Cousins Properties Inc (CUZ) 2013 Q4 法說會逐字稿

Good day and welcome to the Cousins Properties fourth-quarter 2013 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 the expectations regarding leasing activity, rental rates, leasing expenses, development, acquisition, financing, and disposition opportunities, and expectations regarding the demographic and economic trends and markets in which the Company is active.

Such forward-looking statements are subject to uncertainties and risks, 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, 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 webpage at www.cousinsproperties.com. Larry?

Good morning, everyone. And thank you for joining us today. With me this morning are Gregg Adzema, Cousins Chief Financial Officer; and Colin Connolly, Cousins Chief Investment Officer.

For the past two years we've been consistent in our strategy to transform Cousins by focusing on a simple platform, trophy assets, and opportunistic investments. 2013 marked a pivotal year for the Company's execution on this vision.

I want to acknowledge our team at Cousins who have performed at a phenomenally high level in making this transformative year a reality. I am honored to be part of your team. Let me start with a brief synopsis of our year.

Our most notable move, the most acquisition of Crescent'sTexas portfolio grew the Company's total market cap by 57% overnight while adding 5.3 million square feet of class A office assets in Houston and Fort Worth. In the first half of the year, we acquired Post Oak Central in Houston and 816 Congress in Austin. Our Texas presence now represents approximately 52% of our total portfolio square footage in the three major markets of Houston, Dallas-Fort Worth, and Austin.

We simplified the platform with $192.9 million in retail asset sales, including the sale of substantially all of our lifestyle and power center assets. Additionally we broke ground and two well-positioned developments in our core markets, Colorado Tower, a trophy office building in Austin and Emory Point phase 2 and opportunistic mix-use development in Atlanta.

We announced our new strategic plan in January of 2012. Our equity market cap was $665 million with 46% of NOI coming from urban trophy office buildings. Today, it's $2 billion with 85% of NOI coming from urban trophy office assets. We timed the cycle well during this period acquiring $1.6 billion of trophy assets at an average discount of 57% to replacement cost. Once again, our team has done an excellent job of executing the strategy and we are now reaping the benefits in terms of earnings growth, share price appreciation, and a significant dividend increase all while managing the balance sheet leverage at a level notably lower than the majority of our peers.

As we move forward in 2014, we remain very bullish on the health of our targeted submarkets in Houston, Dallas-Fort Worth, Austin, Atlanta and Charlotte. These market boast some of the most dynamic and robust demographic and economic trends in the nation and have proved to be resilient during recent tough economic times.

A critical factor propelling growth in our nation has been the US energy revolution and Houston has emerged as a leader. Since January 2010, Houston has added 377,000 new jobs, more than two jobs for every job lost during the recession. And forecast shows Houston's employment growing at a rate which is more than 50% greater than the national average. The city has also one of the largest medical complexes in the world and stands to gain the economic benefits from the upcoming expansion of the Panama Canal.

Dallas/Fort Worth and Austin represent additional growth prospects in Texas with forecasted employment growth of 2.7% and 3.3% respectively. Dallas-Fort Worth added more than 80,000 jobs in 2013, the second largest gain of any US Metro area. Austin's affordability, strong population growth, and talented workforce continue to fuel future employment with the economy forecasted to grow at nearly double the national pace.

The Atlanta metro area, while slower to recover from the recent recession than its counterparts in Texas, is showing encouraging signs of economic growth. Atlanta has reclaimed all of the office jobs it lost during the downturn with the second half of 2013 representing the strongest two quarter period of office absorption since 2007. The metro area's diverse and talented labor force, coupled with its low business costs, provides an attractive value proposition for new and expanding businesses with the tech sector driving the majority of absorption in the market.

Charlotte has returned to it's pre-recessions peak within an annual job growth forecasted to outperform the national average by 67%. All sectors of business has contributed to this economic expansion and Charlotte will continue to see growth as many corporations consider this market for corporate relocations and expansions.

Confidence in our core markets is supported not only by the healthy underlying fundamentals but also by the high cost and pure physical barriers for new supply. The dynamic of limited, new-spec office product currently under construction, scarcity of attractive office sites due to multifamily development, and tightening vacancy applies to all of our target submarkets providing a positive environment to push rental rates.

Let me brief you on our plans for 2014. Operational excellence, a core value of Cousins for the past 56 years continues to drive our business. We remain focused on capturing NOI embedded within our assets by leveraging our leasing and development expertise to drive value across the portfolio. Gregg will give more color on the embedded NOI later in the call.

