Cousins Properties Inc (CUZ) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to Cousins Properties Incorporated fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Please also note that today's event is being recorded.

At this time, I would like to turn the conference call over to Pam Roper. Ma'am, 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 Operating 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. The Company does not undertake any duty to update any forward-looking statements, whether as a result of new information, future events, or otherwise. The full declaration regarding forward-looking statements is available in the press release issued yesterday, and a detailed discussion of some potential risks is included in our filings with the SEC.

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

Thanks, Pam, and good morning, everybody. Thanks for joining us today.

Cousins opened the fourth quarter of 2016 with the completion of the historic merger and spin with Parkway Properties. These transactions marked a pivotal point in the execution of our long-term strategy. And were accomplished while the Team employed extraordinary effort in carrying out our ongoing business operations. I believe Cousins' fourth-quarter performance provides an excellent snapshot of the Team's tremendous work and dedication during the year.

During the quarter, we delivered FFO of $0.07 per share, or $0.15 per share before transaction costs. Leasing in all six of our markets was strong, with a total of approximately 761,000 square feet in new and renewal leases at very attractive economics. For the second straight year, the Team executed over 2 million square feet of leases, and I am pleased to report we continue to experience positive momentum in 2017.

Just this week, we executed a key lease at Northpark Town Center in Atlanta with WestRock, one of the world's largest paper and packaging companies. WestRock signed a 12-year lease to take approximately 180,000 square feet of space for their new Atlanta office, which brings Northpark to approximately 90% leased. Colin will provide more details on deal activity market by market in his remarks.

Looking back to our fourth-quarter performance, we completed a series of compelling transactions to further upgrade and strategically position our operating portfolio. First, we sold four office assets totaling just over 2.5 million square feet for approximately $637 million in gross proceeds. Those assets included Two Liberty Place in Philadelphia; 191 Peachtree in downtown Atlanta; The Forum in Atlanta; and Lincoln Place in Miami.

Next, we purchased Texas Teachers' equity interest in Fund II for $279 million. Fund II was comprised of the Hayden Ferry buildings in Tempe, and 3344 Peachtree in Buckhead.

As a result of these transactions, we simplified our ownership structure and enhanced our critical mass in two of our key submarkets. We also exited the non-core markets of Philadelphia and Miami, and further realigned our market concentrations.

Atlanta now represents approximately 42% of our NOI, down from 47% we projected when we announced the merger/spin. And in Phoenix, where asking rents in our targeted submarket of Tempe have grown 5% in the last year and vacancy levels are sub-3%, we now own over 1 million square feet. Coupled with the anticipated buyout of American Airlines' ownership at 111 W. Rio, our Phoenix portfolio is anticipated to represent approximately 10% of our NOI, up from 6% post merger/spin.

Looking forward to 2017, Cousins is well positioned to execute with a critical mass of urban, trophy office assets located in some of the most fundamentally attractive markets in the Sunbelt, markets which boast some of the most dynamic and robust demographic and economic trends in the nation. For example, job growth averaged 2.4% across our six markets in 2016, as compared to 1.4% for the broader US market. According to CoStar, these cities absorbed approximately 6.5 million square feet of Class A office space in 2016, and reduced vacancy levels to 10.7%. To further highlight office fundamental health, take a look at the outperformance in our six submarkets, which posted an average vacancy level of 7.9% for the year.

In addition to healthy demand characteristics, new supply in the Sunbelt continues to be relatively modest by historic standards, especially in our six markets, where office development totals less than 2% of the existing office inventory. By leveraging these underlying favorable real estate dynamics, we believe that our office portfolio, which currently commands top rents in all six of our markets, will continue to outperform in 2017, and will ultimately deliver superior returns for our shareholders.

In addition to our market's positive economic trends and healthy supply/demand characteristics, we are pleased to be located in cities where local governments, and business and residential committees, support infrastructure growth. As an example, during the election in November, Atlanta voters overwhelmingly supported a $0.005 increase for MARTA, and a $0.004 increase for transportation improvements, all within the city limits. This tax will raise $2.5 billion for MARTA to add more buses, light rail, and end-fill stations. I believe this is a huge win for Atlanta, and in particular, our portfolio, which we have intentionally assembled around MARTA stations.

Moving forward in 2017, we plan to further rebalance our market concentration through additional asset sales. I previously outlined two likely candidates in last quarter's call, ACSC, our remaining downtown Atlanta asset, and Emory Point, our office and retail project we own in a 75/25 venture with Gables. Once we close on these potential dispositions, our Atlanta portfolio is anticipated to represent approximately 37% of our NOI, down from 42%.

