Cousins Properties Inc (CUZ) 2015 Q2 法說會逐字稿

Good Morning and welcome to the Cousins Properties Second Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Pam Roper, General Counsel. Please go ahead.

Good morning and welcome to Cousins Properties second quarter earnings conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K. If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website at www.cousinsproperites.com. An audio webcast of this call will be available for 60 days through a link in the Investor Relations section of our website.

At this time we would like to inform you that certain matters we will be discussing today are forward-looking statements within the meaning of Federal Securities laws. Examples of such statements include estimates about expected ranges of FFO per share and operating income from properties as well as certain categories of expenses and other income along with our expectations regarding leasing activity, rental rates including above and below market rental income, leasing expenses, developments, acquisitions, financing and disposition opportunities and expectations regarding the demographic and economic trends in markets in which the Company is active.

Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. The Company does not undertake a duty to update any forward-looking statements. Please refer to our filings with the Securities and Exchange Commission including our annual report on Form 10-K for the year ended December 31st, 2014 and our quarterly report on Form 10-Q filed on July 28th, 2015 for information regarding certain risks and uncertainties.

Also, certain items we 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 to the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website at www.cousinsproperties.com.

With that, I'll turn the call over to our Chief Executive Officer, Larry Gellerstedt.

Thanks, Pam, and good morning, everyone, and thanks for joining us on Cousins Properties second quarter conference call. With me today are Gregg Adzema, Cousin's Chief Financial Officer and Colin Connolly, Cousin's Chief Investment Officer.

I'm really happy to report that we had a very busy and terrifically productive second quarter here at Cousins. I'll start with a quick overview of some key headlines for the quarter and then focus my comments around three notable themes; first, the strengthening fundamentals in the Atlanta Office market; second, the execution by our local team to further de-risk our Houston portfolio and lastly, the great progress made in executing our current capital allocation strategy.

During the second quarter Cousins delivered FFO of $0.21 per share for a total of $0.42 per share year-to-date, an increase of 14% compared to the first half of 2014. We also leased over 521,000 square feet of office space in the second quarter for a total of 962,000 square feet for the first half of 2015 an increase of 40% compared to the same period last year. This solid leasing performance was accomplished by a positive second generation of leasing spreads of 32.8% and a 5.2% increase in same property NOI both on a cash basis.

From the fall of 2011 through the summer of 2014 we purchased over $2.4 billion of trophy office assets with value add potential in our targeted Sunbelt markets in attractive prices well below replacement cost. And as this quarter's results prove out, our simplified yet dynamic operating platform continued to create value as strong leasing results translated into robust NOI growth.

Another big headline for the quarter was the announced start of our much anticipated $123 million mixed use project, Carolina Square in Chapel Hill, which we will develop in a 50-50 joint venture with Northwood Ravin. The project consists of a 159,000 square feet of office which is 39% pre-leased to UNC along with 246 apartment units and 43,000 square feet of retail.

In addition to the 61,000 square feet UNC has leased, we are encouraged by our recent conversations with the University that they may have an appetite to take additional space in the project.

I'm also excited to report that the second phase of Emory Point, our $75 million development with Gables, is now open for business. The project includes 307 apartment units and 45,000 square feet of retail anchored by Earth Fare, a specialty grocer. Residents began occupying units at early July and we have already leased 71 units bringing us to 23% lease-to-date.

We are encouraged by the rates we have achieved. It rents well over $2 a square foot, which is more than 10% above our initial underwriting. We are also encouraged by the uptick in retail interest in the project since Earth Fare successfully opened earlier this month.

Now I'd like to take some time to provide color on the Atlanta market. The recovery has taken hold across the entire metro area and real estate fundamentals are as strong as I've seen in my career.

The city has created approximately 80,000 jobs over the last 12 months, which ranks fourth nationally. The record job growth is leading to significant demand for Class A office space. Year-to-date net absorption totaled approximately 2.2 million square feet, which ranked second nationally and the vacancy rate has fallen to 13%, the lowest since 2001.

What's especially compelling is the discipline on the supply side of the equation. Currently only one speculative office project is under construction across the entire 122 million square feet Class A market and we think it is unlikely that any additional office projects of material size that don't have significant pre-leasing will start during the remainder of 2015. Given the lead time to actually start and deliver a project, we feel very confident about our position to push rental rates and occupancy as a growing customer base has fewer options to choose from in the market. The next two to three years should be an excellent environment for our Atlanta portfolio which accounts for over 40% of the Company's NOI.

As we discussed in the past, uncertainty about the Houston market continues as energy sector tries to find the right balance between supply and demand. We do not have a crystal ball to predict how long oil prices will stay low but we do know that the energy market, like the real estate market, cycles and there will be a future recovery.