On the new development front, we continue to be on the lookout for select opportunities in all of our key markets. Austin, Texas is a perfect example of where lease economics, supply constraints and economics expansion support new development. Colin will update you on Colorado Tower in a few minutes along with additional progress in our development pipeline.

In addition to sourcing attractive development opportunities we continue to evaluate value-add and select-core acquisitions which are below replacement cost, as well as taking strategic land positions to bolster our development pipeline. The great recession weakened market fundamentals providing for an excellent opportunity to acquire value-add assets over the last two years. As I've mentioned earlier, we were very active during that window.

We will continue to pursue value-add acquisitions but are mindful of the reduced market opportunity as many of our typical targets have been stabilized. Nonetheless we remain confident in our teams ability to identify growth opportunities by executing and growing our development pipeline while selectively acquiring core and value-add acquisitions that strategically enhance our market concentrations.

In summary, 2013 was truly a transformative year for Cousins. We carefully assembled a portfolio with embedded opportunities to grow value for our shareholders in markets with healthy economic dynamics and position the Company to take advantage of opportunities to grow where and when it makes sense. We're very excited about the prospects that lie ahead. With that I will turn it over to Colin.

Thanks, Larry. Good morning, everyone.

As Larry mentioned, 2013 was a fantastic and transformative year for Cousins. We've repositioned the Company through a combination of value-add acquisitions, several new development starts, and dispositions of non-core assets. The net result is a portfolio that overwhelmingly consists of trophy office properties located in the best urban submarkets of Atlanta, Houston, Austin, Dallas and Charlotte.

The strategy behind this is simple. We believe that these type of properties if managed in a first-class manner will outperform over the long term and generate the best returns for our shareholders.

To highlight this in realtime, let's take a deeper look at the Buckhead submarket in Atlanta which is home to our Terminus property. According to CoStar, Class A occupancy in Buckhead is about 85%. However the trophy [comset] in Buckhead, which in our view consists of approximately 6.5 million square feet, is 91% leased and significantly outperforming the broader market.

There are very similar dynamics at play in our other urban submarkets including Midtown Atlanta, the Houston Galleria, Austin CBD, and the uptown Arch district in Dallas. The best assets in the best submarkets recover the quickest and command the best rents within their respective markets. And most importantly to our shareholders we're beginning to see our strategic focus on trophy urban office properties in our aggressive expansion into Texas translate into real financial results for Cousins.

Our team leased over 430,000 square feet of office space during the fourth quarter at economics that continue to trend in a positive direction. Moreover, the re-leasing spread on a cash basis during the fourth quarter was 11% to the positive. The primary driver of this growth is our Texas portfolio. When we purchased 2100 Ross, 816 Congress, Post Oak Central, and the Crescent portfolio we disclosed that in-place rents ranged in our estimation between 15% to 20% below market. We're now executing on this rent roll up opportunity and are excited to see it have such an immediate and powerful impact on performance.

We continue to make both leasing and operational progress at our recent value-add acquisitions and are capitalizing on their embedded organic-growth opportunities through the lease up of vacant space, strategic incremental capital investments, and the continued roll up of below market rents. More specifically, at Promenade and 2100 Ross we had great early success on the leasing front and are now in the final stages of significantly repositioning these projects.

In both cases, these enhancements have led to robust leasing pipelines which position us well to drive rental rates as we complete the lease up of these properties. We are confident that this will ultimately translate into meaningful value creation on our capital investment.

At 816 Congress, we mitigated a key risk of the investment with their renewal of Teacher Retirement Systems of Texas during the fourth quarter. We are underway on an upgrade of the buildings amenities and believe that the property is now ready to attract more than its fair share of the approximately 320,000 square feet of positive net absorption currently looking for a home in the Austin CBD.

The Fort Worth CBD has softened given the impact of Jacobs Engineering departure at 777 Main, and some recent spec supply that is delivered to the market. We knew this going in to our transaction and still very much believe in a long-term opportunity at 777 Main. Fort Worth alone added over 38,000 jobs last year and we believe it's just a matter of reeducating the market to the CBD which is been 90%-plus leased for some time, once again has some high-quality space available.

Greenway Plaza and Post Oak Central are performing exceptionally well as both properties are approximately 95% leased. We continue to see strong demand for these properties from both existing and potential new customers. This dynamic, coupled with very strong market fundamentals, has allowed our team to successfully drive rental rates well beyond our original expectations.