During the year, we will also remain focused on executing our $512 million development pipeline. Cousins has approximately 1.4 million square feet of office under construction, of which 84% is leased, as well as 60,000 square feet of retail and 246 apartments. Over the next 12 months, we plan to deliver 8000 Avalon in Atlanta, Carolina Square in Chapel Hill, and the first phase of NCR's world headquarters in Atlanta. The remaining projects, NCR phase II and Dimensional Place, are projected to deliver in late 2018.

Going forward, we will focus our efforts on evaluating and securing strategic land sites in core markets in preparation for the next development cycle. With the pullback in multi-family, we are now in a much better place to compete for the best locations. That being said, we will continue to exercise discipline when it comes to commencing any future development projects.

Last, and perhaps most important for 2017, we will continue to focus on optimizing our operating capabilities and synergies across our markets to drive occupancy and rent growth, as well as Cousins-style consistency and excellence in customer service. The Cousins and Parkway teams are fully integrated in all six of our markets, and we are truly beginning to see the power in the platform, especially on the leasing front. I look forward to sharing more big leasing wins in the months ahead.

To close my remarks, I would like to reflect back to January 2012, when I outlined a strategic vision for Cousins that focused on three things: simple platform, trophy assets, and opportunistic investments. We decided then to streamline our business model to concentrate on top-tier urban office assets in high-growth Sunbelt markets. At that time, only 48% of our NOI came from urban office assets, as compared to approximately 80% today. And only seven out of the 31 office assets we own today were a part of Cousins' operating portfolio in January 2012. As a result of our recycling efforts, our property NOI has increased 187% over five years ago, while our total square footage only increased by 35% in that time.

Needless to say, I am proud of our Team and their execution over the last five years. We'll begin the next era for Cousins with a 16.2 million square feet portfolio of Class A assets in prime urban locations in the Sunbelt, an active and well-leased development pipeline, and an industry-leading balance sheet. This well-executed plan drove positive results in 2016, and I believe positions the Company very well for continued success in 2017. With that, I will 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 metrics from the fourth quarter. Next, I'll spend the balance of my time providing specific updates as it relates to each of our markets, as well as additional details surrounding the transactions we closed in the fourth quarter.

The Team delivered a fantastic quarter, as we leased approximately 761,000 square feet. Our second generation re-leasing spread for the quarter was up 18.7% on a GAAP basis and 14.7% on a cash basis, which represents our 11th straight quarter with a positive rent roll-up.

Importantly, weighted average net rents climbed 12% over our results in the third quarter, reaching $26.32 a square foot. Again, to just be clear, $26.32 a square foot reflects a triple net rent, not a gross rent. I emphasize this because this metric clearly drives home the quality of our urban portfolio, post-Parkway transaction, and definitely differentiates us from our Sunbelt competitors.

Before moving on to the portfolio, I would like to echo Larry's earlier comments and thank our Team. Their impressive operating performance throughout the year while completing a transformative merger/spin, is a testament to their unwavering commitment to our shareholders, to our customers, and to each other.

Starting with Atlanta, we now own approximately 6.9 million square feet across the best urban submarkets, including a 21% Class A market share in Buckhead, which has the highest rental rates across the city. Our portfolio was approximately 91% leased at year end, which is 300 basis points better than the overall Class A market.

Our Atlanta Team leased approximately 205,000 square feet during the quarter, and as Larry mentioned earlier, we had a huge win just last night, as we executed an approximately 180,000 square foot lease at Northpark Town center with WestRock, a Fortune 500 paper and packaging company. This exciting transaction will push our percentage leased at Northpark to approximately 90% on a pro forma basis upon its commencement in October of this year. And that is after adjusting for Equifax known moveout of 68,000 square feet in August of 2017.

In our discussions with WestRock, it was very clear that Northpark's direct access to MARTA was key to their decision. We believe that this close proximity to mass transit will continue to grow in importance with our customer base, and be a key differentiator at Northpark, as well as our assets in Buckhead and Midtown.

Our Team had an extraordinary quarter in Tempe. Our 1.3 million square foot portfolio was approximately 96% leased at year end, which has enabled us to successfully push rental rates. At Hayden Ferry, we have eclipsed the $40 square foot rent, as the value proposition in Tempe, given its proximity to Arizona State and mass transit, continues to resonate with customers. During the quarter, the Team leased approximately 355,000 square feet, which accounts for 28% of our total portfolio in that market.

