Cousins Properties Inc (CUZ) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Cousins Properties third quarter 2017 earnings conference call.

All participants will be in listen-only mode.

(Operator Instructions).

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Pam Roper.

Please go ahead.

Good morning, and welcome to Cousins Properties third quarter earnings conference call.

With me today are Larry Gellerstedt, our Chief Executive Officer, Colin Connolly, our President and Chief Operating Officer, and Gregg Adzema, our Chief Financial Officer.

The press release and supplemental package were made available on the Investor Relations page of our website 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.

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 contained in our filings with the SEC.

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

Thanks, Pam.

Good morning everybody, and thanks for joining us today.

The Cousins team continues to drive strong performance across all areas of our business in 2017.

Our office portfolio is 94% leased and generating positive financial results for the 19th straight quarter.

We also successfully delivered our second development project this year with Carolina Square coming online during the third quarter.

Year-to-date, we've leased over 1.2 million square feet of office space, delivered a 196 million in new developments, and the Cousins and legacy Parkway portfolios, when combined, produced same-property cash NOI growth of 8.2% when compared to the same period in 2016.

Looking forward, I'm encouraged by the steady activity we're seeing on the ground in our Sun Belt markets.

Accelerated job growth and ongoing economic expansion continue to support the demand for premium office space, especially in our targeted urban submarkets.

This is evident in our portfolio's performances cycle as well in the markets where we operate.

In Atlanta, Austin, Charlotte, Phoenix and Tampa, the class A office market has experienced 8 consecutive years of positive net absorption and 6 consecutive years of strong net growth.

Another important measure to consider when evaluating the health of our markets is new supply.

Surprisingly, during this cycle, new supply in our Sun Belt markets has been more constrained, averaging 1.7% of total inventory per year.

Putting this into perspective, in the previous cycle, new supply in our markets averaged 5.2% of total inventory per year.

Cousins is well positioned to create value in today's robust real estate environment.

While we have seen no early signs of softening conditions, we will remain prepared and well-capitalized to quickly adapt if fundamentals should change.

Regardless of where we are in the market cycle, we remain consistent with our strategic roadmap.

First and foremost, our strategy is to continue to own premier urban office portfolio in the Sun Belt.

We are confident that our trophy assets located in the best submarkets will be leaders in times of economic expansion and outperform in the economic downturns.

Our strategy leverages the demographic tailwinds across the Sun Belt, with increased barriers to entry that have emerged in urban submarkets as a result of diminishing levels of development-ready land.

In addition, the rapid transformation under way in places like Midtown, Atlanta, the Austin CBD and Uptown Charlotte have created new urban living alternatives for the best and brightest young talent at a much lower cost of living.

Second, we will maintain a disciplined capital allocation strategy.

Over the course of the current cycle, we creatively consummated the Parkway transaction as well as invested an additional $3 billion in new development and acquisitions.

We were intentional in the timing and selection of each investment decision.

Early in the cycle, we focused on class A value-add acquisitions with investments like Promenade in Atlanta and 2100 Ross in Dallas.

Next, at mid-cycle, we deployed our capital into speculative development and were successful with projects like Colorado Tower and Research Park V in Austin.

As the current cycle has extended, we focused our efforts on strategic acquisition opportunities and highly pre-leased or build-to-suit projects like 8000 Avalon in Atlanta and Dimensional Place in Charlotte.

During this time, we also completed a highly strategic transaction with Parkway.

All of our investments, regardless of the timing or type, were funded on a leverage-neutral basis using the most compelling source of capital available to Cousins at the time.

At the present time, we are executing our current $517 million development pipeline, with NCR Phase I set to deliver in January and the balance scheduled to deliver in late 2018 through early 2019.

We are also fielding requests from new and existing customers with expansion needs and limited options available in existing space.

I'm optimistic that this will translate into one or two more projects this cycle, whether it is a highly pre-leased multi-tenant building or a fully-leased build-to-suit development.

I'm especially encouraged by the progress we've made with one of our larger customers.

While it is still premature to make an announcement today, we hope to be in a position to provide more specifics by year-end.