In the meantime we remain focused on executing what is within our control. And the good news is our team has performed exceptionally well to minimize our lease expirations over the next several years when market conditions are projected to be the weakest. To highlight this we executed a 255,000 square foot renewal with Transocean during the quarter that extended their lease through January of 2023 at very attractive economics.

With the renewals of Gulf South, Stewart Title, Direct Energy and now Transocean all successfully behind it in a weighted average rent rollup on a cash basis of 47.7%, our Houston portfolio has unmatched stability. Our weighted average lease term now stands at approximately seven years and have no expirations in the Houston portfolio in excess of 75,000 feet until Apache expires in December of 2018.

Lastly, let me shift gears to our capital allocation strategy, which is largely focused on taking advantage of an attractive office sales market and redeploying that capital into compelling and higher yielding development projects. To that end we plan to sell 2100 Ross and Points of Waterview in Dallas as well as North Point Center East in Atlanta. Colin will give more specifics on process and timing, but let me spend a moment providing some color on our rationale for selecting these particular assets for disposition.

2100 Ross has been an outstanding investment for Cousin shareholders. We purchased this 844,000 square foot tower in August of 2012 for approximately $70 per square foot in an unusual and opportunistic manner by acquiring a B-note and subsequently acquiring the asset in foreclosure.

We have since completed a substantial renovation of this asset and have increased the occupancy from 67% to 86%. We remain bullish long-term on Dallas and the arts district and the uptown submarket in particular where we still own a prime development parcel with [Hines]. However, Dallas is an opportunistic market that requires timing discipline and we believe we are at the right point in the cycle to monetize our investment. Like 2100 Ross, North Point Center East has been a highly profitable development project for Cousins but the property along with Points of Waterview represent the last of our suburban properties and are no longer complementary to the rest of the portfolio.

In aggregate we hope to generate gross proceeds on these sales of these three assets in excess of $250 million at a GAAP cap rate of approximately 6.5%.

Switching gears to the development pipeline, we are thrilled to be working with NCR, the global leader in consumer transaction technologies to build their world headquarters in tech square area of Midtown Atlanta. The project will total approximately 485,000 square feet and cost approximately $200 million.

While the project is 100% preleased with 15 years of term, I think it's important to highlight the quality of the real estate. It's the type of location where we would be comfortable building a more speculative project. Tech square benefits from its close proximity to Georgia Tech, walking distance to mass transit and vibrant urban amenities including high rise residential, high quality hotels, retail and restaurants.

As a result, NCR is not alone in picking the tech square campus to grow their companies. Other Fortune 500 companies like Home Depot, AT&T and Coca Cola have recently added jobs and office space in tech square in an effort to tap in to the commercialization of research and development coming out of Georgia Tech as well as the talent pool that University offers.

Before moving on, let me address the question regarding the rumors of a potential sale of NCR. We were obviously aware of this prior to signing the lease. Therefore, we appropriately structured the lease to provide for credit enhancement that would be triggered in the event that NCR's credit rating was downgraded as a result of a near-term corporate transaction. I cannot comment beyond that due to the confidentiality provisions in the lease.

Another build-to-suit opportunity that we are excited to get underway is in Charlotte with a longstanding Cousins Company, Dimensional Fund Advisors. To brief you on our history with Dimensional, Cousins developed their global headquarters building in Austin, Texas in 2006. The current opportunity in Charlotte is the planned development of the company's 235,000 square foot east coast regional headquarters building. Subject to final approval of incentives for Dimensional by the City of Charlotte in Mecklenburg County, the office building will be developed in a 50-50 venture and will be 100% leased to Dimensional. The project's preliminary cost estimate is approximately $80 million and construction is targeted to commence in the third quarter of 2016.

I'm optimistic we will [be] able to provide an update when more specifics on the site, which will be in an urban submarket in the coming weeks. Until then I can announce that post quarter end Dimensional signed a three-year 50,000 square foot lease at Fifth Third, which will provide temporary space for their growing Charlotte team until the project is completed in 2018. As we made the decision to purchase Fifth Third last summer, part of our rationale was a belief that growing our presence in Charlotte would allow us to better source attractive development opportunities in the market and I am really pleased to see this strategy paying dividends so quickly.

So let me close by highlighting the value creation potential of our development pipeline. If you look at our pipeline on page 19 of the second quarter supplement you will see we had $242 million in active development projects as of June 30. Adding NCR and the Dimensional developments to the pipeline brings the total to approximately $500 million with Cousins' pro rata share equaling $400 million. With this number office development comprises about $300 million of the total and is 74% preleased. We anticipate a GAAP yield on this office pipeline of approximately 8.5%. We will fund most of the office pipeline with assets in an anticipated 6.5% GAAP yield. That's a 200 basis point spread with a relatively low risk profile and we believe this is a really compelling value creation story for all of our shareholders.

And with that, let me turn it over to Colin.

