Cousins Properties Inc (CUZ) 2018 Q1 法說會逐字稿

Good day, and welcome to the Cousins Properties' first quarter conference call. (Operator Instructions) Please also note that 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' first quarter earnings conference call. With me today are Larry Gellerstedt, our Chairman and 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 requirement.

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 risk is contained in our filings with the SEC.

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

Thanks, Pam, and good morning, everyone. The current economic recovery will celebrate its 9th anniversary in just a few weeks, marking the second-longest span of growth and expansion in recorded U.S. history. As the nation approaches this significant milestone, capital markets have begun to experience increased volatility. And for the first time since 2014, the 10-year hovers around 3%, putting pressure on REIT equity prices. While the macroeconomic factors dominate global headlines, a different story is unfolding in the Sun Belt. Business and consumer confidence remains very positive. Office users are growing their footprints, more companies are migrating to the Sun Belt, and new supply remains in check. As a result, well-located Class A office space is in high demand and our teams on the ground are as busy as ever.

To highlight, let me walk you through our first quarter results. Overall, the company delivered a clean $0.15 of FFO per share during the quarter, while posting positive leasing rent rollups and same property NOI results for the year. In addition, the team executed 330,000 square feet of leases in the first quarter, including several key renewals. The solid effort on the leasing front reduced our near-term expiration exposure which is now just 11.3% through 2019. More importantly, it further upgraded our rent roll with average in-place rents across the portfolio now 6% higher compared this time last year.

While these are terrific numbers for any quarter, I want to specifically highlight the consistency of these strong results during this cycle. For the 16th consecutive quarter, Cousins has achieved positive cash rent rollups with 8 of these quarters posting double-digit growth. Even more impressive is our same property performance of 25 straight quarters of positive NOI growth. Certainly we've enjoyed the extended tailwinds that have presented themselves in our markets, but the credit for this important -- impressive run belongs to our team, the team that has performed quarter after quarter, executing on our consistent and straightforward strategy.

With that backdrop, I'm optimistic about the balance of the year for Cousins. As we head into the 10th year of economic recovery, we see no indication of weakening fundamentals in our core markets. Our portfolio and balance sheet are well positioned and our team in platform are proven and stable. Equally important, we have actionable growth opportunities in front of us. First, as I mentioned earlier, we have experienced robust rent growth in our markets, which has propelled average in-place rents across the portfolio. Despite this healthy growth [year-over-year], our current in-place rents remain on average 8% to 10% below current market rents with above-average mark-to-market at many of our Atlanta assets with the attractive vacancy.

In addition to the opportunities embedded in our operating portfolio, we've established a steady avenue for growth with our development pipeline. To start, we've already created substantial value this cycle, delivering $788 million in new development. This includes projects like Colorado Tower which we delivered in 2015 at 100% leased. Additional highlights include our latest deliveries. In Atlanta, at 8000 Avalon, post-quarter activity has taken the project to 98% leased. And over at Carolina Square and Chapel Hill, apartment rents on our first round of expirations have rolled up double-digits.

In January, we celebrated the opening of a 864 Spring Street, the first phase of NCR's world headquarter, which we anticipate will receive LEED Platinum Certification in the coming weeks. Today, Cousins has another 860,000 square feet of office under construction, of which 96% is leased, as well as 42,000 square feet of retail and 330 apartments. Over the next 8 months, we plan to deliver a significant portion with the opening of 858 Spring Street, the second phase of NCR's headquarters in Atlanta, and the opening of Dimensional Place, the East Coast headquarters for Dimensional Fund Advisors and Charlotte.

As for the balance of our pipeline, 120 West Trinity, our mixed-use project with AMLI in Atlanta's Decatur submarket is well underway with delivery slated for early 2020. We also anticipate breaking ground on 300 Colorado, our 100% leased office tower in downtown Austin, sometime in the fourth quarter. Colin will provide more details on the progress we've made here in his remarks.

When stabilized, our recent deliveries and current pipeline are positioned to provide significant contributions to both NAV and FFO in the coming years. These projects are well leased and fully funded with the cash available on our balance sheet. This enviable position gives us the confidence to continue to play out there and with the Sun Belt market showing no signs of slowing, and even more encouraged by our path for additional growth.