Circling back to our strategic roadmap for the future, we will continue to maintain a simple, flexible and low-levered balance sheet.

From third quarter -- from fourth quarter 2009 to today, we've reduced net debt-to-EBITDA from 7.7 times to 4.3 times.

Our conservative approach to balance sheet management has given us the opportunity to pursue transformative investment opportunities like the Parkway merger spend.

Going forward, we will continue to pair our prudent capital allocation strategy with a conservative balance sheet, with the ultimate goal of providing long-term value to our shareholders.

And lastly, we will leverage our strong local operating platforms.

This local sharpshooter approach has served us well in the past and is vital to the ongoing success of the company.

Today, we are well-positioned in each market, with a strong operating platform led by a local managing director who, in addition to having responsibility for on-the-ground operations, also helps us to identify new investment opportunities.

We believe that this entrepreneurial approach with a focus on deep market relationships, customer service and community involvement provides the company with a competitive edge on both the leasing and investment fronts.

Many of you witnessed the power of the Cousins local operating platform approach during our Investor Day in Atlanta last month.

The same can be seen when visiting our teams in Austin, Charlotte, Phoenix and Tampa.

Before I turn it over to Colin, I'd like to once again reiterate my confidence in our strategy, the urban Sun Belt portfolio we've assembled, the balance sheet we secured, and the team we've built.

Cousins is certainly well-positioned to execute and grow in our current markets, where we continue to see a runway of great opportunity.

In addition, we continue to study additional Sun Belt markets where we believe our platform could create value.

Specifically, we are focused on cities with scale, a thriving urban core, and a well-educated workforce.

Nonetheless, any expansion will be driven by identifying compelling opportunities, and we will remain patient and disciplined.

With that, I'll turn it over to Colin.

Thank you, Larry, and good morning, everyone.

It's an exciting time to be part of the Cousins organization, as we are well-positioned to create value for our shareholders.

We have a trophy portfolio and rock-solid balance sheet, and equally important, a focused and committed team.

With that backdrop, I'd like to begin my comments today by briefly highlighting some of our key operational and leasing metrics, and then I'll provide additional details market by market before closing with an update on our disposition activity.

Starting with leasing, the team delivered another strong quarter, as we executed approximately 335,000 square feet of office leases with a cash rent rollup of 7% and a weighted average lease term of more than 7 years.

Excluding Orlando, which accounted for approximately 36% of our leasing activity this quarter, our cash rent rollup was 10%.

As a whole, conditions across our markets remained very favorable, and our fourth quarter leasing pipeline looks strong.

Switching gears to our markets, in Atlanta, office fundamentals remain healthy, fueled by steady demand and historically low levels of new supply.

Our team is active in the market, as we leased approximately 119,000 square feet at attractive economics.

Our 6-million-square-foot portfolio remained at 91.4% leased at the end of the quarter.

As we previously disclosed, Equifax did vacate a 68,000-square-foot suite in August at Northpark, and Aetna is set to give back its 37,000 square feet in October.

On the positive side at Northpark, we were thrilled to lease an additional 25,000 square feet to WestRock during the quarter.

With this expansion, WestRock, which is a growing, $15-billion paper and packaging company, now has 205,000 square feet at the property and will occupy their space in phases, starting in November of this year and ending in May of next year.

During the quarter, we made great progress at our 8000 Avalon project, leasing 43,800 square feet to SAP.

The success and customer demand we've seen at Avalon has been quite remarkable.

In aggregate, approximately 68% of the building will be occupied by large, well-capitalized technology-oriented companies, including Microsoft, Crown Castle and MuleSoft in addition to SAP.

As a reminder, we purchased the second and last office pad at Avalon during the second quarter in a joint venture with Heinz.

We are encouraged by preliminary customer interest and will move forward with that project when we are able to secure commitments on a significant portion of the building.

Moving down the line to Buckhead, in the third quarter we began to see a noticeable uptick in activity, a welcome change after a bit of a summer lull.