Thanks, Larry, and good morning, everyone. I will begin my comments today by briefly highlighting some of our key operational and leasing metrics and then I'll provide more detailed updates on recent activity within the existing portfolio. The team delivered another terrific leasing quarter signing approximately 521,000 square feet of office leases with a weighted average net effective rent of $16.96 per square foot, up from $14.31 per square foot last quarter.

Our second generation re-leasing spread was up 43.8% on a GAAP basis and 32.8% on a cash basis and I believe it's important to note that Houston accounted for approximately 72% of our second generation leasing, which highlights the substantial rollup opportunity within our Houston portfolio despite softening market conditions.

Switching gears, let me walk you through some key updates and market color within our portfolio. We continue to see strong economic growth across Atlanta, Austin, Dallas and Charlotte and good demand for our available space. Each of these markets posted strong positive net absorption during the second quarter with vacancy rates declining between 50 and 100 basis points. Atlanta is particularly well positioned because new speculative supply remains at historically low levels. Net effective rents in well located trophy buildings have increased in the range of 10% to 15% year-over-year and we are getting there through lower concessions as well as face rents, which are now moving higher. Given the lead time required for new construction to ramp up, we believe that this trend will continue for the next several years, which is great news for our portfolio.

Downtown Atlanta continues to make significant progress. Georgia State University is making a huge positive impact on the street environment and we were thrilled to see Georgia Pacific, one of the anchor tenants in the CBD, recommit long-term to the submarket as they purchased Met Life's 50% interest in Georgia Pacific Center and now own 100% of the asset.

At 191 Peachtree we closed the quarter at 93.8% leased, which is the highest it has been since the first quarter of 2005. We signed a 10-year lease with a regional law firm which included a renewal of approximately 26,000 square feet and an expansion of approximately 50,000 square feet.

Over at ACFC we were seeing renewed activity from additional data center users who value the large floor plates and main fiber lines that run through downtown Atlanta.

As I outlined last quarter, Oracle did vacate its 70,000 square feet at Northpark Town Center in June, which is why the project dipped to 88% leased during the quarter. However, we have great activity at Northpark in the form of new leasing, expansions and early renewals and are confident we can push leasing back above 90% in relatively short order.

Terminus 100 dropped to 90% during the quarter as two customers left the project for a lower cost alternative. Given the favorable market fundamentals, we were very comfortable trading a short-term drop in occupancy for higher long-term rental rates which we believe will enhance the property's long-term value. In addition, we do have an improvement project underway at Terminus which will add additional amenities including new common areas, collaboration space and a Starbucks Corporate store with Peachtree Road frontage, which is expected to open this fall. We are confident that these enhancements will solidify Terminus as the premier business address in the Buckhead submarket.

The office market in Austin continues to perform very well with its 18th consecutive quarter of positive net absorption. According to CBRE the direct vacancy stands at 11.9% for the overall market and 10.2% for the CBD. Our portfolio reflects the strength of the broader market. Last quarter we gave guidance that the occupancy would slip this quarter at 816 Congress as a result of that (inaudible) vacating 22,000 square feet and moving to their permanent space at our Colorado Tower project. But as you can see in the supplement, we outperformed our most optimistic forecast and actually increased leasing to 94.4%, up from 78% at acquisition in April 2013 with over 39,000 square feet of leases executed during the quarter.

Colorado Tower remains 98.5% leased but we have activity on the last remaining suite and are seeing rents in the mid $30 a square foot range on a triple-net basis, up from the high $20 per square foot level when we started the project.

Shifting gears to our Austin Development project, Research Park V, we are in advanced discussions with several customers and remain confident that we will have some leasing to announce prior to the building's completion in the fourth quarter. As you will note in the supplement, we did push our projected initial occupancy to the first quarter of 2016 as the timing of commencement on these potential leases has slipped a few months into early next year.

Similar to Atlanta, the market fundamentals in Charlotte are very strong as a result of a pick up in demand in several years of historically low new construction. According to CBRE, the second quarter of 2015 represented the thirteenth consecutive quarter of positive net absorption in Charlotte and the overall direct vacancy rate has fallen to 9.5%, which is the lowest recorded level since the fourth quarter of 2000. We really like our position in Charlotte and are excited to be expanding with our new development for Dimensional Fund Advisors.

And I want to highlight the similarities between the opportunity that we have with Dimensional and what we accomplished with at [Lacey] and at Colorado Tower. In both cases we were able to utilize one of our existing Class A properties to mitigate timing issues for a customer who had a preference for new construction. This creativity and flexibility provided us with a significant competitive advantage in securing great value creation opportunities for our shareholders. With Dimensional's approximately 50,000 square foot lease at Fifth Third the project is now approximately 92% leased, up from 82% when we purchased the building last August.

At Gateway Village we continue to have very constructive conversations with Bank of America regarding their 1.1 million square foot lease that expires in December of 2016. I don't have specific details to share at this time but we still believe that they will likely keep a vast majority of the stakes which they view as mission critical to their back office operations.

