspective, is the team of people that will be joining Cousins Properties that are currently on the Crescent team. Their property management people and leasing people really bring a fantastic depth and experience to bring to our Texas platform. Additionally, will be able to utilize those resources to some of the assets I mentioned earlier that they previously owned that we are currently using third-party management and leasing folks. We will have the opportunity to look at bringing those things in-house.

So it really is a combination. I think it meant a lot to them that we wanted their people in addition to the financing and price things. I will let Colin address the roll in terms of Greenway.

Sure. I think you are looking at the investor presentation. In year two I would say what's primarily driving that is Exxon Mobil and in year four that would properly be driven by Transocean.

I would, I guess, point out to give little bit of color there, as I mentioned in my prepared remarks, Transocean has been a tenant in Greenway Plaza since the 1980s and I think really highlights the stickiness and loyalness of the tenant base, which really enjoys kind of the central location here in between the CBD, the Galleria, proximity to River Oaks. Then I think what is actually often kind of overlooked here, you are also in very close proximity to the Texas Medical Center.

In both cases, in kind of both years, the tenants I just mentioned are, call it, less than 50% of that expiration that you see. The others are made up of smaller, much smaller tenants, but those would be the two big ones.

(Operator Instructions) Aaron Aslakson, Stifel.

Good morning. Just I guess given the cyclicality historically of Houston, I guess what is your outlook going forward in terms of that market?

Aaron, one of the things that really has attracted us and why Houston has been a part of our strategic drive for the last three or four years is really the shift in what's going on in our country as a whole in terms of energy. Houston is not only oil, but it's gas and it's all the engineering support the goes to support those industries. In addition, all the other forms of energy, alternative sources of energy.

So it has really now become the global center for energy and the US, obviously, is going through a revolutionary change in terms of our energy position relative to the rest of the world. So we think that if you look at Houston in the last 10-year period, it has been a very strong performer throughout the cycle. It really did not get impacted in any significant way by the recession and all projections are that it will continue to do well.

And it's not just totally dependent upon energy. It has got one of the largest ports there in the country, which with the widening of the Panama Canal will continue to benefit. It has got one of the most largest and most respected medical centers anywhere in the country that's right near Greenway. So not that any city is recession and cycle proof, but we really think the prospects in Houston continue to be very strong. Probably the strongest of any of the markets we are currently in.

Thank you.

Michael Knott, Green Street Advisors.

Good morning, guys. John Bejjani here. So quick question just more strategically.

Previously, Larry, you mentioned you were kind of targeting desired concentrations around 40% Texas, 40% Atlanta, then another 20% North Carolina. Would you say that -- basically is that still the goal following this transaction or is anything -- or has the transaction or anything else you've seen this year impacted your thinking?

No, it really hasn't. Obviously, if you look at the relative size of those markets, we think the concentration that we currently have in Texas is fantastic and appropriate. We are just thrilled we've been able to source these opportunities.

If you go through the opportunities, this one and Post Oak really were certainly not widely marketed. Post Oak wasn't marketed at all; this was a very limited process. And so we've been able to source some things in Texas that we think are extraordinarily compelling -- 2100 Ross also we did a very creative deal, the new tower in Austin.

So the only fully marketed deal is 816 Congress, which we used to manage and so we know that asset well. So we like the concentration. We also like Atlanta.

Atlanta is really showing some very strong economic data in terms of job growth and projections. It's back to being in the top five in the country and has had some fantastic corporate relocations and just internal job growth. We would love to find some more stuff in Atlanta to add to our platform.

North Carolina continues to be strong. We just have not found something that fit just right for us or that we were able to achieve the pricing that other people in the market were able to underwrite on some assets there. So I really like the blend of where we are and we will continue to be more opportunistically driven within those three markets than trying to maintain a real tight balance with percentages.

Okay, that's helpful. I guess on the funding front you mentioned noncore asset sales, so just a quick question. Given the rise in interest rates that we've seen lately, are you seeing or are you expecting to see any impact on pricing for any of those assets?