With Three Alliance now approximately 80% leased and no new additional construction under way in Buckhead, I feel optimistic about the 140,000 square feet we will get back at Terminus in 2019 from the previously-disclosed moveouts of CBRE and Bain.

With the 2-year leadtime, a fantastic location and a dynamic amenity base, I believe our team is well-positioned to backfill this space, as we are already in lease negotiations on several floors.

Over in Austin, it should come as no surprise that office fundamentals remain strong.

Metro-wide, the 35-million-square-foot class A office market has limited vacancy at 8.6% and has posted 1.4 million square feet of positive net absorption year-to-date.

In the CBD, where Cousins owns approximately 20% of the class A office market, rents continue to climb, brushing up against $60-a-square-foot gross for new and existing top-tier products.

While construction activity has ramped up to over 3 million square feet across the city, only 700,000 square feet of new supply is under way in the CBD, of which 75% is reportedly pre-leased.

We see very similar themes in Charlotte.

Fundamentals remain very solid across the metro, and Uptown Charlotte, where our 3-million-square-foot portfolio is located, continues to shine.

The submarket as absorbed 748,000 square feet year-to-date, and vacancy stands at just 10%.

Our Charlotte portfolio remains 98%-plus leased, with no material exposure until Dimensional Fund Advisors moves from Fifth Third Center into our build-to-suit project at the end of 2018.

We are confident that this 2-floor, 50,000-square-foot block of space will be backfilled quickly based on preliminary interest.

Moving down to Tampa, real estate fundamentals are rapidly improving, especially in the Westshore submarket, where our 1.7-million-square-foot portfolio is located.

Class A vacancy dropped another 100 basis points in the third quarter to 7.9%, asking rights grew 8% compared to a year ago, and no new speculative product has broken ground this cycle.

Amgen took occupancy of 33,000 square feet earlier this month and will phase into the remaining 92,000 square feet through June of 2018.

The portfolio was 96.9% leased at quarter-end.

And as we have previously disclosed, Laser Spine Institute will vacate its 60,000-square-foot space at Harborview upon expiration in February of 2018.

However, we have interest in some or all of this space from several groups, and thus we are optimistic that we can release it quickly and minimize the future downtime.

Our team in Phoenix posted another terrific quarter, as well.

We signed 45,000 square feet of leases, with double-digit rent rollups.

Notably, we took an additional floor back from Zenefits, along with the termination fee, and immediately backfilled this 20,000-square-foot space to ZipRecruiter at a significantly higher rental rate.

While this transaction resulted in a few months of down time, our team was able to respond to the needs of a growing customer while also creating long-term value.

The portfolio did drop to 95.7% leased at the end of the quarter, down from 97.1% last quarter, as a result of a full-floor move out.

However, post quarter-end, we re-leased this 28,000-square-foot space to Symantec, and the lease will commence in January of 2018.

Since acquiring the Phoenix assets a year ago, we have executed approximately 500,000 square feet of new and renewal leases.

While this volume is quite remarkable when compared to the total size of the portfolio, I'm equally pleased with the team's creative approach to stabilizing the rent roll while upgrading and improving the rent stream.

In this process, we were able to grow customers like Amazon, Silicon Valley Bank, ZipRecruiter and Symantec while reducing our exposure to higher-risk profile companies like Zenefits.

Lastly, I would like to take a moment to update you on our current disposition activity.

We are under contract to sell our 20% interest in Courvoisier Centre in Miami, subject to standard lender consents.

We are hopeful to complete this transaction in the next few weeks.

In Orlando, we are actively marketing our 1-million-square-foot portfolio in the CBD, which we disclosed last quarter.

We have received first round offers and are very pleased with the depth and quality of the interested buyers.

Once we complete the bidding process and select a buyer or buyers, we anticipate a year-end 2017 or early 2018 closing after the completion of standard due diligence.

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

Thanks, Colin.

Good morning, everyone.

Overall, our markets remain healthy, and we had a solid quarter.

FFO was $0.15 per share and stands at $0.46 per share year-to-date.

I'd like to begin my comments by highlighting 4 items that impacted our third quarter results.