As I mentioned in our last call, we terminated US Airways' full-building lease and simultaneously executed an 11-year, 225,000 square foot lease with ADP to backfill the entire building. In addition, we agreed to take back three floors from Zenefits, a free IPO company with a valuation of approximately $2 billion, and simultaneously leased two of the floors to Amazon and a third to ZipRecruiter. Collectively, the new leases with ADP, Amazon, and ZipRecruiter averaged a very impressive 20% rent roll-up on a cash basis.

In Charlotte, the market remains tight, with vacancy in uptown just under 10%. Our 3.1 million square foot portfolio ended the year at approximately 98% leased, with no expirations during 2017.

During the fourth quarter, we did convert 69,000 square feet of Chiquita's unoccupied space at NASCAR Plaza to a10-year direct lease with Cardinal Innovations Healthcare. While the sublease alternative prevented us from rolling up Chiquita's below-market rental rate on this space, we're nonetheless pleased to further activate this asset and begin a new relationship with Cardinal. Chiquita continues to pay rent on their remaining square footage, which has termed through October of 2025. Our Team is hard at work looking for opportunities to create value within this residual Chiquita space.

Switching gears to our for Florida markets, we executed 30,000 square feet of new and renewal leases in Tampa during the quarter, and our 1.7 million square foot portfolio is 88% leased. The vast majority of our vacancy in Tampa is at Corporate Center in Westshore, where we have approximately 191,000 square feet of available space. We view this as one of the better opportunities across the Company to drive NOI, as Corporate Center is widely regarded as one of the best assets in the strongest submarket of Tampa. We're very pleased with the robust pipeline of prospects to backfill this space, and we are very confident that we'll make good progress over the next quarter.

Similar to Tampa, we have very attractive available space in our Orlando CBD portfolio. During the quarter, we leased approximately 34,000 square feet, improving the 1 million square foot portfolio to 88% leased, with the largest vacancy at One Orlando Center, which is approximately 82% leased. While the activity in Orlando has been soft as of late, we remain optimistic about the lease-up opportunity, as the CBD has just 10% vacancy according to CoStar, with virtually no new speculative supply under construction.

Lastly, we did have a quiet fourth quarter in our Austin portfolio, as a result of that portfolio being 96% leased. Activity across the city as a whole remains very strong, with approximately 375,000 square feet of net absorption in the fourth quarter, according to CBRE. The overall market finished the year at 9% vacancy, and the CBD filled a 6% vacancy, creating a very friendly environment for landlords to push rental rates.

To illustrate this point, we expanded a customer at 816 Congress last month at a 35% increase in rental rate over their original lease, which was signed less than two years ago. We're monitoring the construction pipeline in the Austin CBD, which currently totals approximately 1 million square feet. While the pipeline is 77% pre-leased, we are always mindful of the competitive landscape, and we continue to reinvest in our portfolio to ensure our assets will remain attractive to our customers.

Turning to the fourth-quarter transaction activity, as Larry mentioned, we sold 191 Peachtree in downtown Atlanta for $267.5 million, or $218 per square foot, and The Forum, which is located on the edge of the Buckhead submarket, for $70 million or $318 per square foot. Interesting to note, in both cases the buyer completed the purchase with foreign capital, which is a growing trend in our urban Sunbelt markets.

Also during the quarter, we completed the sale of Lincoln Place in Miami for $80 million or $571 per square foot, and bought out our equity partners' interest in Fund II for $279 million. As a reminder, Fund II consisted of 3344 Peachtree in Buckhead, the three Hayden Ferry properties in Tempe, as well as cash from the previous sale of Two Liberty Place, and a promote owed to Cousins based on the positive performance of the Fund.

This was a complicated transaction with lots of moving pieces. But the simple framework of the deal was based on a blended gross valuation of $409 per square foot for the real estate assets in Tempe and Buckhead. The year-one cap rate on a cash basis is projected to be approximately 6%, and it is projected to stabilize in the mid-6%s, with the growth driven primarily by contractual leasing.

Before I turn the call over to Gregg, I would like to highlight some of the recent leasing activity at two of our development projects. At Carolina Square, our mixed-use project in Chapel Hill, we signed a 15,000 square foot lease during the fourth quarter, bringing the office component up to 74% leased.