Moving on to progress in Houston, as Larry mentioned, Transocean renewed 255,000 square feet including 100% of Four Greenway Plaza through January 2023 at very attractive economics as our second generation re-leasing spreads prove out. This renewal was a big win for the Company and it also highlights the strong competitive position that Greenway Plaza enjoys in the marketplace. Like our previous renewals with [Gold South Pipeline] and Direct Energy, Transocean, like all customers, had other space options to choose from in the market but Greenway Plaza's unique combination of a very central urban location, campus like amenities and a very attractive price point carried the day. Transocean has been a customer at Greenway Plaza since 1989 and we are thrilled that they have chosen to recommit to the project on a long-term basis.

At Post Oak Central Apache's new company fitness center and cafeteria are complete and look fantastic. We have received very positive feedback from the Apache Team and these new amenities are great upgrades for Post Oak Central long-term. As we said last quarter, we have received some initial inquiries from Apache about extension possibilities. Given the lead time associated with new construction, they will likely need to make a decision in the next six to nine months. We have always assumed that they would leave in December 2018 for their planned new building and that was certainly factored into our purchase price of $180 per square foot. However, current market conditions in the energy sector could potentially alter Apache's thinking regarding the cost of new construction, which would be a big upside surprise relative to our original underwriting. It's still too early to speculate on the outcome with any certainty but we will continue to update you as the situation unfolds.

Our Houston Team continues to work very aggressively on backfilling the approximately 215,000 square feet at Three Greenway Plaza that we got back from Exxon in February. Our complete renovation of the lobby is ahead of schedule and will open in September. We are confident that this will provide a boost to our leasing efforts as prospects can see the finished product as opposed to renderings in an active construction site. We are in discussions on several floors within this block and are finding particular interest from some existing customers within Greenway who view this as an opportunity to consolidate or upgrade their space. While this would not be positive net absorption per se, we believe that the overall economics would be very accretive for Cousins.

Lastly, we are in the design phase of a substantial renovation of the food court at Greenway Plaza which will modernize this space, create additional collaboration areas and add a fitness facility for phase one. We believe that this project will both enhance the marketability of Three Greenway Plaza as well as energize Greenway Plaza as a whole.

While we expect the overall Houston market to soften in the near term, we are seeing our targeted urban submarkets, which include Greenway Plaza and the Galleria, holding up better than the western suburban submarkets, which include the energy corridor and West Chase where net effective rents have fallen by up to as much as 15%. The primary drivers of this out performance in the urban submarkets is higher barriers to entry, which limited new development activity and less energy concentration, which has translated into less sublease activity. As an example, Greenway Plaza as a submarket in total has only 194,000 square feet or 2.2% of the total inventory available for sublease according to local brokers and the Galleria has only 598,000 square feet or 3% of the total inventory available for sublease, both only about 1% higher than historical average.

To further the point, our 5.6 million square feet Houston portfolio has less than 35,000 square feet available for sublease per [Coast Star].

Looking ahead, our Houston portfolio is now very well protected while the energy cycle plays out. Our market exposure is low as our current occupancy is over 90%. We have excellent credit throughout the portfolio and have very modest expirations in the coming years when the market is projected to be at its softest.

To highlight, our annual expirations as a percentage of our Houston portfolio total just 4.9% in 2016, 6.4% in 2017 and 3.2% in 2018 excluding Apache's December 2018 expiration. Further, we do not have a single expiration at Greenway Plaza greater than 80,000 square feet until December of 2022. These are extraordinarily low numbers for a three-year period and a direct result of our Team's proactive efforts to complete early renewals with our major customers.

Lastly, I'll provide some color on the timing and process of our planned asset sales. We are in the market with both 2100 Ross Avenue and North Point Center East and plan to bring the Points of Waterview out after Labor Day. We have received first round bids on 2100 Ross and have been pleased with the level of interest. North Point Center East is about a month behind 2100 Ross with initial bids expected in late August. Our goal is to close these transactions by year-end although we will remain flexible on timing to optimize the best execution.

With that, I'll turn the call over to Gregg.

Thanks, Colin. Good morning, everyone. We had another terrific quarter. FFO was $0.21 per share, up 17% over last year. Within FFO same property cash NOI was up 5.2% during the quarter compared to last year and is now up 10.2% through the first six months of 2015. Excluding the recent Exxon move out at Greenway, which as Colin said we assumed would take place ever since underwriting this purchase a couple of years ago, and it really is a discrete event. It doesn't reflect the economics of the balance of the portfolio. Same property cash NOI would have been up an even more impressive 13.4% during the first six months of 2015. No matter how you cut it it was a clean, solid quarter driven by strong internal operating metrics.