Then I'll move on to our capital markets activity during the quarter, and I'll conclude by updating our 2017 earnings guidance.

I will start with termination fees.

For a little perspective, between 2009 and 2016, annual termination fees ranged from a low of $500,000 to a high of $4.5 million, so the $10.2 million in termination fees we've received so far in 2017 is unusual.

Although the 2017 total is comprised of almost 20 customers, 75% of these termination fees have come from just 3 customers.

At our Hayden Ferry project in Tempe, Zenefits moved out to make way for Amazon and ZipRecruiter.

At our 111 West Rio building, also in Tempe, US Airways moved out, which allowed us to sign a full building lease with ADP.

And at our Northpark project in Atlanta, we proactively worked to move out Axial to make way for WestRock.

All 3 spaces have been fully backfilled.

These are huge wins that not -- excuse me, that not only generate fees in the short-term, but create real long-term value at the properties.

Later in the call, I will update our termination fee guidance, but as a quick remainder, termination fees are not included in our property-level NOI.

We include them in the other income section of our supplement.

Second, our general and administrative expenses remained elevated during the third quarter, again driven by an increase in our long-term incentive compensation accrual.

As has been the case for many years, in order to ensure management's interests are aligned with our shareholders', the vast majority of our performance-based long-term incentive compensation here at Cousins is determined by our total return performance relative the SNL office index.

During the third quarter, Cousins' total return was positive 6.9%, compared to negative 0.3% in the office index.

I will also update our G&A guidance later in the call.

Third, we recognized the $429,000 gain on debt extinguishment during the third quarter.

This was the result of prepaying the 3344 Peachtree mortgage that we assumed in the Parkway merger.

This mortgage had an above-market interest rate that created a premium we were amortizing over the remaining life of the mortgage, thereby reducing interest expense.

We prepaid it without penalty 3 months prior to maturity, accelerating amortization of the premium and recognizing a gain on debt extinguishment.

This is only a timing issue.

The mortgage was scheduled to mature later in 2017, so from a GAAP perspective, all we did was pull forward the amortization of the premium and moved this amortization from interest expense to gain on debt extinguishment.

There is no impact on full-year FFO numbers.

Finally, we continue to clean up the accruals associated with the Parkway transactions.

This quarter, that cleanup led to an adjustment that reduced transaction costs by about $600,000.

It's not a big number considering the size and complexity of these transactions, but I wanted to call it to your attention.

It again does not affect our 2017 guidance.

This number is included in other expenses on our income statement.

In the capital markets, we funded the second tranche of our inaugural $350 million private placement of senior unsecured notes during the third quarter.

This tranche is an 8-year, $250 million note at a 3.91% fixed rate that we drew on July 6. With this funding, we have now locked down our balance sheet for the next several years.

We have no debt of any consequence maturing until '21 and no balance outstanding on our $500 million unsecured credit facility.

We have a weighted average debt maturity of almost 7 years at a weighted average interest rate of approximately 3.6%.

And net-debt-to-EBITDA continues to hover around 4.0 times, where it has been since 2012.

Our rock-solid balance sheet has been and will continue to be a core tenet of our company.

Low leverage supports our development efforts and provides dry powder during times of economic stress.

I'll wrap up my section of the call by providing detail on our updated earnings guidance as well as some color on our same-property performance.

Overall, we are raising and narrowing our 2017 FFO guidance to between $0.60 and $0.62 per share, from previously between $0.58 and $0.63 per share.

This change is driven by updates to 3 of our assumptions.

First, we've raised our fee and other income assumption to between $19 million and $21 million from a previous range of $18.5 million to $20.5 million, primarily due to an increase in anticipated termination fees.

Second, we've raised our general and administrative expense assumption to between $27 million and $29 million from a previous range of $26 million to $28 million, primarily due to an increase in the long-term compensation expense.

Finally, we've lowered our interest and other expense assumption to between $40 million and $42 million from a previous range of $45 million to $47 million, primarily due to transaction timing and interest rate variances.

Although we're not changing our same-property NOI assumption, I'd like to take a minute to talk about it.