At 8000 Avalon, our 224,000 square foot office project in Atlanta, we signed 9,000 square feet of new leases in January of 2017. In addition, we have recently agreed to terms on an approximately 30,000 square foot deal, which would increase the project to 38% leased upon execution. With the addition of this new leasing activity post quarter end, our $512 million development pipeline, which includes 1.4 million square feet of office, would be approximately 87% leased. With that, I'll turn the call over to Gregg.

Thanks, Colin. Good morning, everyone. It was clearly a busy quarter here at Cousins, and our financial statements reflect that activity. What I hope shines through is the underlying strength of our properties and of our markets. We did well where we like to do well.

Same-property NOI on a cash basis was up 7.1% during the quarter, and 8.4% during the year. Second-generation re-leasing spreads were firmly positive, with double-digit growth on a cash basis during both the quarter and the year. And the leasing velocity was strong, finishing 2016 with positive upward momentum.

With that, I would like to start my comments by pointing out a few of the accounting items that may prove helpful as you review our financial statements and earnings supplement. Then I would like to discuss the significant items that ran through our results this quarter. And finally, I would like to conclude by looking ahead at the capital markets activities we have planned for 2017, and reaffirming our previously provided earnings guidance.

Let's start with the accounting items. First, please remember that we completed our merger with Parkway on October 6. So, our quarterly results do not include a full quarter of Parkway results.

Inside the supplement, you will specifically see this on page 8, where we provide asset-by-asset NOI numbers, and on page 10, where we provide asset-by-asset interest expense for those assets that have property-specific debt. Included in these partial-quarter Parkway results are 100% of the Texas Teachers Fund II assets. We purchased Texas Teachers interest in this Fund on December 23, so we only actually owned 100% of these assets for the final week of the quarter. Texas Teachers portion of the results for the period of time they had ownership in the Fund is removed under a line entitled, partner share of FFO and consolidated joint ventures, on page 10 of the supplement.

In addition, we also included in these partial-quarter results our 75% ownership interest in 111 West Rio in Tempe, formerly known as the US Airways building. US Airways terminated their lease in early November, so the numbers in our supplement only reflect approximately one month of ownership.

Finally, per GAAP, we've classified the operations of the Houston assets we spun into new Parkway, which are Greenway and Post Oak, into discontinued operations. So, again, on those same pages in our supplement, you will not see these two assets listed. Their results are consolidated into the discontinued operations line items, and only include the period of our ownerships during the quarter, which was essentially the first week of October.

You will also notice that our same-property pool was small this quarter, relative to the size of the entire property portfolio, comprising approximately 18% of our total NOI. Consistent with prior practices, we've only included assets that we own as of January 1 of the previous year in our same-property pool, so that we can provide clean year-over-year comparisons under our ownership. The unique combination of the Parkway merger and the Houston spinoff is the primary reason behind our small same-property pool in the fourth quarter using this definition.

Of course, we had prior Parkway data on each of their legacy assets, but as usual, GAAP gets in the way of easily using this data. Parkway made GAAP adjustments to their property data, and so did we when we merged with them. Therefore, the GAAP comparison is not meaningful.

A comparison of cash results, however, would be helpful, and we will look into this, potentially providing this data in addition to our traditional same-property data in some form in 2017. The following year and beyond, the same-property pool using our historic methodologies should again represent the majority of our cash flow, and provide meaningful GAAP and cash comparison data going forward.

There is one other item I would like to point out in our supplement that has nothing to do with the Parkway transaction, but merits mentioning. The fully amortizing mortgage associated with Gateway Village in Charlotte matured during the fourth quarter, specifically on December 1. As we have discussed several times in the past, once this mortgage matured, our 50/50 joint venture arrangement with Bank of America on this building shifted from us receiving an 11.46% preferred return to us receiving a 50/50 split of the cash flows. Therefore, the fourth-quarter NOI for Gateway Village in our supplement reflects two months of preferred return, and one month of a 50/50 split.

With that, let's move on to the significant items that ran through our financial statements during the fourth quarter. Obviously, the largest item was the Parkway transaction costs. We incurred $26.5 million in transaction costs during the fourth quarter, and we have incurred almost $31 million in total transaction costs to date.

We also continued to proactively reduce our non-core land holdings during the fourth quarter through three separate sales, which resulted in a cumulative net loss of approximately $800,000. All of the land we sold is located in Atlanta, and it was comprised of a commercial pad in Alpharetta, several hundred acres of residential land in Fulton County, and our long-held joint-venture interest in Callaway. After these sales, our land holdings now represent less than one-half of 1% of our total asset value. As Larry said earlier, we are now turning our attention to increasing our land holdings with acquisitions that complement our strategic focus on key urban submarkets.