Transocean did exercise a termination right during the fourth quarter on 82,000 square feet at 5 Greenway Plaza that also triggered a termination fee. Transocean leased the space, which is adjacent to their headquarters space in 4 Greenway Plaza to house additional legal resources following the Deepwater Horizon disaster that occurred in 2010. As that legal work has been winding down, we were not surprised to see this underutilized space given back and happy to report that the team is already backfilled approximately 10,000 square feet of the space.

Transocean has been a long standing and loyal customer at Greenway Plaza dating back to 1989. We look forward to continuing our strong relationship and serving their needs into the future. We look forward to introducing Greenway Plaza and Post Oak Central, both terrific assets to those of you attending our investor day next week in Houston.

On the development front, Colorado Tower in Austin, Texas is on schedule for a fourth-quarter 2013 delivery. We are now 25% leased, up from 22% leased at year end with the addition of approximately 12,000 square feet of new leasing in the first quarter. As I mentioned earlier, the pipeline of net absorption in Austin CBD is significant and Colorado Tower continues to receive very strong interest in marketplace. We are in final lease negotiations with several of these potential customers which gives us confidence that our pre-leasing will continue to increase throughout the course of the year.

We also broke ground on Phase II of Emory Point, an opportunistic mixed-use development in Atlanta. Following the success of Phase I of Emery Point where the retail is now 90% leased, up from 87% at year end and the multifamily component is 97% leased, we plan to add 43,000 square feet of retail and 307 apartment units. The project is slated to open in the first quarter of 2015.

We continue to pursue the 123 West Franklin, a mixed-use development project in downtown Chapel Hill where we hope to commence construction in the first quarter of 2015 the development of anticipated is consist of 314 apartment units, 123,000 square feet of office, and 51,000 square feet of retail.

On the disposition front, we sold the Inhibitex building located in the North Fulton submarket of Atlanta for a purchase size of $8.3 million before credit for free rent. As a point of reference, this property was 100% vacant since the third quarter of 2012. Our team did an excellent job of identifying a single user for this non-core property which in turn allowed us to monetize this asset at an attractive price for our shareholders. I will now turn it over to Gregg.

Thank you, Colin. Good morning, everyone.

As I mentioned in the last quarter's call, we expected fourth-quarter earnings to accelerate and they did not disappoint. FFO for the quarter was $0.18 per share, up almost 30% over the fourth quarter last year. Excluding the gain on a recent sale of third-party business, this was our highest quarterly FFO per share number since 2008.

It was also a clean quarter. There were no special or unusual items pushing FFO either up or down. We expect this to be the beginning of a constructive trend.

Going forward, the simplicity and quality of our earnings should increase with a much larger percentage coming from property level NOI rather than fee income, land profits and the like. And as such it should be easier for you to understand, to forecast, and to value. When all is said and done we expect fourth quarter of 2013 will mark an important point in time for Cousins. It will be the beginning of a period in which we expect to generate mover simple and predictable, high-quality earnings.

And high quality doesn't stop with just earnings. We also have a higher quality balance sheet. I would like to take a moment to quickly review the progress we have made with our balance sheet over the past five years. It's fairly dramatic.

In the first quarter of 2009 our debt to total market cap was 70%. Today it is 29.5%. Adding in preferred equity, it was 80% in the first quarter of 2009. Today it's 32.8%. Our debt-to-EBITDA in the first quarter of 2009 was 14.9. In the fourth quarter of this past year it was 4.7.

These are significant improvements, and relative to our office peers these are best-in-class ratios. But most important, this balance sheet strength puts us in an excellent position to execute the strategic plan Larry laid out earlier in the call. It's an active, not a passive plan, that very few in our industry could successfully implement. It requires powerful relationships, it requires deep development expertise, and it requires rock solid financial flexibility and we have all three.

Now for the numbers. Our fourth-quarter earnings performance was driven by solid same-property operating data. Revenue was up 4.3% and NOI was up 3.7%, as well as continued lease up at our portfolio properties that have in place embedded NOI growth potential.

As a quick reminder, in the summer of 2012 we identified three large assets in our portfolio that had significant NOI upside potential due to existing vacancy. 191 Peachtree, Promenade, and the American Cancer Society Center. Upon the purchase of 2100 Ross during the fourth quarter of 2012 we expanded this list to four assets. When we purchased 816 Congress during the second quarter of 2013 we moved the number up to 5. We added a sixth, 777 Main, a trophy office tower that was part of the Crescent acquisition last quarter.