As a reminder, we originally provided full-year 2017 same-property year-over-year NOI growth on a GAAP basis of between 2% and 4%.

That range remains unchanged, and we still anticipate hitting it.

However, as I discussed on our previous earnings call, the quarter-to-quarter same-property results can be lumpy.

In the third quarter, this lumpiness was primarily driven by an unusual expense comparison to the previous year.

In the fourth quarter, this lumpiness will be primarily driven by several large moveouts.

Let's start with the third quarter expenses.

On a year-over-year basis, same-property expenses were up 17.3% in the Cousins pool and 22.6% in the Parkway pool during the quarter.

When combined, same-property expenses were up 20.7% over last year.

This is a big number, but it's driven by an unusual prior-year comp for property taxes.

As I discussed in our call last quarter, both Cousins and Parkway were very successful in our 2015 tax appeals, which resulted in a large reduction in tax expense that rolled through in the third quarter of 2016.

This created an unusually low prior-year comp for our third quarter 2017 performance.

Excluding property taxes in both years, combined expenses for both same-property portfolios increased 4.9% during the third quarter, which is more consistent with previous periods.

Looking to the fourth quarter, we anticipate same-property revenues to remain positive, but below the recent trend.

This will be temporary, primarily driven by the several large moveouts that we have at Northpark.

However, occupancy at Northpark will quickly return to its previous level as soon as WestRock moves in over the next few quarters.

Bottom line, a little lumpiness in our same-property results during the second half of 2017, but no change to our original guidance.

Finally, as Colin mentioned earlier, we anticipate closing the Orlando and Miami dispositions at or around year-end.

Although these sales won't impact 2017 earnings, they will impact 2018 earnings, and we will include them, as should you, in projected numbers.

Before wrapping up, I'd like to point out an item from last quarter's financial supplement that has been corrected.

On the development pipeline page, we reported $15 million in total project costs incurred and $3.1 million at our share for our 120 West Trinity project.

These numbers should have been $12 million and $2.4 million, respectively.

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

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions).

The first question comes from Dave Rodgers of Baird.

Please ask your question.

Thank you.

Colin, I wanted to follow up on your comments about Tampa.

I don't think you're the first one to point out that Tampa has kind of resurged lately, and you provided some good statistics.

Can you kind of talk about tenants there that are active in that market, what you're seeing in addition to, obviously, Amgen?

Good question, Dave.

We've been very pleased with our activity in Tampa since we closed on the Parkway portfolio a year or so ago, and as I mentioned in my prepared remarks, there's been kind of little to no speculative development across the entirety of the market, and we've seen a real pickup in demand in Tampa, and I would characterize Tampa as a bit different than Orlando where we do see some large, kind of national and international corporations that really find Tampa attractive from a quality-of-life standpoint, adjacent to, obviously, the waterfront, and they've got a view that they can attract really high-quality talent.

So we've seen other large-scale corporations, like Amgen, looking for space, and it's in a lot of different sectors.

It's certainly in the healthcare space, like Amgen, but also you see a lot of large financial services that use that for some of their back-office operations.

And so as I said, we're continuing to see good activity from those types of users.

And again Colin or maybe for Larry, on the development side of the equation, it sounds like you're having some good discussions on potential build-to-suits, but you had good success at Avalon, obviously, going in with a little bit less preleasing and giving yourselves some space to work with.

Are there any markets or submarkets where you'd think about that today or you'd be comfortable taking on speculative leasing risk, just given your comments about how strong the Southeast is and the limited amount of supply?

Yes, Dave, this is Larry.

A measured amount of speculative risk we'll take if the leasing pipeline that we see on a particular project is really, really strong, but we're going to want some preleasing -- some significant preleasing, even on a project like the second building at Avalon.

If I remember correctly, we started Avalon with about 20% preleasing, but it was Microsoft, and we had visibility behind it of a customer interest with the strong roster that you see.

And so we don't ever look at new development opportunity with a fixed percentage of preleasing that we have to get to.

