Cousins Properties Inc (CUZ) 2015 Q4 法說會逐字稿

Good morning, and welcome to the Cousins Properties fourth-quarter 2015 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Pam Roper, General Counsel for Cousins Properties. Please go ahead.

Good morning, and welcome to Cousins Properties fourth-quarter earnings conference call. With me today are: Larry Gellerstedt, our Chief Executive Officer; Colin Connolly, our Chief Investment Officer; and Gregg Adzema, our Chief Financial Officer.

The press release and supplemental package were distributed yesterday afternoon, as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. 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.

Please be aware that certain matters discussed today may constitute forward-looking statements within the meaning of Federal Securities Laws, and actual results may differ materially from these statements due to a variety of risks and uncertainties and other factors. A detailed discussion of some potential risks is contained in our filings with the SEC. The Company does not undertake any duty to update any forward-looking statement.

With that, I will turn the call over to Larry.

Thank you, Pam. Good morning, everyone, and thank you for joining on us on our year-end 2015 earnings call. Last year, during Cousins fourth-quarter earnings call, I walked through the Company's strategic initiatives for 2015 which included driving positive results within our existing portfolio, and executing and growing our development pipeline, all while maintaining an industry-leading balance sheet.

Our balance-sheet discipline ensures that during turbulent times, our Company maintains the flexibility to make the best long-term decisions for our shareholders versus short-term reactive decisions which destroy long-term value. I'm pleased to say that despite negative macro headwinds, Cousins has had an exceptional year in 2015 executing this strategy, and our team's tremendous effort is reflected in our strong results. In short, outside of our share price, the Cousins, the Company continues to perform exceptionally well.

We ended 2015 with FFO of $0.89 per share, up 10% from the previous year. Leasing momentum hit another all-time high for the second year in a row, as we completed approximately 3 million square feet of new and renewal leases. Our second-generation releasing spread was up a very strong 19.8% on a cash basis for the year. And finally, our same-property NOI on a cash basis posted a solid increase of 7.3% in 2015, as compared to the prior year.

Diving a little deeper, I would like to provide some key highlights for the year in each of our specific markets. Starting with Austin, we finished 2015 with our CBD portfolio 96% leased. This result is 600 basis points higher than the current Class A CBD sub-market average in Austin, and 400 basis points higher than where the portfolio stood a year ago. As a reminder, Cousins Austin CBD portfolio was built through a combination of a value-add acquisition, 816 Congress, and a ground-up speculative development project, Colorado Tower.

Since we purchased 816 and broke ground on Colorado Tower both in 2013, we've executed over 676,000 square feet of new leases and renewals, and have increased rents 33% over this period. These results truly reflect how Cousins development expertise, deep-market relationships and value-add capabilities create long-term value for our shareholders. I am also pleased to report we are seeing an increase in activity in our newly-delivered office project, Research Park V, where we signed another 26,000 square foot lease last month, bringing the asset to 45% leased. Looking to 2016, we believe office fundamentals in Austin will remain strong.

Moving on to Charlotte. At the start of 2015, Fifth Third Center, our 698,000 square foot uptown office tower was 83% leased, and Gateway Village, our 1 million square foot office asset owned in a 50/50 JV with Bank of America had less than two years of remaining term. One year later, Fifth Third Center is now 95% leased, and Bank of America has extended their lease at Gateway Village for 10 additional years.

While our Charlotte portfolio is generally stable, and the supply-demand characteristics remain favorable, we will continue to seek select opportunities to grow our concentration in this market. I am happy to report we are making progress on developing the East Coast Headquarters for Dimensional Fund Advisors in the South End sub market of Charlotte. The City Council recently approved our rezoning application, and the project is now slated to begin construction in the first quarter of 2017.

Let's now take a look at Atlanta which is currently our strongest market. We made significant progress during 2015, growing occupancy at two of our trophy towers, 191 Peachtree finished the year 91.5% leased, up 210 basis points from year-end 2014, and Terminus 200 finished 2015 at 92.2% leased, up 440 basis points. We still have an opportunity for occupancy growth in Atlanta during 2016, specifically at Northpark Town Center and American Cancer Society Center, two properties with the largest amount of vacancy in our portfolio.

Fortunately, we are well-positioned, leading in -- leasing into a market where a Class A net absorption in 2015 eclipsed 3.6 million square feet for the first time in the last 30 years, and new supply accounts for only 1% of the entire Class A market. We feel especially confident in Northpark Town Center's position in the central perimeter sub market, where large corporations and Fortune 500 companies prefer to locate, and where there are only a few large blocks of contiguous space still available.

In Houston, the office market has clearly shifted from a landlord to a tenant market in 2015, as vacancy hit 14.5% at year end, up from 9.5% at year-end 2014. We expect this trend to continue in 2016 and likely into 2017, as energy markets rebalance. Given that backdrop, we are especially pleased with our Houston team's hard work and successful execution this year.

Excluding the one-year extension with Apache, we signed 764,000 square feet of new leases and renewals, which represent a 26% increase in volume from the prior year. Lease economics on these deals were positive, with second-generation rents rolling up 32.5% on a cash basis for all of 2015. Our team took an extraordinarily proactive approach over the course of the year to mitigate our large near-term lease exposure.