That being said, in the never ending rush to quickly parse quarterly numbers or react to the latest headlines, sometimes it's easy to lose perspective on longer-term strategy and execution. The things that really move the needle over time; are we in the right markets? Do we own the right assets? Is the balance sheet in good shape? Is the dividend safe? These are critical questions and if you take a step back and look at our performance over the last few years, we believe the answer to all of them is an unequivocal yes.

For proof let's expand our view beyond the current quarter and examine some longer-term metrics. First, quarterly year-over-year same property net operating income on a cash basis has been positive for 14 straight quarters. That's 3.5 years and has averaged a remarkable 8.1% growth over that extended period of time. Our year-over-year change in second generation rents on a cash basis has increased six of the last seven quarters and has averaged over 17% over that period.

Debt to undepreciated assets has hovered around an industry-leading 30% since late 2013 and our [FFE] payout ratio has been under 70% since 2012. All of these statistics compare very favorably to our office peers. We've a simple compelling strategy and we're executing it effectively quarter-after-quarter.

Returning to the second quarter numbers, there are really only a couple of items that merit specific discussion. First, our G&A expenses increased quite a bit from the first quarter. This is not a surprise. I talked about it on our last quarterly earnings call in May. As a reminder, at the beginning of the year I provided an annual range of $21 million to $23 million for net G&A expenses during 2015, which equates to a quarterly run rate of about $5.5 million. We reported actual net G&A expenses of $3.5 million in the first quarter and $5.9 million this quarter. The sole reason for this volatility is our long-term incentive compensation accrual driven by our relative share price performance versus our peers during each quarter.

During the first quarter our share price performed poorly. During the second quarter our share price did better. It's as simple as that. During periods of share price volatility like we are experiencing right now, this compensation accrual can and will be jumpy. Despite this recent volatility we are not changing our G&A expense assumption for 2015 at this time.

One other area I'd like to highlight before moving on to our capital strategy is our continued strategic disposition of non-core land, particularly residential land. The market for land is strengthened and, as I said last quarter, we anticipate selling several land parcels into this strength during 2015. If we continue this effort during the second quarter with a disposition of 345 residential acres in Paulding County outside of Atlanta and over 2,600 residential acres at Blalock Lakes outside of Atlanta as well. That represents our entire remaining position at Blalock. Combined these sales resulted in a net loss of $324,000 which ran through our FFO this quarter. Blalock Lakes was consolidated while the Paulding County land was not so the financial results of these sales are not crystal clear in our GAAP statement of operations. To get some clarity I would encourage you to go to page eight in our quarterly supplement where we break out the two sales very clearly.

Finally, I thought I would provide a few more specifics on our funding plan for the development pipeline Larry laid out earlier in the call. As pro rata share of development spending on the five projects he discussed is approximately $400 million. Through June 30th we had already spent about $70 million of this so we had $330 million left to fund. We anticipate using asset sales augmented with retained cash to fund this commitment on a leverage neutral basis. Although it will take about 2.5 years to fully spend these dollars and to complete this pipeline, we anticipate selling the necessary assets in the next couple of quarters as Colin laid out.

We like to go ahead and take advantage of the robust market for our assets right now and lock in our cost of capital. We believe the benefits of this funding strategy far outweigh the short-term dilution to earnings.

Before moving on to guidance I wanted to point out a typo we found in our supplement. The net rent per square foot per new lease is in our office leasing activity schedule, which is page 12 in the supplement, has been corrected. The change was not significant and the corrected numbers are still very solid. Nothing else in this schedule was affected. A new supplement reflecting this correction has been posted to our website.

With that, I'll wrap up my portion of the conference call by updating our FFO guidance. As you can see in the earnings release, we have increased our guidance range from between $0.82 and $0.86 per share to between $0.83 and $87 per share. This increase is driven by an anticipated reduction in our net interest expense during 2015 from a range of $43 million to $45 million to a range of $41 million to $43 million.

We've replaced a large debt financing that we anticipated for the first half of the year with 2100 Ross and North Point Center East asset sales Colin discussed earlier, both of which are expected to close late in the year, sometime during the first quarter. The net result of this replacement and the different timing increases our annual FFO guidance for 2015. There are no other changes to guidance at this time.

Let me now turn the call over to the operator for your questions.

(Operator Instructions). Our first question will come from Jamie Feldman with Bank of America Merrill Lynch.

I guess just starting out with Gregg, you said no other change to the assumptions on the call. I think on the last call you had said 2.5% to 3.5% same store NOI growth in 2015?

That's right.

Is that still accurate given though the first half you've delivered?

That's right, Jamie. The original guidance was same property NOI growth on a GAAP basis between 2.5% and 3.5% for 2015 and we're leaving that unchanged at this time.

Okay and you guys had mentioned potential share repurchases. It sounds like you've got more development in the pipeline now. Any latest thoughts on that?