The US Airways transaction in Tempe that Colin discussed earlier accomplished many important objectives, including generating a $2.8 million termination fee during the quarter. Termination fees, although very lumpy and difficult to accurately predict, are a recurring part of our Business, so this fee, in and of itself, is not unusual. However, the size of it is extraordinarily large, which is why I wanted to draw your attention to it.

Our general and administrative expenses during the fourth quarter were also unusually large. This was caused by a sharp increase in our long-term incentive compensation accrual, which was driven by our strong recent share price performance. During periods of share price volatility, this compensation accrual can be very jumpy, which was certainly the case during 2016.

Our quarterly G&A expenses moved from $8.2 million during the first quarter of the year to approximately $4.5 million during each of the second and third quarters, and back up to $8.3 million in the fourth quarter. It wasn't always this way. However, since late 2014, our shares have traded in a range almost twice as wide as the RMZ, first driven by oil prices and our Houston exposure, and then driven by the Parkway transaction. Rest assured, our actual core G&A expenses are not this volatile.

Finally, we completed quite a bit of productive work during the fourth quarter, both commensurate with the Parkway closing and soon afterward, to clean up our post-merger balance sheet, which resulted in $5.2 million in debt extinguishment costs. Included in this number are costs associated with some of the debt we paid off when we purchased Texas Teachers interest in Fund II, as well as pre-payment costs associated with several other mortgages.

Looking forward, we have two primary balance sheet objectives in 2017. First, we need to address a little over $550 million in debt that matures during the year. Approximately $200 million of this debt will be retired through the identified asset sales Larry and Colin talked about earlier, Emory Point and the American Cancer Society Center. The remaining $350 million of debt maturities is associated with legacy Parkway assets, and will be refinanced. With an average coupon of 5.84% on this maturing debt, we have a real opportunity to bring our interest costs down materially with this refinancing.

Second, we need to reduce leverage. We have purposefully maintained a very low-levered balance sheet over the past few years, with net debt to EBITDA right around 4.5 times. Why so low? Let me take a moment to explain our rationale.

Cousins has over 50 years of development expertise. We believe we have created and continue to create significant value through our development activities. But a development pipeline does increase corporate risk.

We manage this risk by capping our development efforts as a percentage of our total asset base, as well as maintaining a low-levered balance sheet. We believe this combination, a prudent development effort supported by a conservative balance sheet, is very compelling. We also like the dry powder low leverage provides during times of macroeconomic stress.

As part of the Parkway transactions, we transferred some of our low leverage to new Parkway to ensure their financial strength at the time of the spinoff. As a result, our net-debt-to-EBITDA ratio has increased to 5.2 times. This is still very strong and well below the office average of 6.8 times, according to [S&L], but we intend to bring it back to the 4.5 range in the intermediate term.

Before turning the call over to the operator, I wanted to again reaffirm the earnings guidance we provided in early January. There are no changes to our estimated FFO range or the assumptions behind it.

In closing, no doubt about it, our quarterly financial results were complex. Don't let that complexity hide the fact that we accomplished quite a bit during the fourth quarter, all while generating terrific operating results. We've worked hard to make sure 2017 will be less complex.

We want to ensure that you, our investors, have a clear line of sight to the power of the Company we've created, and it is quite a company. It is an exciting time here at Cousins. Thanks for your patience and support.

With that, I'll turn the call back over to the operator for your questions.

(Operator Instructions)

Jamie Feldman, Bank of America.

Great. Thanks. Good morning. I guess the first question the same-store guidance of 2% to 4%, is that the entire portfolio, or is that just the seven Cousins assets that you quote in the supplemental?

Jamie, it is Gregg. Good morning. We will add two additional assets to the same property pool that was there in the fourth quarter. Those assets are Northpark in Atlanta and Fifth Third Center in Charlotte.

Those are two big assets, which will increase the same property portion of our total NOI from about 18% to about 31% during 2017, assuming we don't sell or buy anything else. It's bigger in 2017 than it was in 2016. There is a couple additional assets.

Okay. So, you're giving us the internal growth guidance of 2% to 4%, but that is really only a third of the portfolio. Do you have a sense of what that number looks were for the entire portfolio?