After completing key renewals with Direct Energy, Transocean and Apache, which account for three of the top deals done across the entire Houston office market, we now have no major lease expirations until late 2019. As a result, our Houston portfolio is well-positioned for the downturn at 91% leased, which is 500 basis points higher than the Class A market average, and with a strong credit profile, and 6.5 years of weighted average lease term. I know there is a lot of concern about Houston, but due to this limited rollover and high credit quality, the key issue to consider with Cousins, is not so much what is happening in Houston today, but where the Houston economy and office market will be in 2020.

Switching gears, I would like to take a minute to discuss our outlook for future growth. Gregg will handle 2016 guidance, and the assumptions behind that guidance later in the call. However, I wanted to take a moment to look beyond 2016.

First, I would like to remind you of the value creation potential of our development pipeline. Our $323 million development pipeline which includes Carolina Square and the NCR Headquarters is well underway, and will begin to come online in 2017 and 2018, respectively. Adding our recently delivered Research Park V, and our future project with Dimensional Fund Advisors to the pipeline brings the total investment to $448 million, with Cousins pro rata share equaling $347 million. The office portion of these projects, which is currently 86% leased account for about $300 million of our pro rata share. Assuming a GAAP yield on the office portion of approximately 8.5%, annualized stabilized NOI of this office portion would be $25.5 million.

In addition to our development pipeline, we have a significant amount of embedded NOI in the portfolio that has yet to be realized. Specifically, three large leases at Greenway, as well as our recently executed transaction with Bank of America at Gateway Village would generate between $11 million and $12 million of additional NOI on an annual basis beginning in 2017. Colin will give more specifics on these transactions in his remarks. With that, I'll turn it over to Colin.

Thanks, Larry, and good morning, everyone. I will begin my comments today by briefly highlighting some of our key leasing metrics from the quarter, and then spend the remainder of my time providing more specifics on our Gateway Village property, the Houston portfolio, and lastly, our recent disposition activity.

The team delivered another terrific leasing quarter across the portfolio, signing approximately 1.2 million square feet of office leases with strong economics. Our second-generation releasing spread for the quarter was up 39% on a GAAP basis, and 24% on a cash basis, which represents our seventh straight quarter with a positive rent roll-up. Net effective rents for new and expansion leases signed during the quarter were up over 8%, compared to the fourth quarter of 2014.

I think it's important to note that over 50% of the new and expansion leases were first-generation space at Research Park V and Carolina Square which elevated our leasing costs for the quarter. Our overall weighted average net effective rent did decline to $13.47 per square foot. But this was a direct result of our large renewal with Bank of America at Gateway Village in Charlotte. This 923,000 square foot 10-year renewal was a terrific outcome for Cousins on several fronts, so let me provide some color.

First, we mitigated what was the Company's largest 2016 lease expiration, and now do not have a single expiration greater than 50,000 square feet during the year. Second, the economics are very positive. The rental rate on the surface appears low, but importantly, there were no leasing or capital costs associated with this lease. In addition, the transaction as a result of a change in partnership economics will be NOI accretive. Cousins currently receives an 11.46% preferred return on our original investment, which generates approximately $1.2 million of cash flow on an annual basis.

When the renewal commences in December of 2016, the financial structure will shift to a 50/50 split of current cash flow. Based on the renewal rate, we project that Cousins 50% share of this current cash flow will increase by an additional $5.8 million on an annualized basis. As a reminder, Bank of America does have an ongoing purchase option at a 17% look-back IRR to Cousins.

Moving on to Houston, we understand the concerns about the market relating to the downturn in energy, and we'll do our best to provide as much transparency as we can. At a macro level, fundamentals clearly weakened during 2015, as the result of both slowing demand, and an increase in the delivery of new supply. However, our urban sub markets continue to hold up much better than the overall market.

To highlight this, the Galleria and Greenway Plaza sub markets both have sublease availability of approximately 3%. In contrast, suburban sub markets like the Energy Corridor and Westchase have sublease availability of approximately 11%. Importantly, according to Costar, our portfolio has just 14,000 square feet of sublease space available today, which equates to well less than 1% of our Houston portfolio.

Looking forward, we do expect market conditions to remain soft in 2016 and 2017, with below average leasing activity and declining economics. Fortunately, our team identified this trend early, and significantly reduced our near-term market exposure through their proactive efforts. Our Houston rollover now totals just 5.2% in 2016, and 6.8% in 2017. With this limited near-term exposure, we are positioned to maintain the portfolio's leasing percentage at or near 90% over the next several years, with only a modest amount of new leasing.

Turning to the fourth-quarter's leasing results, our team on the ground had another terrific quarter. We successfully extended Apache's expiration at Post Oak Central through 2019. While this was only a one-year extension, we always assumed that Apache would vacate in 2018. So we are pleased to now have almost four years of remaining term.

We are hopeful that this additional time will position us to execute our planned releasing of Post Oak Central in a much stronger market. We have a great relationship with Apache, and we'll continue to have an open dialogue with them, as they evaluate their long-term real estate options. At this point, it's way to early to speculate, regardless we will likely have three years of advance notice if they elect to proceed with a new Headquarters, given the lead time associated with new construction.