Jamie, this is Larry and as I've said in the last call, we just look at the math and we look at the development opportunity and the spread on that and then constantly run the math against share repurchase or other capital allocation strategies and when we lay out both our track record on capital allocation and these development opportunities at this point we feel like this is the most compelling way to get shareholder return but we don't ever close the door on any alternatives that we think makes sense for the shareholders.

Okay and then just two Texas development questions to wrap up, one on Research Park. Can you talk a little bit more about the demand pipeline? I think in the past you've said 200,000 active and 500,000 square foot of potential tenants in discussions. And then on Dallas just any thoughts on the Uptown Dallas development?

Well the -- I'll start with Dallas. I'll let Colin give some specifics on Research Park. Dallas is -- we have said when we first started looking at this A, we've along with our partner Heinz we bought a terrific site at just over $70 a square foot which is well below market in a great area and we are going to be very disciplined on the project in terms of trying to get to be to a pre-leasing hurdle. We had set a sort of internal soft hurdle of around 100 plus thousands, plus or minus thousand square feet, and I would say at this point just given where we are in the cycle and some new developments that are continuing to start in the uptown market we're probably a little bit more conservative than that and want more pre-leasing but none of those are firm and fast numbers. The demand side in Dallas is still strong at this point but we don't want to mess up a great development site by developing at the wrong point of the cycle so we're just going to continue to be very conservative in Dallas.

And, Jamie, on Research Park the numbers that you mentioned in terms of high point, I think those are still consistent. Tim Hendricks I think most of you know is still very bullish on the prospects for Research Park. I think it's just been a little bit of a timing lag in the summer and we're still, as I said, very optimistic that we'll have some leasing in place as we deliver the building in the fourth quarter.

Okay and then will Dimensional take any space out of Austin when they move to -- I think you said it was a regional headquarters?

Yes they will not. That's an add on space, not anything they'll be moving out of Austin.

Okay. All right great. Thank you.

Michael Lewis, SunTrust.

On Apache I'm curious if you have any insight into how big of an impact it might make on their decision for oil to dip below $50 again and perhaps stay there. And then I'm also curious if you have any insight on whether they're just dead set on eventually building their own building or if maybe it's possible that they could consider that they're better off being tenants than owners.

Well, I'll start on that, Michael. We certainly don't know how Apache underwrites bull markets in terms of their business model but they certainly have shown in the last year or so just with corporate actions of being very disciplined in terms of right sizing their G&A and their operating platform, selling off some properties etcetera. When Apache was -- when there was the site that they have for this project and when it was announced that they had gotten a permit I think one or two quarters ago, Apache issued a corporate announcement saying that the receipt of the permit did not signal that they were getting ready to start construction on the project, that that was a process that would take them about a year and a half to work through the governing things in Houston.

And so the discussions that -- the preliminary discussions we've had, as Colin said in his comments -- at this point I just think they're just keeping their options open and watching how their business model does but I don't think they're committed to building a new building. I don't think they're committed to what they're going to do based upon their public statements and our conversations with them.

Thanks and I have a question on the residential land. I mean to me these sales are kind of non-core. They've bounced around quarter-to-quarter but I am curious if selling the Paulding County land is that a meaningful source of cash potentially or are these relatively small deals?

They're relatively small deals.

Okay and then just last, you mentioned the 80,000 new jobs in Atlanta so I don't know if you saw but the BLS just released the preliminary June employment data by MSA actually right before the call started. Your number is still accurate. It's about 77,000 net jobs. It looks like Houston added about 4,000 jobs in June and they've actually added 56,000 since last June so that's up 1.9% year-over-year. That's actually a little bit better than the US average. I am curious if those numbers in Houston surprise you at all one way or the other and if you have kind of an outlook or how you think about how closely you look at job growth there given that your lease rollover is pretty much [bound] up for the next couple of years.

Yes we did actually see those numbers released at ten and we're watching those and you're right, Atlanta did kick down slightly but still fourth nationally in the ranking and so, as we said, we continue to see very good job growth in Atlanta so we're very optimistic over the next several years. As it relates to Houston, we have seen the last couple of months perform better as it relates to the job numbers. Obviously right at year end and kind of January you saw some of the layoffs hit as CapEx and G&A were cut relative to oil prices but again, I think it's important to note that a lot of the job cuts that you read in the headlines attributed to energy companies those are international many times and we've seen most of the cuts occur out actually in the oil patches as opposed to into corporate headquarters so I think we'll just have to watch.

I think it's interesting as you look at Apache as an example we've seen a lot of companies within Houston and our portfolio retrench to the core and so Apache recently shuttered a suburban Houston office as well as their office in Tulsa and are bringing those jobs back to headquarters at Post Oak Central so I think that's been a positive. But again, the energy cycle is going to play out and that's certainly not -- we're not experts, unable to make kind of those predictions.

Thank you.

Jed Reagan, Green Street Advisors.