With the addition of 777 Main we estimate that moving the occupancy on these six assets from where it was at the time we added them to this group until they reach 90% occupancy, will generate approximately $18.5 million in embedded NOI. As of December 31, we have signed net new leases representing about $10 million of this total. The amount of annualized revenues we are realizing on these leases was about $3.5 million during the fourth-quarter 2013, up from $2 million in the third quarter. We'll continue to keep you apprised of our progress with these properties.

Also wanted to note the significant progress we have made with our overhead costs. In the last year alone we have reduced G&A expenses as a percentage of undepreciated assets from 1.3% to 0.7%. And we've done this while preserving our value add and development capabilities. We honestly believe that Cousins offers investors a unique opportunity in the REIT space to benefit from its proven value-add and development capabilities at a reasonable cost.

Please note that we've added a new schedule to our earnings supplement. This schedule outlines office leasing statistics for the current quarter and the year to date. It provides detailed rent and cost information, as well as year-over-year changes in rent economics for second-generation space. I hope you find it helpful.

Finally, I wanted to express how excited we are to have recently increased our annual dividend rate from $0.18 per share to $0.30 per share. This is a 67% increase. The increase is driven by the successful execution of our strategic plan over the last three years. We are confident that our cash flow going forward adequately supports this increased dividend rate.

While we are talking about cash flow growth, I would like to take this opportunity to provide introductory guidance for 2014. Before starting I want to remind everyone that we do not provide FFO guidance. We only provide guidance for specific assets where historical performance may not exist or may not be a good guidepost for future performance. We also provide guidance on fee income, as well as G&A expenses.

I'll start with the assets in our embedded NOI portfolio that require updates. Where occupancy gains will drive higher NOI as the year progresses. First at 191 Peachtree, our office tower in downtown Atlanta. We expect to generate approximately $4 million in first-quarter NOI, increasing to $4.4 million by year end.

At Promenade, our office tower in Midtown Atlanta, we expect to generate approximately $2.5 million in first-quarter NOI, increasing to $3 million by year end. At 2100 Ross, our office tower in the Arts district of Dallas, we expect to generate approximately $900,000 in first-quarter NOI, increasing to $1.8 million by year end. At 816 Congress, our office tower in downtown Austin, we expect to generate approximately $1.6 million in first-quarter NOI, increasing to $2 million by year end.

Now for our other properties that require updated guidance. At Meridian Mark Plaza, one of our two medical office assets in Atlanta, we recently completed a 10-year extension with Northside Hospital. As part of this extension their base year was reset moving quarterly NOI to between $900,000 and $1 million during 2014.

At The Points at Waterview, our office asset outside of Dallas, we have a move out in early 2014. This will move quarterly NOI to between $250,000 and $350,000 for the year. At Terminus 200, one of our office towers in Buckhead, continued improvements will lead to quarterly NOI in 2014 to be between $1.3 million and $1.4 million.

And finally, I would like to provide updated guidance for our two large acquisitions in 2013. First, at Greenway we expect to generate approximately $18.5 million in first-quarter NOI, increasing to $19.5 million by year end. And at Post Oak Central we expect significant increase in NOI during 2014, driven by increased occupancy. As well as Apache, our largest tenant, switching to a triple net lease resulting in increased expense reimbursements. Quarterly NOI at Post Oak Central will move up from approximately $4.3 million in 2013 to between $5.5 million and $6 million in 2014.

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

Regarding G&A expenses. We expect our 2014 net number to be between $20 million and $22 million, this is down about 5% from 2013. As for fee income we expect a number between $7 million and $8 million in 2014.

To wrap up, the team here at Cousins is excited with our prospects for 2014. Office fundamentals are improving in our markets and we have a large portfolio of assets with embedded NOI potential that we are leasing up into the strength. Many of our recent acquisitions have in place rents, below current market rents and will also benefit from the strength as leases expire. We are also at a point in the real estate cycle where development may make sense and we have the team and the experience to take advantage of this opportunity.

Finally, our overhead is appropriately sized and our balance sheet is in great shape. We look forward to reporting our progress as we move through 2014. With that, let me turn the call over to the operator for questions.

(Operator Instructions)

Jamie Feldman, BofA Merrill Lynch

Great, thank you and congratulations on the quarter. Can you guys talk a little bit more what you're seeing in Downtown Atlanta? I know from broker contacts we've been hearing that Midtown and Central Perimeter are all doing well but it's like you're starting to see more signs of life Downtown. You also had some leasing at 191 -- oh, I guess you lost an occupancy at 191 Peach Street. But just generally what's happening in that market and how should we think about it going forward?