In addition to the Apache renewal, our team leased 109,000 square feet in Houston during the fourth quarter, with a weighted average second-generation cash releasing spread of 50%. The activity in the quarter included 65,000 square feet of renewals, and importantly, 44,000 square feet of new leases or expansions. To highlight diversity of the customer base, industries represented in this quarter's leasing activity included real estate, financial services, legal, consumer products, government, and energy.

Our leasing success in Houston is making impact on the bottom-line results. Let me highlight this. Fourth-quarter 2015 NOI at Post Oak Central is up over 17% year over year. At Greenway, our fourth-quarter 2015 NOI is slightly above fourth-quarter 2014 NOI, despite the known Exxon move out which lowered our occupancy by approximately 5%.

This is a direct result of the significant rent roll-ups that we have achieved in Houston and there is more to come in the future. As I mentioned last quarter, there is 5.7 million of incremental NOI which will kick in during 2017, as Oxy, Transocean and Gulf South convert to triple-net leases from gross leases. These three releases alone will generate over 7% NOI growth at Greenway. We are carefully monitoring any changes to the credit quality of our customer base in Houston, and have no new updates to report. The quality and location of our product tends to attract a well-capitalized and diverse customer base, including names like Oxy, Invesco, and Camden Property Trust.

Let me give you some additional highlights. Customers in energy-related businesses without an investment-grade rating account for just 12% of our 5.6 million square foot Houston portfolio. Drilling down on this further, a vast majority of this exposure is connected to near investment-grade companies like Transocean, or to private firms who have a strong credit profile, but have no need for a public debt rating. Overall, our exposure to high-yield energy businesses is relatively small, less than 5% of our Houston portfolio, and less than 2.5% of the Company's total portfolio. Importantly, we currently do not have any material accounts receivable issues, and have no indications of any near-term bankruptcies that would negatively impact us.

Despite the severity of the current energy downturn, we remain optimistic about Houston's long-term future. I think it's important to point out that Houston created 23,700 jobs in 2015, notwithstanding the headwinds from a low oil price. In addition, investors continue to show appetite for high quality real estate at record pricing. In all cases, north of $500 a square foot was achieved in the CBD, the Energy Corridor, and the Galleria during 2015. Hitting close to home, 2200 Post Oak Boulevard located immediately adjacent to Post Oak Central traded for $527 a square foot during the fourth quarter.

Switching gears to our disposition activity, we closed on the sale of two suburban office assets. The Points of Waterview, a 203,000 square foot office building in Dallas sold for a gross price of $26.75 million or $132 a square foot. North Point Center East, a 540,000 square foot office complex in Atlanta sold for $92.25 million or $171 a square foot. Including our previously announced disposition of 2100 Ross in Dallas, we generated gross proceeds of $250 million from the sale of these three non-core office assets. With that, I will turn the call over to Gregg.

Thanks, Colin. Good morning, everyone. As you can tell from Larry and Colin's remarks, we had a very solid fourth quarter, which capped a terrific year. EBITDA was $0.23 per share for the quarter, and $0.89 for the year.

Providing a little perspective, it was only two short years ago, 2013 to be exact, when our annual FFO was $0.53 a share. That's a 68% increase in just 24 months, and we accomplished this while reducing leverage, debt to EBITDA was 4.7 times in 2013, and today it's 4 times.

It's been quite a run, however, I suspect everyone on this call has followed our share price, and based on its weak performance over the last couple of years, the logical assumption is that business hasn't been great. But in fact, the exact opposite is true, the underlying fundamentals in our markets have been exceptionally strong.

Drilling down into our fourth-quarter performance, there are only two unusual items I would like to bring to your attention. First, same-property NOI on a cash basis increased 8.2% over last year. This is a strong number, and marks the 16th straight quarter of positive cash NOI growth.

However, the components of NOI growth this quarter were atypical. Revenue declined 4.5%, while expenses declined 18.3%. What drove these declines? It was property taxes. Our Management Team was very successful in reducing our assessment at the end of 2015 for some very large properties. In some cases, they not only reduced the 2015 property tax bill, but also got the 2013 and 2014 bills reduced as well.

All of this was trued up during the fourth quarter, and it was this true-up that drove the large same-property expense decline. And since most property taxes are reimbursed to us by tenants, this expense reduction also drove down revenues during the quarter. Without this property tax true-up in the fourth quarter, same-property NOI on a cash basis would have increased 4.6% during the quarter, driven by 2% revenue growth, and a 1% expense reduction. Still a very solid quarter.

The other unusual item flowing through FFO this quarter was our G&A expense. As has been the case throughout 2016, our G&A expenses have been very volatile, as a result of our long-term incentive compensation accrual driven by our share-price performance. Our most recent G&A guidance provided on our third-quarter conference call assumed full-year G&A expenses of between $19 million and $21 million. Actual G&A expenses for 2016 came in at $17 million. This positive variance is completely explained by a reduction in our compensation accrual during the fourth quarter.