Jamie, as I said in the prepared remarks, we are going to take a look at providing incremental information in 2017 that will give you a little more transparency in to the performance of the whole portfolio in 2017 relative to 2016. But that will be in addition to our consistently provided same property performance that we will definitely provide. The 2% to 4% that we talked about refers to that nine-property portfolio I talked about that represents 31% of the total portfolio.

Maybe just your gut feel of what do you think internal growth is for the whole business?

As we look forward, 2017 and on, I think the growth trajectory of the Company looks very attractive. The rents across our portfolio continue to be below market, roughly 10% is the number that I provided in the past. As we look forward to 2017, I think it's important to look at we do have a portfolio that continues to inch out from a percentage lease standpoint, and we do not have a whole lot of expirations over the course of the next couple of years.

I think if you looked at our supplement relative to our peers, our rollover profile in 2017, 2018 and 2019 is relatively low, and that is a testament to the fantastic job the team has done getting in front of some of those expirations. As highlighted by the quarter that we just had and the leasing activity and the continued rollup in our rents, you will continue to see that translate into 2017 and beyond.

Any latest thoughts on market concentration, and if you'd sell maybe some of the Florida markets?

When we look at the Florida markets, we're excited, because, to sort of piggyback on what Colin just said, we do have vacancy there, and we are very focused. Tampa, in particular, the pipeline has picked up, and we think we will have some positive things to announce during the balance of the year. So, our focus on the Florida markets is continue to get to know them better, but take advantage of this vacancy and get it leased up to create value for the shareholders.

As we look to the balance of the Company, the thing that we will absolutely do is stay disciplined with urban assets in the best submarkets, and we'll look for opportunities for those within all of our existing cities, but we also continue to look at other cities in the Sunbelt. Where we can get that dynamic that has led to the success that we have had is our current strategy, which is trying to get the best urban submarkets, near transit, best buildings, and in an environment where we think our operating approach to doing business will be successful. So, we will look both with our existing portfolio, as well as continue to look for other opportunities outside that portfolio.

And Jamie, just to add on to Larry's comments, in addition to looking for new opportunities, whether it be in some of our existing markets or some potential new markets, is your question regarding growth. Again, we do have organic growth through below-market rents, but to echo our earlier comments from our script, we have got a fantastic development pipeline of about $500 million, that today we think pro forma could be in the high 80s on a percentage-lease basis.

You'll start to see that pipeline begin to deliver later part of this year and 2018, so that is going to be a fantastic growth opportunity for the Company. We will continue to look for new opportunities. Certainly, in a disciplined manner.

Just last question from me. Thinking about the CapEx needs for the year, what are your thoughts based on the guidance of where you might end up on AFFO, and is there room to bump the distribution in 2017?

Jamie, it is Gregg. We do not provide AFFO guidance, we just provide FFO guidance. I am going to pass on that comment in terms of providing AFFO guidance.

In terms of distributions, we do drive our distribution decisions off of AFFO. It is a decision made by the Board every quarter.

But when we right-sized the dividend to reflect the Parkway distribution in the fourth quarter, we right-sized it with an eye toward 2017. So, I think that you should probably expect very little, if any, change to our dividend distributions in 2017 versus what we just did for the fourth quarter of 2016.

Okay. Thank you.

Tom Lesnick, Capital One.

Good morning. My first question on the investment sales environment in Atlanta, particularly for multi-family assets. We have heard comments from players in the apartment industry about fewer bids out there for assets right now, and cap rates potentially ticking a little higher. How are you guys thinking about the environment for your Emory asset?

Great question, and we have seen an overall, I would characterize, spinning a bigger pool in the multi-family space, perhaps a slight pullback from some of the institutional, larger institutional investors and that could lead to creep-up in cap rates. Some of that is a function in the multi-family space of the supply that is out there, which is certainly a bit different profile than what we see in the office space today.

But I think as we would look at Emory Point, it is important to point out the incredible in-field location that we have there, adjacent to the CDC and Emory University, and if there is one area in Atlanta that has been under supplied and supply constrained, it is that particular submarket.

On ACS, I believe you have historically talked about that site being a potential demand from the data center community. What are you guys seeing there?

That is an asset that, as Larry mentioned, we will likely bring to the market in the relatively near future. I think it's going to be a very attractive opportunity for a wide-ranging group of investors. As you mentioned, there is a data center component, it is a bit of a hybrid, given the network and fiber that runs underneath Atlanta.

Today, I would say that it is roughly 25% or so of the square footage comprises of data center customers, with 75% on the office side. As we bring that out, we hope to see good interest from not only office investors, but potentially some of the technology-oriented real estate investors, as well.