Good morning, Jamie. As you alluded to in your question what we have seen in Atlanta is significant tightening of the Central Perimeter, or significant tightening in Buckhead which bodes well for both Midtown and Downtown. And in the last two quarters we've begun to see that demand in terms of prospects looking at both submarkets, and the tightening will happen first in Midtown but the amount of activity we are seeing in Downtown has also increased significantly.

And I want to remind folks on the call -- as we've said before, there is about $2.5 billion of investment, new development investment going on in Downtown Atlanta which surpasses the amount of investment that went on during the 1996 Olympics. That includes a new Falcon Stadium, a streetcar that opens in May of this year, new college football Hall of Fame which opens in August, new National Center For Civil and Human Rights which opens in June, as well as significant expansion for both Georgia Tech and Georgia State.

Downtown, in addition to that, you got Coca-Cola which are moving 2,000 high-paying IT jobs from Cobb County to Downtown this year. We are beginning to see the benefits of that in Downtown but we are also seeing increased demand in Midtown which has lagged a little bit behind Buckhead thus far and obviously we have been the beneficiary of that at Promenade.

Great. Thank you and then I guess a follow-up, in your comments you mentioned your submarkets have not seen a lot of these supply but can you talk a little bit more granular about Houston? We are seeing supply start to pick up there and just how we should be thinking about your portfolio positioning versus maybe the submarkets that are seeing new supply?

Yes, Jamie. I will kick it off and I'll let Colin add some color to that. In the Galleria submarket, which is about 18 million feet, you've had two buildings deliver in the last year that totalled a little bit over 600,000 feet and they're both being delivered with significant occupancy in place. I think it's close to about 90%. That's the first two buildings that have been added in 30 years in that submarket and obviously it has absorbed that supply easily.

The other thing that's happened across all of our submarkets which I alluded to in my speech, is a lot of the office sites in all of our markets have been taken up by the multifamily expansion, which is great for office owners on two fronts. One, it takes our competitive sites and two, it as to the quality of life that folks are looking for with the urban experience. So we think there is only two or three sites left in the Galleria market and a couple of other sites are taken by build-to-suits which are slated to happen in the next year.

Greenway has not seen any new supply. We understand that there may be one building that is starting some site work and I will let Colin add to anything that I've missed in those comments.

Sure. We're certainly very mindful of the new development discussion in Houston and track it very closely throughout all of the submarkets. Really, you look at it on a macro level in Houston depending on whose numbers you use, there's anywhere from 13 million square feet of 14 million square feet under construction, but it's approximately 70% to 75% pre leased. And a vast majority of that activity is either in the Woodlands, which is either being driven by Exxon's massive consolidation, national consolidation into that submarket as well as adding the energy corridor.

But it's really focused on the urban submarkets; being the Galleria, and Greenway and Downtown which is where we are most focused on. There's a lot of talk of new development. We haven't really seen a lot of action at this point. And a large part of that is driven by what Larry alluded to. It's hard to find suitable sites within those markets and so we are very mindful of it.

We think there's a couple sites that over time could be developed in the Galleria. There's a couple sites outside of our Greenway Plaza footprint where we think a couple of people might build. But again, on a relative basis to scale these markets we don't see a meaningful impact at this time.

Okay, and you had mentioned Downtown. Is that really a core submarket you guys?

It's a market that we continue to look at. I think long term we certainly would like to find an entry point there. I don't think that is something in the near term that we will pursue. I think given the cost of where we see existing assets trading well above replacement cost, I don't see that on the near term for us but is certainly a market we want to continue to be educated on.

And Jamie, I would just add one thing to what Colin said, we don't want to show too much of our cards on this call. But obviously these markets that are tight and have few development sites, that's obviously a focus of us is seeing its it makes sense for us to see in and get one of those sites and be a developer of new product which is certainly a skill set which we have.

Great. Thank you.

Thanks, Jamie.

Dave Rodgers, Robert W. Baird

Good morning. Maybe Colin or Larry to start with. Can you guys talk a little bit more about Austin if you would and the development lease up there? You said you've got two leases that you're further along in negotiations. Obviously without giving us too much, can you give us a little color on the sizing range of some of those tenants? But maybe more broadly on are you seeing the in-migration that building was really predicated upon and how you feel about it.