We also continued to buy back stock under our $100 million share repurchase program. During the fourth quarter, we repurchased 3.2 million shares for $29.1 million, bringing the total purchased in 2015 to 5.2 million shares for $47.8 million, since initiating the program in September of 2015.

The balance sheet remains simple and strong. Debt to undepreciated assets is 27.5%, debt to EBITDA is 4 times, and fixed-asset coverage is almost 5 times. These are strong balance sheet metrics from any perspective, and compare very favorably, not just to our office peers, but to the entire REIT industry.

Looking forward, we intend to maintain this strong balance sheet. As we sit here today, we have completely pre-funded our entire development pipeline. As Colin outlined earlier, we've sold $250 million of properties since September.

Adding these proceeds to the $17 million in land sales we have also recently completed, as well as our anticipated retained cash over the next couple of years, this fully funds our development pipeline. Selling these assets in advance of deploying the dollars into our pipeline is certainly a bit dilutive to FFO, but we thought it was important to lock down our sources of capital, and eliminate any funding risk for our development efforts.

With that, I will wrap up the portion of my conference call by providing details behind our 2016 FFO guidance. Before I begin, I would like to remind everyone that all of the assumptions I will provide align with the FFO presentation in our earnings supplement, located on pages 6 to 9 in the current supplement. This means we don't breakout unconsolidated operations into their own line item, as is the case with our GAAP statements. Instead, we include unconsolidated data, along with consolidated data in each assumption.

As we outlined in our earnings release, and as Larry discussed earlier in the call, we expect to report 2016 FFO in the range of $0.86 per share and $0.92 per share. This guidance range is driven by following assumptions. First, we anticipate positive same-property NOI growth of between 0.5% and 1.5% on a GAAP basis. Breaking this down a bit by geography, we expect same-property NOI in Houston to decline about 1% in 2016, and same-property NOI in the rest of our markets to grow about 4%.

As Colin said earlier, there is certainly emerging weakness in the Houston office market right now, but our Houston NOI guidance for 2016 is not the result of this weakness. Our Houston guidance is being driven by: one, an artificially low expense base line as a result of the large property tax adjustments I just discussed; and two, lower average occupancy during the year of between 1% and 2% driven by a timing lag between leasing execution and occupancy. From a leasing perspective, we anticipate our Houston portfolio to end 2016 right about where it began. As Larry and Colin mentioned earlier beyond 2016, we should anticipate significant NOI growth, driven by our development pipeline, as well as embedded increases in executed leases we have firmly in hand.

Moving on, we anticipate general and administrative expenses of between $19 million and $21 million net of capitalized salaries. We anticipate fee and other income of between $8 million and $9 million. For clarity, we include termination fees in this line item. We don't include them in the property-level NOI line item.

Consistent with prior-year guidance, we are not anticipating any termination fees in our guidance at this time. We anticipate interest and other expenses of between $39 million and $41 million, net of capitalized interest. Our guidance also assumes completion of our $100 million share repurchase program during 2016. Finally, we anticipate GAAP straight-line rental income of between $15 million and $17 million, and above- and below-market rental income of between $7 million and $9 million.

With that, let me turn the call back over to the operator for your questions.

(Operator Instructions)

Jamie Feldman, Bank of America Merrill Lynch.

Great, thank you. Good morning. I guess, Gregg, starting with you, do you have an outlook for cash same-store NOI? I think you provided GAAP.

Yes, we provided GAAP. We have not provided cash. GAAP is what you need to solve for your FFO number, Jamie, so that's why we provide GAAP.

Okay. And then, what is the -- where do you think you would come in on FFO, or maybe can you talk us through the CapEx outlook for the year?

Well, yes, CapEx has gone up recently. Our CapEx number, for example -- give me a second to turn to the correct page. Our CapEx number during 2015 in total was $54 million, second-generation CapEx. That was up from $35 million in 2014, and $16 million in 2013.

So it's gone up dramatically over the last couple years, and that reflects the velocity of leases that we have been signing. As Larry said earlier, we've had a couple of years here of record leases that we've signed. You'll see that plateau and start to decline as the years go forward, as we move past this hump of leasing that we've done over the last couple of years.

So you're saying a number in 2016 similar to 2015 would be about right?

Well, we don't provide guidance on second-generation CapEx because that depends upon leasing velocity, and then the terms of those leases. But I think a number around [2015] probably isn't a bad guess.

Okay. And then, can you talk about the leasing prospects for some of the vacancy at Greenway Plaza, the Exxon space, just what is the expectation there, of when you could get it filled? Or at least what kind of conversations maybe you are having?

Sure, hey, Jamie, it's Colin. And we continue to have activity at Greenway. And I think as we look at the portfolio, we don't necessarily just focus on the Exxon space. We think about the vacancy across the portfolio as a whole. And I think if we look at the performance in the fourth quarter, again where we did approximately 45,000 or so square feet of new leases, I think it's reflective of the fact that we've got good activity. And it's been, I'd say, primarily not in the larger 50,000- to 100,000-square-foot leases, but as we work through this quarter, we had good velocity on 5,000- to 15,000- to 25,000-square-foot leases. And so, as we look forward to 2016, we hope to be able to replicate what we did in the fourth quarter of 2015.