That is helpful. Shifting gears, Gregg, other companies have undergone reverse splits in the last couple of years with some success. Just given that you guys are kind of going along at $0.15, $0.16, and consensus appears to remain that way for the foreseeable future. Is there any inclination on your part to pursue that and potentially increase the share price and per-share metrics?

Clearly, we are trading below $10, which kind of puts that on the table. We're not at $2 or $3 or $4, which would absolutely put it in front of the table, but that's a decision for the Board. We talk about it, if that's something we decide to pursue, we will be transparent with you all going forward.

I appreciate that. Last one from me. I am sorry if I missed it, but were there any residual costs from the merger that are expected to be expensed in 2017 from a timing perspective?

Tom, included in our 2017 guidance is a range of between $1 million and $3 million of additional lingering transaction costs that will run through our 2017 numbers.

Perfect. Thanks for the reminder.

Michael Lewis, SunTrust.

Thanks. Good morning.

You mentioned the big lease that you signed at Northpark. Just happens that your next lease rolling over 100,000 square feet, it's not until early 2019, but it's also at Northpark. Just wondering if there's any visibility into that yet, and if that mark-to-market is kind of consistent with the roughly 10% that Colin spoke to for the overall portfolio?

Michael, it is Colin, and you are right, our next large expiration at Northpark, aside from the Equifax moveout, which we have mentioned in August of this year, is AIG in 2019. It is a bit too early to project, but we have had a great relationship with those folks.

The dialogue continues. I think it is just a bit premature for them. But that is certainly something that we'll be very focused.

In terms of the specific mark-to-market, again don't want to provide guidance on a specific lease upcoming rollover like that from a competitive standpoint, but we do see really good opportunity at Northpark across the board to continue to roll rents to market. And that particular lease wouldn't be any different. I just want to shy away from the specifics as we begin those conversations.

Understood. In terms of the development portfolio, obviously, a lot of well leased projects and [build-to-suit], Carolina Square leased up, it looks like there is some leasing to do at 8000 Avalon.

I think Colin may have mentioned a lease there, but is there any color you could provide kind of on tenant demand there? And then also more broadly, Atlanta has been a strong market, are there any signs of slowdown in activity or tenant demand?

I would say Atlanta continues to have strong demand. We haven't seen any dip in terms of lease volume. The total square footage leased in the city in 2016 is a little lower than it was in 2015. But just like on the lease we just executed with WestRock, we continue to see good opportunities in the best buildings near transit to drive good results.

In terms of Avalon, usually when we do a building like this, our goal is to be sort of in the 40% to 50% leased range when the building opens, because particularly in a mixed-use environment like Avalon, a lot of it is letting people see it so they can understand the true value offering that we have there. And I'm confident we will be in that range by the time we open it. The pipeline looks really strong, and we're feeling pretty confident about where 8000 Avalon sits.

Thank you.

Jed Reagan, Green Street Advisors.

Good morning, guys. Can you talk about the expected timing for some of these lumpier 2017 dispositions? Are there any taxable gains you may need to protect or pay out with ACSC or Emory Point?

Jed, it is Colin. I will tackle the first half of that from a timing perspective.

Our goal with both Emory Point and ACSC is to be in the market here very shortly, and we'd like to get those done in the first half of the year. They could creep over a month or two, depending on the specific timeline of the deal, but we're focused on moving this forward, and this process is now.

Good morning, it's Gregg. In terms of the taxability of those two asset sales, and whether they would require a special distribution on our part, the answer is currently, no. We don't anticipate either of those sales generating the requirement for special distribution.

You mentioned a little bit earlier potential external growth opportunities. Wondering if you could offer any more color on how you're thinking about the acquisition environment today, and if there are any build-to-suit opportunities you are pursuing that might hit in 2017?

Jed, this is Larry. We continue to see some build-to-suit opportunities. Not anything that we can see on the very short-term horizon, but those things pop up, usually where you know a quarter or two in advance, and you're pursuing them, and you have a little bit better things. We don't have any visibility on anything in our portfolio that I would put in that sort of short time frame.

In terms of the acquisition market, as we look both within our own portfolio in cities, as well as future cities we look at, it is the importance of our balance sheet strategy. If when we start to see markets that meet our standards in terms of where we want to be, we also want to be patient and make sure we buy assets at the right time to get the kind of results that our portfolio demands, and that is the reason that we are, as Gregg said, keeping our powder dry.