Let me talk about the overall market and I will let Colin give you a little color on the specifics of the new leasing that we are seeing. The overall market dynamics I alluded to in my speech remains strong. The thing that particularly encouraged about and it was one of the things that we really spent a lot of time thinking about before we started Colorado Tower was with some of the end migration -- the lack of end migration to the Downtown market driven by lack of supply. Due to tight vacancy, or was it driven by other factors, in terms of was Austin losing some of that capability.

And the comfort level that we have certainly seen in last year, and just in an extremely significant way in the last few quarters is if you start to look at the leasing that I am confident that we will begin announcing in the next six months, a large percentage of it is in-migration. Either in-migration from other submarkets in Austin or in-migration for other markets around the country.

And that's really what always has driven Austin, so that early leasing that we did, because you are talking about generally small tenants in the Austin CBD. And the fact that we had not started was primarily tenants moving from one building to another in the CBD and us capturing our share of that. But you are really now beginning to see the in-migration that we all count on in Austin taking place. Colin you might give a little more color on the specifics.

Sure. In general I would say the average square foot of the leasing that we are working on it with is plus or minus 25,000 square feet. We see some twofold floor type deals where we are working on some half floor type transactions, but in general, as Larry said, a big chunk of that is in-migration.

One of the themes that we were focused on as we started the project is a little bit of this flight from California to Texas. And we're certainly starting to see that play out. Out of the 320,000 square feet of net absorption I said is floating in the market. There is a big chunk of it that is exactly that California to Austin as is you imagine a lot of that is technology driven.

The other thing that we are actually have been very interested to see though, is some of the energy companies who might've been in smaller markets in Texas or Oklahoma looking for a larger market that is very attractive to their employee base and we're starting to see some of that in-migration as well.

Great. Maybe second question. With regard to the lease expiration schedule just looking for you've got three tenants expire within the next two years. You talked a little about it in the past. I'm wondering if you had any updates.

You mentioned Transocean earlier but they have some remaining space. Exxon is expected -- at least many of us expect that they will leave but the timing is unclear. If you have any update on the timing there and then it's net assets. Any clarity on the space that they have?

Sure. Over the next two years we don't have a significant number of material lease expirations. I guess I would characterize that as anything over 50,000 square feet. As we look forward into 2014 Firethorn, which is it two floor tenant at Terminus has in August 2014 expiration. We believe that they will be leaving that space. We are actively in lease negotiations to backfill about 25,000 square feet of it. Some of the other expirations that you will see in 2014 were either very close to or have signed extensions to those. Coats Rose, which is a large law firm in Greenway Plaza. In 2015, as you mentioned, Exxon does have their 300,000 square foot expiration in February 2015.

That being said, they do have two six-month renewal rates and we will start to get some visibility on whether they are going to trigger those extensions sometime in the middle of the year. One other large expiration in Atlanta is Net Assets out of North Point. That's about 120,000 square feet that expires in June 2015 and we are actively in those renewal discussions today.

Great. Gregg, last question for you. The term fee that Colin mentioned for Transocean, was that in the fourth quarter or will that be in the second quarter? And if it's in the second quarter is that embedded in your fee income guidance?

Fee income for the fourth quarter of this year was about $800,000, about $600,000 of that was a portion of the Transocean term fee. We have to amortize their entire term fee from the period of time they give us notice to the period of time that they actually vacate. So they gave us notice the beginning of the fourth quarter, they vacate mid 2014. So we recognized about a third of it in the fourth quarter and we will recognize the balance as the year progresses.

Thank you.

John Guinee, Stifel.

Larry, you talk a lot about replacement cost, buying at a discount to replacement cost, et cetera. And back of the envelope it looks like Colorado Tower is going to cost you about $340 a square foot. Can you give us a rundown on what you think replacement cost is in the better business districts where you are doing business: Greenway Plaza, Galleria, Arts District, the various submarkets in Atlanta, even Birmingham?

You know, John, they vary a little bit market to market because there is some differentiation just in terms of land prices and construction costs as well as tenant improvement costs from market to market. I would say, back of the envelope, is Colorado Towers a pretty good measure of what new construction is going to be. So $350 to $400 on the upper side would be good benchmark to use.

So in most of our markets that translates back to be able to do new development you need to net rents in high $20s to low $30s to be able to make the numbers work. As you know we generally underwrite to trying to get 150 to 200 basis point spread over what we think is a conservative 10-year cap rate. That's the way we generally look at it and it varies a little bit market to market but not a whole lot.