Okay. And then, we appreciate the color on the composition of your tenants in Houston. Can you talk about maybe a watch list you guys have, or maybe how it has changed in terms of how you are thinking about some of the credit risk?

Absolutely, we do spend a lot of time looking at this, not only from public information, but private information that we have, and relationships we have with some of the restructuring folks out there. I think, as we look at our portfolio as a whole -- and I did not point this out in my earlier comments is, if you look at the top 10 customers that we've published previously, 8 of those 10 have either a investment-grade debt, or insurance company rating. And that's about 46% of the portfolio.

So as I laid out in my prepared remarks, is we really drill down to what the exposure is. We're primarily focused on those names, the smaller independent energy companies, either in the upstream or services space. And as we look at our portfolio, it's less than 5% of those type of names that would fit that category. And we do watch those closely, and as I said earlier, we have no AR issues with any of those customers. And based on the work we've done, have no visibility at this point on any kind of near-term bankruptcy or anything like that, that would negatively impact us.

Jamie, this is Larry. Yes, I think that a couple of things that just shouldn't be overlooked is just what Colin said -- that credit quality. I think as people think about energy and risk in Houston, they really need to dig down and look at where our energy risk is -- the size of customers and the credit quality there. That, combined with the limited lease rollover we have in our high occupancy is really -- to be in a tough market is a pretty strong position to be in. And I'm concerned that continues to be overlooked.

Okay. And then, I guess, just to follow-up to that. I think there has been some talk in the past of maybe trimming exposure. I know it's kind of hard, given the size of your assets, but how do you guys think about that these days?

Well, when we purchased -- Jamie, if you think back, when we purchased Greenway Plaza, we stated our intention over time was to lower the percentage of NOI coming from Houston, and we've done that through asset purchases. Since we bought Greenway, we purchased Fifth Third and NorthPark Town Center, and we're doing development deals like NCR and Dimensional Fund Advisors, Carolina Square, and others. So, our perspective hadn't changed on that.

And we will, and are, looking as we should be at joint venture opportunities in Houston to potentially achieve that objective. And the thing that we aren't going to do, though, because our balance sheet doesn't make us do this, is we're not going to break our financial discipline. So we're going to look at the -- we will continue to look at it, but we're not going to feel pressured to make a short-term decision that isn't in the long-term interest of the shareholders.

So the thing that I also want to reiterate is, we continue to be strong believers, long-term, in Houston. And so, we are committed to maintain a strong presence in the future. But, yes, if we found an opportunity to trim it, either through any of those three methods, then that's the kind of things we'd look at.

Okay, I appreciate the color. Thank you.

Michael Lewis, SunTrust.

Thanks. Following up on one of Jamie's questions, I assume that there is no bankruptcies assumed in your guidance for next year. And then, I am also wondering about tenant behavior in a market like this. Does this cause tenants to hunker down and increase the renewal rate? Or are they out there, shopping around for the very best deal?

Well, I think that, certainly the -- we don't have any bankruptcies forecasted, and that's based upon the credit metrics that Colin just walked through with you. Michael, I think that people's behavior in turbulent markets is, one, they tend to make decisions slower and more conservative than they have in the past. But, obviously, economics are a key factor when they are faced, looking at those decisions.

If you look at the basis of our assets, we've got these fabulous assets in these two -- the two strongest sub-markets in Houston at a $200-a-square-foot basis, with limited rollover. So, when we are looking at those renewals, or when we are looking at these new prospects, we're in a very strong position to compete to retain those. And we're confident that we will be able to.

And just to add on to that, in terms of part of your question relating to our customer behavior, we have seen in many cases, customers retrenching to headquarters, which has -- actually has benefited us. We have seen that play out with Apache, Oxy, and Transocean, where they have shuttered some of their regional offices, and have brought some of their employees back to either Greenway Plaza or Post Oak Central, and increased density in our particular properties. It's just been helpful.

Thanks. And then, on the rent spreads, they have been very strong for many quarters in a row already. As I kind of do back-of-the-envelope math, it looks like those spreads could continue to be pretty positive. But as you continue to churn and roll everybody up, what kind of runway do you have before you think those spreads start to come back down, both in Houston and elsewhere?

We -- as you mentioned, we've had very good success over the last seven quarters of rolling up of rents. And as we look across the portfolio, including Houston, we do think that there is continued runway there, and then across the portfolio our rents are below market. And so, in the coming quarters, we think you'll see more of that. But I would caution you on any particular quarter, it's going to be very much a function of the particular space that we're leasing. And so, that can be choppy as we look forward. But we do think that there is -- that there is additional opportunity.

Thanks.

Tom Lesnick, Capital One Securities.

Hey, good morning, guys. Just on the buybacks, it seems like you guys were obviously pretty aggressive in 4Q, and there's only about half of the authorization left. Given that shares are obviously lower than they were in 4Q today, do you see yourselves being more aggressive now, and would you look to the Board to increase the authorization?

When we announced this share buyback, we stated that our philosophy is, when we announce the share buyback, we intend to do the share buyback. So Gregg and his team will continue to aggressively buy the shares back, as the quarters move forward.