Okay. Makes sense. Can you just run through it quickly, maybe Colin, how the rent growth environment is looking across some of your markets? Maybe just a range for the kind of rent growth, if any, that you guys are observing currently?

As I mentioned in my prepared remarks, we have seen very, very significant growth in Austin. Double-digit type growth. Certainly, there has been fantastic opportunities for us to drive rental rate growth in Tempe. We are also seeing that here in Atlanta.

Kind of order of magnitude, Jed, I'd say over the last year or two, it has ranged anywhere from 5% to 10%. Florida has been a little bit slower than some of our other markets in Tampa and Orlando. It has been a little bit more moderate and probably closer to inflation-type ranges 2% to 3%. As both of those markets have now tightened, we're optimistic that we'll see a catch-up in both of those.

Okay, and that 5% to 10% also applies to Atlanta?

We have seen that. I would say that the Tempes and the Austins have been at the higher end of that range. I would say that the Atlanta and Charlotte have been closer to that kind of 5% range, with Tampa and Orlando closer to inflation-like levels.

Just last one from me. I think you had originally outlined about $85 million of expected merger costs, and I think you have recorded about $30 million or so, so far, and a couple million more programmed in 2017. Were you able to just execute at lower cost than expected, or did Parkway end up shouldering a little more of the burden, or how did that play out?

Jed, it is Gregg. A lot of the transaction costs went on Parkway's books at or before the time of the merger. So, you won't see the full $85 million show up through our numbers, because it is a combination of our expenses and theirs.

But when you combine the two together, we believe that the total transaction costs are going to come in right around $85 million. I think we're going to hit that number.

Okay. Appreciate that. Thank you, guys.

(Operator Instructions)

John Guinee, Stifel.

Good morning. Just a few quick ones. Colin, do you think you can exceed the outstanding debt on the sale of the ACSC building?

We do. We're very confident of that.

Second, just to clarify, the dividend has been reset at about $0.06 a share per quarter?

At exactly $0.06 a share per quarter.

Third, 191 Peachtree sale, did Cousins re-up there, or are you going to relocate into a Cousins-owned building?

We will relocate this summer to a Cousins-owned building.

Which one?

3344 in Buckhead.

Okay. And then, Colin, NCR if I'm doing the math right, looks like it is going to cost about $445 a square foot. Avalon looks like it is going to cost about $325. And the Dimension building in Charlotte about $250 a square foot.

First, if those numbers are accurate, let me know. And then can you talk a little bit about the difference in what you are delivering for those widely different prices?

Sure. A couple of comments on those. First, those are our GAAP numbers, which does incrementally increase those costs a bit relative to a cash number. I'd say the key differentiator as you kind of go across those particular assets that you mentioned.

The NCR deal was ultimately done on a return-on-cost basis. The amount of TI that went in there was maybe a little bit higher, given the build-to-suit nature of that, and some of their tech requirements. So, that pushed that project cost up a bit.

Avalon at a little over $300 a square foot I think is representative of a kind of mid-rise suburban project with a structured parking. The Dimensional Fund Advisors projects you referenced, what is missing there from a project-cost standpoint is Dimensional decided to fund their tenant improvements outside of our transaction. And so you would have to add a market TI to that to get to a kind of a more normalized market level development cost.

And have you quoted any expected yield on cost for these development deals?

We have not provided specifics per project. In the past, we have referenced on a GAAP basis that the return on cost is in the mid-8s on the projects on a blended basis.

Great. Wonderful. Good luck.

Thank you, John.

Jed Reagan, Green Street Advisors.

Thank you. Just on kind of market selection, you've got the Carolina Square project, which obviously is delivering in the Raleigh-Durham area. Is that a market you would like to expand in, or is that likely to be more of kind of a one-off there?

Raleigh-Durham market is one that we have looked at. I wouldn't say it is on the top of our list going forward, for various reasons.

So, I would look at the Carolina Square as more of a one-off opportunity, although that always can change as cities change and demographics change. But it would not be on the top of our list.

Okay. Fair enough. Thank you.

Thanks, Jed.

Ladies and gentlemen, at this time I would like to turn the conference call back over to management for any closing remarks.

We, as always, appreciate your interest in our Company. 2016 was obviously a fantastic year, and we are optimistic as we look forward to 2017 and appreciate your continued interest.

If you have any questions, as always, the management team is available, and just feel free to reach out. Thanks so much.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.