And if you work backwards, the two major components are base building and then land. Can you just give us the number and if not we can talk off-line in terms of land per buildable square foot in some of these markets? For example Galleria and Greenway where residential makes a lot of sense and it may have a different land bases than some of the other markets. Is there a sense for the difference or the disparity in land cost per available foot?

There is a little bit just because as you would imagine a market where, like the Galleria in Houston or Downtown Austin where there's a little bit more active supply coming on the multifamily side and a little bit on the office side. They get a little bit higher. But you know generally you're looking on in FAR basis I would say low to high you're going to be in the $25 to $30 square foot range for land and in the other markets, in some of the tighter markets you make it up in the $40 square foot range, that type of variation.

Okay and just a little cleanup question. What is going on in Charlotte with a big gateway joint venture you have with the Bank of America?

Sure, it's Colin. As you recall that property in Charleston is about million square feet and effectively 100% -- or is 100% leased to Bank of America. That has term through December's 2016 and also has a maturity on the loan of December 2016. We continue to have conversations with Bank of America about that and their long-term plans. I think at this point they don't have the clarity to make any long-term decisions. That being said they certainly identify this asset is mission critical to them. But that will be conversation that will continue to unfold over the next 12 to 18 months.

Great. Thank you very much.

Thanks, John.

(Operator Instructions)

Brendan Maiorana, Wells Fargo.

Gregg, if I did the math correctly on the NOI progression by those lease-up assets it sounds like by the end of the year I guess, that 6.5 million of signed but not yet cash flow recognized NOI should be in place. Is that correct?

And then at Post Oak the jump in NOI seems pretty significant. How much of that is attributable to the change in structure of the Apache lease versus, I think you mentioned that you expected a little bit more lease up asset as the year progresses as well.

I will answer the first question which is of the $6.5 million which is the delta between 10 million leases that we signed and then 3.5 million of revenues that we actually captured of that $10 million, you are correct. The vast majority that will come through in the balance of 2014, but not all of it. We have a couple leases.

One in particular, at Promenade, it has a staggered move in, and you will see some move in, in 2015 and 2016. So I'm just going to round for you, Brendan, but I'd say 90% to 95% should roll in by the end of 2014. And then in terms of Post Oak Central we typically don't get that granular in terms of breaking it down but those are the two primary drivers. The Apache drivers larger than the occupancy driver at Post Oak in 2014. That's a big lease and that's a big number.

Is the change in the Apache lease, does that give us -- is anything related to their expiration and what they may do? And I forget if that was 2017 or 2018, I don't remember when the expiration was, is the change in lease give us any indication what they may do on expiration of their term?

The lease expires in 2018 and no it doesn't. That was cooked in there ready. We have got no fresh information on Apache on their intentions.

Okay. Great. So, if I just do math it sounds like your annual NOI is probably up somewhere between $10 million and $12 million on a run rate by the end of the year just from the Post Oak and the big assets in terms of lease up, I guess, is how we should think about it.

Yes. If you sum up everything you get to number right around there.

Okay, great. And then I'm not sure if this is for Colin or Larry, but the lease spreads in the quarter were very high on both the cash and GAAP basis. Year to date they were modestly negative on a cash basis but still pretty healthy on a GAAP basis. I think Colin, you mentioned in your remarks that you felt like the Texas assets coming into the portfolio over the past couple of quarters really helps your market-to-market on a cash basis. I guess the question is what you did in the quarter more indicative of how you see the portfolio and the trends going forward or do you think that year-to-date number that you posted in terms of rent spreads is more likely as we look out over the next year or two?

Brendan, it's a good question and again we don't provide forward guidance on our re-leasing spreads. I guess I would take a look back in terms of my prepared comments where we said that at the time of acquisition the Texas assets we disclosed those properties were anywhere from 15% to 20% below market and those obviously comprised a pretty significant chunk of our portfolio today. So as you said that is ultimately what is driving those spreads.

So I guess maybe just to ask in a little bit of a different way. Is the fourth quarter, was there anything unusual in the fourth quarter or is maybe that more representative look of your portfolio as it stands today and maybe where you were in the first couple of quarters of the year?

Again, it's Gregg. There's nothing unusual in the fourth quarter in terms of new leases that were signed that would drive that number up or down. But, again, we don't get that granular as to provide guidance on this going forward.

Fair enough. Thanks, guys.

Thanks, Brendan.