I think as we look forward, it falls back on what I talked about in terms of the balance sheet strength of where we are, is we just we'll continue to look -- once we get through this share buyback, we will continue to look at where the share price is, and where our capital options are. And if the most compelling thing to do is to buy shares back, then we'll continue to buy shares back. And we can do that by a number of measures.

We're not going to take the balance sheet, lever the balance sheet way up to do that. But we've got non-core assets and other options that we can look at. So, to us, our intention is to stay aggressive, particularly at these prices. And once we get done, then the Board and Management will sit down and decide where we go from here.

Appreciate that insight. Gregg, one for you. Obviously, I know you said that the driver for G&A was the stock-based comp accrual, but given the sequential change and where the stock price was between 3Q and 4Q, it seemed pretty depressed in both cases. I was just wondering, are there any other mechanics that are going on there, besides the stock price that we should be aware of?

No, no, Tom, really not. Maybe just a little too much detail, but it might be helpful. There are really two levers here. So it's our relative performance, versus our office peers, and then its the absolute share price. If we do -- if the share price goes up, and our relative performance goes up, it's like a multiplier effect, you get this big swing upward.

The exact opposite has happened over the last couple of quarters. Our relative performance has declined, at the same time our share price has declined. So that's why we've gotten this really volatile move to the downside. And our compensation committee looks at this. They are very comfortable with where that portion of our long-term comp is, comparing us to our peers. I think it makes sense as well.

But, unfortunately, what it leads to is volatility. Not typically, I mean, we haven't changed this compensation plan in several years. So if you go back two or three years ago, this wasn't an issue. It's only emerged as an issue in the last 12 months, because of the relative underperformance of our stock, and at the same time, our share price has been declining.

Got it. Makes sense. And then, just one quick one, and I'm sorry if I missed it earlier. But what drove the delay in the close of that final North Point Center building?

It was just working with our buyer, as they had certain kind of tax issues that they needed to work through. And so, we were accommodating to them with that.

Got it. Thanks, guys. Appreciate it.

Richard Schiller, Baird.

Hey, good morning, guys. A quick question on the debt side, on your balance sheet. You guys have 18% or so, that's floating rate. How are you guys seeing -- with where rates are today, with the potential to go higher, and even some reports today the potential to once again go lower, how are you envisioning adjusting your floating versus fixed rate heading into 2016?

Well, we -- our floating rate is real -- first, it's Gregg. Our floating rate is really comprised of two items, it's our credit facility and our construction financing. And we really only have one construction loan that has anything drawn on it, that's the Emory Point construction loan. At 18%, that is actually very consistent with where we have run it over the past five years.

If you go back and you look over the broad span of time, I mean, we have a corporate objective of being somewhere between 15% and 25%. So we are right in the meat of where we want to be. And so we're very comfortable with it, at that point, and we've got no strategic objective to significantly lower it, or raise it.

Sure. And with your leverage relatively lower against office peers, any plans to go fixed or floating, probably more fixed, in the next coming years or no?

No, like I said, I think that we're generally comfortable with a fixed-to-floating ratio of about 20% floating to 80% fixed.

Okay, great. Thanks, guys.

Jed Reagan, Green Street Advisors.

Good morning, guys. How are you thinking about development at this point in the cycle? How much do you think you might start in the near term, excluding the DFA project? And then, are there any new acquisition opportunities you're focused on today?

Jed, we are -- I think we are much closer to the end of the development cycle, than the beginning of the development cycle, in terms of what you will see us do. So, if you see us do anything additional to what we've already named, or have in the shadow pipeline, it would not be anything that's on my radar screen right now. So it would be something that came up that was just extraordinarily compelling. We don't see buy opportunities in our markets today.

And, as I said, when we get through with this current share repurchase, then we will certainly continue to look at that. So we've got -- I think our development pipeline, which has been years in the making, is just phenomenal and is a great utilization of capital for our shareholders. And there may be a deal or two more, but there won't be much more. We think we're pretty much through this cycle, and we'll start looking to position ourselves, with maybe some land purchases here or there, to get ready for the next cycle in our key markets.

And is there any update on the Victory project in Dallas, how you are thinking on that?

We are not -- we have our leasing people in Dallas. If there is a large build to suit that wants to look at the building, then we certainly are showing that. But it's not something that we have in our capital plan, just once again where we are in the cycle, and where we look in terms of the amount of new supply in Dallas.

We've got a phenomenal site at $70 a square foot that would be significantly worth more than that. We think that site will be fantastic for future development. And outside of landing a big customer, then we don't see moving forward with Victory any time in the next year or two.

Okay. And then, on dispositions for 2016, how much do you think you might be able to sell? And what do you think of as being non-core in the portfolio at this point?

Hey, Jed, it's Gregg. We've got nothing in the base case right now to sell in 2016. As I said at the beginning, in my comments, we've sold everything we need to sell to fund the current development pipeline. And so, we don't typically provide kind of unnamed assumptions around acquisitions or dispositions. When the point in time comes that we identify an acquisition or disposition, and we get the details on it, we will tell you about it, and we'll adjust our numbers accordingly.