We do want to see some meaningful preleasing just where we are in the cycle, but it's also a combination of looking at what's behind it and how strong we think that the product is positioned and the interest level of the customer.

We feel really good about the second building at Avalon, and we've been in the design process and getting it through all of the zoning requirements so that we can be ready to go in a short amount of time when we do see that demand, and the demand looks good so far.

We just have to see how much of it we can get converted into actual leases before we start.

And maybe last for me -- and I don't know if this is Gregg or Colin, but in terms of the low point of maybe what we'd call your transitional NOI number as you kind of transition from some of the older tenants to some of these new leases -- is that low point in the fourth quarter, kind of given what you've said, and you start to kind of work higher as you move into '18?

I think if you look at our same-property performance in the fourth quarter -- I mean, as I mentioned in my prepared remarks, you'll see a dip in revenues and a dip in same-property occupancy, but as Colin pointed out in his prepared remarks, I mean, the pipeline behind that fills it up rather quickly in '18, so it'll recover quickly.

So in terms of same-property occupancy, kind of fourth quarter, first quarter -- that will be the low point.

The next question comes from Chris Belosic with Green Street Advisors.

(Operator Instructions).

Mr. Belosic, please go ahead.

So just another question on the build-to-suit interests that you guys were talking about.

I believe last quarter, you said that it was Tempe, Tampa and Austin is where you're potentially seeing those tenants expanding where that could possibly happen.

Is that still the same mix, or has any of that changed from last quarter?

We certainly still have those type of opportunities that we're looking at in Austin and Tempe, but we also have opportunities that aren't as far along that we're looking at in our other three markets as well.

So it really is at a point, in terms of our portfolio and where we want to be in these cities, of just being disciplined and making sure that we have the right customer under the right terms and moving that way.

And as I said, I'm optimistic that we have one that should -- we should be ready to talk about hopefully in the next quarter or so, and then we've got a couple behind that, that -- we'll have to see, but we feel positive about them as well.

And it's very encouraging.

It's a function, once again, of the markets we're in and then the submarkets we're in, and it's just where the customers want to be and then the limited amount of new speculative supply that's been added in these markets.

So a big customer that wants to do a significant expansion, whether it's a Dimensional Fund Advisors or an NCR, the build-to-suit option is a very viable one at this time in the cycle.

Okay, great.

And then can you guys remind me, with the kind of delivery and putting Carolina Square into operations, what are your thoughts again on Raleigh kind of longer-term?

Is that somewhere that you're looking to grow, whether it's this cycle or next?

And if so, is that primarily going to be through development, or could you be an acquirer there?

We really look at our go-forward strategy -- as I said, we overlap staying in the Sun Belt, looking at major cities, and then looking at the amount of space that qualifies in terms of a truly urban submarket, and we really scan by a combination of cities, but then drilling down within each city to is there an urban submarket that really fits our model here, and I would not say that Raleigh is a primary focus of ours right now.

We're always opportunistic, and Raleigh is a great market, but it wouldn't be one that we are prioritized at the highest level right now, and it's primarily just there's a very strong player there in the REIT space that does a terrific job, and the true urban core of Raleigh and the CBD is a relatively small sample size in terms of the type of assets that we look to own.

Okay, thanks, Larry, and then just one last one for me.

I just want to make sure I understand on the kind of year-over-year tax difference for 3Q.

That's something that is just more reflective of the one-time kind of reimbursement in 3Q last year, and so when we're thinking about 4Q, there's not some kind of tax hike where there will be a similar increase year-over-year in 4Q?

Hey, Chris, it's Gregg.

No, you should expect this -- although we don't provide quarterly guidance on expenses, you should expect to see our same-property as well as the Parkway same-property expenses drop more in line with recent trends during the fourth quarter.

As we're not showing any further questioners, this will conclude our question-and-answer session for today.

I would now like to turn the conference back over to Larry Gellerstedt for any closing remarks.

We appreciate everybody being on the call.

As always, we're available for any follow-up calls or questions that you have, and we appreciate your interest in our company, and we look forward to seeing a lot of you all at NAREIT next month.

Thanks very much.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.