If you're able to get sort of sufficient preleasing done at Victory Center would you feel comfortable moving forward on that project now from a funding perspective? And then I guess related to that, do you feel like the bar is higher now for new developments penciling just given the big NAV discount you guys are trading at currently?

Well, we certainly take into account that when we look at any kind of capital recycling, Jed, is we're -- we try to be agnostic and just look at where the returns best are. Relative to Victory, what I was saying in the last question relative to Victory is we are paying attention to how much the softening of the energy markets is tangentially going to touch Dallas. A lot of the service providers, law firms, accountants, consultants, etcetera come from Dallas and we're watching that really closely. We haven't seen any impact thus far. We're also really watching new supply and the uptown area in terms of folks at new projects that have been announced that they might go. We're really watching that too so we are just being very, very cautious on Victory and if we get a big customer and decide to go certainly where our capital structure is and NAV discount will be as much a part of that decision as the preleasing hurdle.

But do you feel like you have the sort of the funding bandwidth currently to sort of take on an additional project of that size if everything else kind of lined up?

Yes. I mean we would -- we could always fund it with additional things we have on our pipeline in terms of asset sales but were really I feel like on that particular opportunity we're getting a little ahead of ourselves because we just haven't seen that preleasing momentum yet in Dallas. We still -- you know, we think the site is fabulous. The value proposition relative to other new buildings is fabulous but we just don't have that in our crystal ball until we see demand and at that point we'll certainly take a look at where we are on the capital side.

Sure okay. And I guess related to that, just looking beyond the assets that you're currently on the market with in terms of dispositions, would you consider JV-ing some assets like an 816 Congress or a Promenade or Colorado Tower and realize some of the value you've created in those buildings? And then how about the medical office, just wondering if you sort of think of that as core at this point?

You know, we certainly look at all of our assets and our capital decisions on an almost arms-length basis. We don't have any emotion attached to any of them and so looking at whether it's JV partners or debt structures or sales, we don't shut the door on any of that but we try not to get ahead of ourselves in terms of trying to give much guidance on what our funding strategy might be for particular developments until those developments actually get close to taking place.

Okay and just last one if I may on Houston, just can you give an update? I know you touched briefly on net effective rents around the market. Maybe if you can just touch specifically on kind of the current look of net effective rents in your specific submarkets, are you seeing any pressure there? And maybe as the kind of the most recent hiccup in oil prices, changing activity or you're seeing on the grounds currently?

Sure, Jed, it's Colin. I would say as I mentioned in my remarks we've certainly seen our urban submarkets hold up much better than the western submarkets. Out there we've been reported that net effective rents had dropped by as much as 15%. We have not seen that in our particular submarkets. We have started to see a tick up in free rent or TIs but face rents have held, both within our portfolio as well as our competitors in the Galleria and Greenway so I would characterize kind of the change in net effective rents in our markets it's been -- I'd say it's been less than 10%.

But in terms of the activity level with the recent slide in oil prices, I would say activity is generally consistent with what we said last quarter. There was a noticeable slowdown in the fall and the early part of the year but as we've moved on we started to see very good activity in the [5,000] to 25,000 square foot range and that's continued. And from a kind of a customer industry standpoint it's been very diversified. We've seen the medical kind of healthcare customers kind of start to percolate, financial services, insurance and even some smaller energy customers so the activity is there. It's not the large big ticket several hundred thousand square feet energy type customer but the smaller users are starting to kick tires and we've got a pretty good pipeline.

Okay great. Thanks very much.

Brendan Maiorana, Wells Fargo.

Gregg, so you laid out a nice strategy for the balance sheet, got about -- I guess it sounds like about $330 million to spend on a development pipeline, [$250 million] at sales and that $330 million gets spent over the next 2.5 years. It seems like with the amount of retained cash flow that the delta, that $80 million delta, you probably more than make up for. As you sort of think about the current pipeline and sources and uses is leverage actually likely to go down over the next couple of years?

The strategy is certainly not to reduce leverage. The strategy is kind of to maintain leverage over the next two or three years. We like our leverage where it is right now and the development pipeline that we've laid out for you there is a shadow development pipeline. There's potential developments behind that and so we hope to over the next quarter or two talk about those if in fact they emerge as real. And to the extent that we have excess proceeds, we would use them to fund those and if we needed more we would, as Larry said, we would look at what we had at the time, where our share price was, what our assets would be worth, and we'd make a decision how we'd fund the incremental then. But the development pipeline that we've laid out, the numbers that you just repeated back to us, is our current development pipeline. We hope to have a little bit more behind that.

Okay that's helpful. And then with respect to guidance, so I gather included in the guidance is kind of no impact from the sale of 2100 Ross or North Point or is there maybe some modest impact in there but it's just expected to hit so late in the year that it actually wouldn't have a real impact on reported FFO for 2015?