And Jed, this is Larry. I would add that, as we look to the future, we've always been fairly clear that the apartment deals we do are not long-term holds for us. We are not anticipating selling those either, but we are not a -- we're an office company that opportunistically develops. And so, if we found needs for capital, whether it's for a new investment opportunity or a share repurchase, we've got -- still have a fair amount of asset sales that we could look to do at that time.

Okay, that's helpful. And just in terms of Houston leasing activity, is it fair to characterize that leasing velocity in rents have been continuing to decelerate, just given the recent new leg down in oil prices? And then, is there any color you can give on the larger tenants in the market, their level of activity, call it the 50,000- to 100,000-square-foot plus category?

Yes, hey, Jed, it's Colin. And I think the best way to answer your question, I think at a high level in Houston, obviously, the economics are weakening, and we are seeing that across the market. I think, certain sub-markets are positioned better or worse. And so, as you go out into suburban sub-markets, the headlines in terms of significant drops in rental rate and concessions, that's absolutely happening.

But I think, again, in an effort to provide as much transparency as we can as to what's happening in our portfolio, last quarter I walked you through a two-floor deal that we did at 3 Greenway Plaza. And that starting rental rate was $24; it was a 10-year deal, at about a $40 TI and four months of free rent. And we've just recently, in this past quarter, signed another full-floor deal in Greenway, and the economics on that were, call it $23.50, with a 12-year term. This is a large financial institution that we're excited to have, and the underlying economics -- the concessions with that were similar: it was four months free on a 12-year deal, $55 TI on a 12-year deal.

And that wasn't just in isolation. We signed over 50,000 square feet at 9 Greenway Plaza in total, which again would be very comparable to 3 Greenway Plaza, during the fourth quarter. And the weighted average rent on that 50,000 square feet was about $23.90. So we haven't seen a big move in our portfolio.

And to put that in context, looking backwards, the other full-floor deals that we've done in 9 Greenway Plaza -- or 11 Greenway Plaza, over the last couple of years, those levels were $22 and $23 for some of our large leases in 2012 and 2013. So it's held up relatively well. But, obviously, as we look forward, we are going to continue to monitor that and would expect that conditions would weaken further.

And as far as the big block tenants, any activity there, or is it really most of the smaller tenant crowd?

As you look downtown, there's quite a bit of larger customer activity. I would say that some of that has been driven by -- there's been some pent-up demand, I would say, over the last year. Large users have been reluctant to make decisions. And so, as we look forward to 2016, 2017, at some point, some of these larger groups will be forced to make some decisions. But, overall, I would characterize that larger deal activity is being much slower and muted than the full-floor deals or the 15,000-square-foot deals. There our pipeline has actually held up relatively well.

Okay, thanks. And then, just last one. Some of your peers on the office side have been talking about seeing leasing pipelines slowing down, in general. Obviously, Houston is kind of its own story. But in your other markets, any sign of tenants, kind of tapping the brakes early this year, just given some of the global market uncertainty?

Jed, we are certainly keenly aware and watching for that. I would not say we've seen anything in our other markets that would indicate it yet, but we wouldn't be surprised if we started to see it in the balance of the year. But, actually, in Austin and Charlotte and Atlanta, the pipeline has come out pretty strong in 2016, in terms of leasing thus far. But it's something that we are keenly watching and would anticipate. It's got to be -- there's got to be some slowing we would start to see, if things sort of stay the same.

Thanks very much, guys.

You bet. Thanks, Jed.

Brendan Maiorana, Wells Fargo.

Thanks, good morning. Really great execution on Gateway, getting that lease done. Has there been any updated discussions with BofA about what long-term ownership of Gateway Village may look like? Or do they feel pretty comfortable kind of in the 50/50 structure as it stands now?

The -- when we had the discussion with our partners, Bank of America on Gateway, the partnership structure never came up in terms of wanting to change that. And so, we were successful working together as partners to extend this deal. But I really couldn't -- I don't have any color about what BofA's long-term plans are, other than this is clearly a mission-critical building for them. And, to date, I know that's been the reason they have kept their ownership stake in it.

They really appreciate the skill of our team in Charlotte, because it has so much critical -- mission-critical space in it, that we are able to work with them on those aspects. But long term, I don't have any color about what Bank of America's intent might be.

Okay. And this is probably for Gregg. But from the accounting standpoint, I think you mentioned $1.2 million of -- I think you said cash flow that comes through today, versus what will be $5.8 million of your pro rata portion of NOI starting in 2017. Is the $1.2 million, is that also what gets recognized from a GAAP earnings perspective? Or is that $1.2 million]net of the debt amortization, and that's actually just the cash flow, but maybe not the actual earnings impact?

Brendan, the $1.2 million is what we get paid economically in cash, and that equals what we recognize for GAAP. It's a preferred return, solved for using an [11.43%] return based on our initial $10 million investment 10 years ago. And then the $5.8 million that Colin referred to, that's an increase. So, once this new renewal kicks in, in December 2016 -- so about 11 months, 10 months from now -- the 17% look-back IRR that we've always had remains unchanged. Just the cash flow is changed. When we go from receiving that $1.2 million number to receiving something closer to $7 million, the delta, the variance is the $5.8 million that Colin referred to.