Those four are -- I think the sales that we have been doing, we have not seen an impact on them. And I think that's really a combination of the type product it was and the location it was, as well as we took these assets to market really before the latest little spike in interest rates.

So what impact it has on go-forward sales, it will have to have some for the levered buyers and I'm sure that we will see that. But we haven't seen any of that in our current asset sales that we mentioned.

Great. Thanks, guys.

Thanks for waking up early.

Brendan Maiorana, Wells Fargo.

Thanks. Larry, you mentioned that you guys have been really good at harvesting value when it has presented itself. When you look at Greenway, this will be about a third of these asset value of the new Cousins, but it's a portfolio, and I think historically it has been a portfolio that is probably difficult to break up and maybe something that you don't want to break up.

How do you think about the long-term hold of Greenway? And do you think that there are opportunities to harvest value in that portfolio, maybe sometime in the more near-term versus maybe holding it for a very long time?

We really look at Greenway as very much of a 20-year project in terms of the redevelopment opportunity. It was a real driver for us looking at it and I think probably distinguished the underwriting, which we did. So we are not going in with an expectation that we are going to do a lot of new development right off the bat.

But we did, as you would expect, Brendan, just given our history, we did a fairly deep dive into what the development opportunities there are that Colin mentioned in his talk. It's not as complicated as it would look. Some of the buildings are relatively small, older vintage buildings.

But also the 2 million square feet that Colin mentioned, a fair amount of those buildings, 0.5 million square foot, first couple of buildings, the pads would really become available just by building additional parking that then frees up the space to -- that currently is covered with parking for the future towers. If you look at the cost of that, since we didn't attribute any value to the pads, the cost of making those pads ready on an [FAR] basis are very much in line with what you would go out and buy a site like that.

So we look at the new development aspect of Greenway more in that five- to 10- to 15-year perspective, but it was very much a part of our thought process in terms of looking at it. Colin, I will let you address some of the shorter-term things.

Sure. Brendan, historically Greenway has been held as a single asset. One of the things that really attracts us to Greenway is the optionality and embedded flexibility that is within the portfolio.

We obviously spent a lot of time doing our diligence. There actually is -- it's a pretty straightforward, simple process. Ultimately, if you did want to break up Greenway, and we could look at harvesting different buildings, I think we will go through and try to figure out what our master plan long term how we view that. We haven't made any decisions.

But, again, that kind of built-in optionality, both on the -- how we work with certain assets, whether it's to redevelop those, keep as is. And then also from the leasing perspective, I think the flexibility has been just a tremendous advantage for Greenway. Having different buildings close proximity to offer growth and expansion space and different price points has really helped Greenway over the years.

Okay, that's great color. Then just last follow-up for me.

Larry, with Greenway and then Post Oak Houston is -- I think it's about 44% of your asset base now. Did I hear you correctly, no increase in G&A? And I gather you are bringing on the Crescent folks into the Cousins fold, but are there longer-term plans to maybe add some additional staff in Houston over time?

The percentage actually in Houston will be 37%, which will be -- Houston and Atlanta will be abruptly the same in terms of our percentage ownership. Initially, what we look for to happen in Houston is there's just fantastic property management, very experienced leasing team and asset management team that has been covering not only Houston, but Dallas and Austin and some other markets, for Crescent.

As you know, Crescent also over the years has been a developer and so there is certainly development knowledge and expertise and history within the Crescent folks, so we may also be able to add some development expertise in Texas as well. That would be something we will determine a little bit more between now and closing. But the people, the platform, the experience of those people will be extremely beneficial to not just Houston but just our entire Texas operation.

Thank you. We have no further questions at this time. Mr. Gellerstedt, I will turn the call back over to you for any closing remarks.

Well, we very much appreciate everybody being here on short notice and at an early hour. This is something that we obviously are extraordinarily excited about. It's one of the most compelling opportunities that I have seen in quite a while and we will be hard at work today doing the rest of the equity raise.

We look forward to talking to you all anytime today or in the future. Thanks so much.

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.