Michael Knott, Green Street Advisors

It is Jed Reagan here with Michael. Maybe if you could talk specifically about the renewal prospects at Transocean just given the recent contraction, if your outlook for that has changed at all?

Not really. As Colin said in his speech, they have been there since the late 1980s and this was space, Jed, that they added immediately after the disaster in the Gulf. So the space was occupied by their lawyers, which is scary to think how many lawyers that represents, but it was occupied by lawyers working through all of the claims. So it never really was core Transocean space. We were not surprised by the early termination. We can certainly see it as the space just became underutilized for them.

But it really is not connected in any way in terms of the core corporate Transocean functions. So we feel good about our chances in terms of when that lease rolls and this was really something that was more of a one-time event there.

Okay, thanks. And you talked a little bit earlier about the Houston supply picture. Can you talk a little bit about the demand picture there? Maybe how tenant demands have changed versus maybe three months ago? And can you talk a little on top of that about just the magnitude of market rent increases you're seeing in your submarket there?

Sure. Jed, it's Colin. I guess on the demand perspective since we have talked last quarter, it really remains unchanged and we would characterize it as very strong across the submarkets that were active and across the market as a whole. There was a second piece to your question?

Just the magnitude of rent increases you have seen or expect to see in your markets in Houston?

It's very good and a large part of what drives the increases, Jed, is what was the effectively the expiring lease term. Some of the tenants who have had -- who are kind of rolling off a 10-year lease term it's obviously been very dramatic increases to those rents. So you could find buildings in our submarkets where some of those roll ups can be north of $10 a square foot.

Okay, great. And what would you consider to be non-core in your portfolio at this point?

Thank goodness that list is getting pretty small but we certainly look at the Watkins portfolio that has the grocery anchored public center is something that is non-core. And we may look to monetize that over the next year or 1.5 years. We also, if you note in our supplement we moved Birmingham to held-for-sale and we will be marketing those assets in the next few quarters. So those would be the two things that would come.

We could certainly continue to have some land that is non-core as that we continue to look to move off of the balance sheet. And as I said in my remarks, I imagine that we will -- as we move some of that land off, and just with general move-ins more into the development cycle we will probably add some strategic land hold positions in some of these core submarket as we alluded to. Those would be the main things.

Thanks.

This is Michael. Gregg, quick question for you, now that the business is much simpler just curious how you thought about the decision to continue giving guidance the way you guys have as opposed to doing more conventional FFO per share guidance.

Yes. It's something that we think about a lot, Michael, and it's something we will consider as the year progresses.

And then also, just curious as well, it looks like your operating expenses have been growing at a pretty healthy rate in the same store pool. It's interesting to compare that to Highwood and they were about flat. I'm just curious what is driving those numbers there?

Well, our operating expenses during this past quarter grew at 5%. But if you go back and look at kind of the eight quarter average, they grew up less than 1% average over the previous eight quarters. So expenses can be lumpy and sometimes it's driven by property taxes, sometimes it's driven by one-time events, but I think if you broadened your horizon a little bit beyond one or two quarters you see we've actually had a pretty good track record of keeping expenses under control.

Okay and then I appreciate the new disclosure on releasing spreads and showing it on and after CapEx basis. Just curious how that 11%, you would think that if some of your rents are 15% to 20% below market and I presume those comments were on a of gross rent space is not sort of a net effective, you might think that the 11% might've actually been a little bit higher. Do you have similar rents that are going to be rolling that are even more below market than what we saw in the fourth quarter?

Michael, it's Colin. Just to clarify. That spread is on a net rent basis not on the net effective rent basis. Again I think at 11% we feel like it's a very healthy spread and as I referred to earlier with the addition of the Texas portfolio. I think that's what you're really starting to see drive that through as we added Greenway in the fourth quarter and Post Oak in the second.

Okay and then just last one for me, to touch back on the Austin and CBD development, is your progress so far consistent with what you had underwritten or where do you stand on that versus what you thought?

Yes. I might've said -- I know I said in an earlier call, we underwrote it to be 50% leased at the time that we opened which is the end of this year. We feel very good about where we stand relative to that. And then we always underwrite to have a couple of years to lease up until we get to full stabilization. So we're very, very pleased with where we are with Colorado Tower and continue to be confident about it.

Okay, guys. Thanks a lot.

Thanks, Michael.

We have no further questions at this time. Mr. Gellerstedt, I'll turn the call back to you.

We appreciate everybody's continued interest in Cousins and we look forward to seeing a lot of you all in Houston next week. We will wrap it up at that. Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.