Okay, that's helpful, great. And then, just a final one, I don't know, for Gregg or Larry. So, you guys have done a really great job with the balance sheet, got it in -- leverage is very low, I think probably the lowest for any office company, or at least in my coverage universe. You've got some spend on the development pipeline, but that still keeps your pro forma leverage pretty low, even when you run that spending out. If we are in an environment where prices weakened for assets that you guys might like to acquire, where do you think you would be willing to let leverage go to, if the opportunity set does become attractive out there?

Well, Brendan, first of all, as a key part of our strategy to put our balance sheet in that position, for exactly the type of market we are in today. As I said, if we are able to take a long-term view, and balance the short-term view, and then have ultimate flexibility in making decisions, whether it's buying assets or repurchasing shares, or buying a building or whatever. But the key driver in doing that was exactly what you just outlined, is that when prices do drop in markets that we have called strategic, then that's the opportunity when we will take leverage up opportunistically to take advantage of those buy opportunities.

And we don't want to miss those at the right time of the cycle. And what we would take it to, those would be decisions that we would make at the time. But that's the key element of why to keep -- the two elements to why to keep the balance so conservative. One is, so that we don't have to react in times of turbulence. And, second is, so when that opportunity comes on the buy side of the market that, that's where you use the leverage and take it up a little bit to take advantage of that. And we intend to do that.

Great. Thanks, guys.

(Operator Instructions)

John Guinee, Stifel.

Great, Thank you. First, on page 13 of your supplemental -- probably Colin, and I think you are the only office REIT we cover that does this, you really get down to what real estate guys look at, and you're basically saying, your net rents signed in 2015 were $18.30. Spreading out your leasing costs on the lease term, you got down to a $14.16 net effective rent. Where do you see that going in the next year or two?

Yes, John, thanks for, one, noticing the level of detail that we provide. As we talked about earlier, we do think that, within the portfolio, there continue to be mark-to-market opportunity. And, as we look at all of our markets, I'd say with the exception of Houston, we are seeing the underlying net effective rents in places like Atlanta, in Charlotte, in Austin, continue to have a little bit of runway, as it relates to driving rental rates.

Obviously, that will be dependent on some macro market trends. But, as we see it today, in a market like Atlanta, where we hope to have a good chunk of our leasing, with new development being such a small percentage of the market, and really at historically low levels, and now occupancy is up close to 90%, we think that, that's going to afford us the opportunity to push the rental rates.

Great, okay. We have you trading at about $190 a square foot, so this is -- these are stunningly good economics, relative to your basis. Changing subjects, then and acting -- talking a little bit more about BofA's purchase option.

Probably Gregg, for some reason, rightly or wrongly, we have Gateway Center valued at about $35 million, which for some reason we think equals BofA's purchase option. If I just take what you've said, with the 17% IRR look-back means staying in place, and your cash flow on your $10 million investment going from $1.2 million to close to $7 million, that would imply that the purchase option is going to decline in years two, three and four and five because you are getting a $7 million return on your $10 million investment. Is that the right way to look at it?

Well, let's start by saying good measurement today, before we move forward to the transaction that changes the immediate economics. If you solve for -- the worst we can do, John, the absolute worst we can do, is if they buy us out, and give us 17% IRR on our original investment. And if you do that simple math, and they were to do that today, they would write us a check for about $45 million.

Okay, great.

So, the worst-case scenario we have today is $45 million, and hopefully it's significantly better than that. That's the worst that could happen. When this rolls forward, in the transaction December of this year, that 17% number stays in place. The only thing that is changing, is that instead of getting $1.2 million currently, we get $7 million currently.

The 17% number stays in place. So then you set to make an assumption about timing. So, immediately -- and the value to us doesn't change materially the day after this transaction takes place, because we're still solving for 17% IRR. But as you roll forward, the growth in that $45 million number that I provided you will come down, because we are just receiving more of it currently, instead of it being deferred.

Great, okay. And then, the second thought process there is, my understanding is the loan is fully amortized. So there'll be a zero debt outstanding on that asset sometime in 2016. So BofA essentially can take100% control of that asset for $45 million, with that number declining. Our friends at SL Green, with 388-390 Greenwich, Citibank, have the same sort of situation. And what it does is, it allows these banks, I think -- and correct me if I'm wrong -- it allows these banks just to keep these major assets off balance sheet as long as they want, and then just bring them on at any time. Is that how BofA is looking at this?

Well, I can't say how BofA is looking at this. But your first statement about once the loan amortizes completely in December of this year, and they can buy us out for approximately $45 million, and take control of the building, that's true. That's a wonderful outcome for us, by the way. We will have earned a 17% return on our money for a 10-year period of time. That's a terrific outcome. But that's true, they could buy us out in December of this year. The loan will be fully amortized, and they could take control of the building for $45 million.

Okay. And so then when you -- when your cash flow increases $1.2 million to close to $7 million in about 10 or 11 months, where will you be booking that $7 million?

Right through NOI, at the property level.

Okay. So we just have to think about it differently at that time?

Yes.

Great, thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Larry Gellerstedt for any closing remarks.

Once again, it's been a great year for Cousins, and we appreciate everybody being on the call. As always, reach out any time if you have any questions or comments you want to give us. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.