Sure. We can't determine the date of sale exactly but the current anticipation is that we would sell 2100 Ross and North Point Center sometime in the fourth quarter so they would have some but very limited impact on 2015 FFO. They would have a much larger impact on 2016 FFO clearly.

Sure, and then the Transocean lease, I forget when the exact execution date on that was but was the impact -- how does the impact flow through from both a GAAP and a cash NOI perspective to Cousins and was there an impact in Q2 that showed up from that lease renewal?

Brendan, it's Colin and I'll answer the both kind of cash and GAAP. So the -- it's ultimately done as an amendment and extension and so from a cash perspective that will not kick in until the original expiration in 2017. From a GAAP perspective we're really not seeing anything float through yet and really what's driving that previously it was a gross lease and now it's switching to a net lease and those gross and net lease numbers face rates were relatively similar and you actually don't GAAP, kind of GAAP it by straight line the operating expense pass through so we won't really see any uptick in our numbers until 2017 on a GAAP or a cash basis.

Okay that's helpful. And then, Colin, last one probably for you, I'm just -- you mentioned Charlotte activities, better there. You guys got the nice lease with Dimensional Fund that fit into Fifth Third. How are rents at Fifth Third trending versus kind of what you guys originally underwrote when you bought the building?

I'd say we're at we've been outperforming what we originally laid out and Charlotte feels very similar in many respects to what we said about Atlanta in terms of demand and job growth are starting to kick in and there's just been relatively little new supply over the last several years so that market today in the CBD uptown Charlotte is vacancy is sub 10% with no new supply projected to deliver for at least a couple of years and so we're finding it would be a pretty good time to be an owner of a trophy asset in uptown.

And I guess you guys have maybe 50,000 square feet or so of remaining vacancy at Fifth Third. Do you have a prospect list for that remaining space?

We always have a pipeline.

All right fair enough, thanks, guys.

John Guinee, Stifel.

Right, okay first up, Larry, correct me or stop me but did you ever mention your new Board Member?

I did not, John, but I appreciate your bringing that up. Bob Chapman, who many of you all know, who was with Duke Realty for a number of years and today is CEO of Centerpoint in Chicago, joined our Board last quarter and he's just a great addition. We're delighted to have him.

And if you were to -- if you look at Board members, they run anywhere from really sharp real estate guys, don't need the money, great fiduciaries all the way to perhaps not great real estate people, perhaps need the paycheck. Where would Bob fit in that continuum?

He'd be a not great real estate guy that's desperate for a paycheck, Bob. And I hope he is listening to this transcript. Bob would obviously check all the boxes, just a tremendous real estate mind and a guy that's doing it to try to help us be a better Company.

I applaud you for that decision. Second is if I look at the three asset sales, Colin or Larry, it looks to me like about 1.6 million square feet, 10% of your portfolio. The quick math I am getting is about $155 or $160 a foot, which surprises me as a little light. Is there one or two assets that's a really draw dragging down your per square foot if I've got that number correct?

John, the -- I would say out of the three, right, the Points at Waterview is a suburban asset in Dallas that would bring down the average of the three but I think we're excited about where we think values will be at all three but particularly 2100 Ross and North Point I think are very well positioned for kind of a great monetization in this environment.

Okay and with that I am going to go fill up my tank with gas to help get your oil price up. Thanks.

Keep it going; thanks, John.

Thomas Lesnick, Capital One.

Most of my questions have already been answered so I'll keep it brief but just looking at page seven on the Supplemental I was just curious what is the end of quarter run rate for consolidated and unconsolided NOI? I see about $54.78 million for 2Q on the consolidated line and about $4.5 million on the unconsolidated line. Just given kind of the timing of lease commitment, commencements and whatnot, what was that at quarter end?

Tom, hey it's Gregg. Good morning. As much as I'd like to guide you on the specific metrics, it's just not guidance that we provide. We used to provide asset-by-asset NOI guidance and we've transitioned over the last couple quarters to a much more industry-standard FFO guidance with the supporting assumptions. And this is not one of those assumptions that feeds into our FFO so I think we do a great job of giving you historical run rate for every asset and you can sum them up and then take the same property guidance we provide and come up with something.

Okay fair enough. On Colorado Tower I was wondering could you provide maybe a better sense of the timing of the lease commencements as that ramps up?

Yes the -- we would expect a majority of those leases to really -- to kick in as we move through 2016. We're -- have already moved in some of the initial customers and I'd say the vast majority of that will kick in next year.

Right, the largest tenant to Colorado Tower is Parsley Energy and they had a staggered move-in schedule with the last move in, I think, taking place in the second half of 2016.

All right that's helpful. Thanks, guys.

And this will conclude our question and answer session. I would like to hand the conference back over to Larry Gellerstedt for any closing remarks.

We certainly appreciate everybody's continued interest in the Company. It was a terrific quarter and we will look forward to more great results for the balance of 2015. Thanks for everybody's interest.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.