Let me walk you through what we've got lined up. Today, we control 5 terrific development sites and some of the most desirable submarkets in the Sun Belt. In Midtown Atlanta, we are under contract to buy a site at West Peachtree Street, which is attractively located less than 2 blocks from MARTA, Tech Square and NCR headquarters. Next, we were under contract to purchase a fantastic site in Tempe, located adjacent to our current portfolio and on the front steps of Arizona State University.

Surveying the land inventory in our supplement, you'll find we also own a site in Uptown Dallas, adjacent to mass transit, the second and last office pad in Avalon and Atlanta, and a site, a corporate center in Tampa where our buildings are over 97% leased.

In totality, our land bank once developed will include approximately 1.6 million square feet of Class A office space. I'm pleased to report we have a solid pipeline of interest for each location, including existing customers and potential new prospects from a wide variety of industries. And with pre-development now underway, we anticipate that each site could be shovel-ready by the end of the year. Therefore, I'm highly encouraged with our ability to begin one or more of these opportunities over the next 12 months.

Rest assured, we will remain disciplined in our approach to capital allocation. Our ultimate responsibility is to provide long-term value to our shareholders, and it is with this overarching goal that we will make a call when evaluating not only future development projects, but all investment decisions made for the company.

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

Thanks, Larry, and good morning, everyone. I'll begin my remarks today with a few of the key operational and leasing highlights for the quarter and then provide an update on each of our markets as well as a few update on our development activities. The Cousins team is off to a great start this year signing 330,000 square feet of new and renewal leases in the first quarter at exceptional economics. As the portfolio was 93.9% leased with modest near-term explorations, this was a terrific performance given our limited available inventory.

Second generation net rents were up 35% on a GAAP basis and 19% on a cash basis with each of our 5 markets posting double-digit growth. This quarter's rent roll-up was the highest in more than 2 years and harvest a strength of our team and our Sun Belt office portfolio. While we are particularly pleased with this quarter's leasing results, we expect our average run rate to generally be in line with our historic performance, which is averaged approximately 10% since we closed the Parkway merger in the fourth quarter of 2016 with variability from quarter-to-quarter based on the particular mix of leases.

Moving on to our markets. Atlanta continues to perform exceptionally well. According to CoStar, Class A net absorption across the Metro area was approximately 990,000 square feet, which is nearly 70% increase in activity compared to the previous quarter. Importantly, Buckhead, Midtown and Central Perimeter, all submarkets that focus for Cousins posted positive results. Consistent with the overall market, our 6.6 million square foot Atlanta portfolio had a solid quarter with the team executing over 73,000 square feet of leases. At quarter-end, the portfolio was 91% leased with a significant improvement in occupancy from 84.9% to 88.7%. This increase was largely driven by WestRock's phase moving at Northpark Town Center, NCR occupancy of 864 Spring Street, Amazon's occupancy of second quarter Terminus 200 and the lease commencements at Crown Castle, Regus' Spaces and Microsoft at 8000 Avalon which continue to perform extraordinarily well. We recently agreed to terms on one of the last available spaces in the building and over $40 per square foot, which is on par with classy rents in Buckhead and Midtown.

Looking at near-term expiration, we will be getting back approximately 140,000 square feet of space during 2019 from Bain and CBRE at Terminus 100, which we are in a 50-50 joint venture with JPMorgan. In the North Point [Town] Center in the Central Perimeter, we continue to have discussions with AIG regarding their 105,000 square feet that expires in January of 2019. We do not yet have an update to share as AIG is still evaluating the long-term space needs and market options. As that process plays out, our team remains ready to actively market the space if need be, confident that Northpark's unbeatable access to MARTA and recently upgraded amenities will continue to generate interest from large, well-established companies looking for space in the Central Perimeter.

Overall, the leasing pipeline across our Atlanta portfolio in Atlanta is as robust as it's been quite some time. And we've been pleased to see prospects of all sizes from a diverse set of industries, including technology, financial services, legal and other large corporate users. Our team is hard at work and confident that we can convert some of these exciting opportunities over the next several quarters.

Over in Austin, the market continues to benefit from some of the strongest economic and real estate fundamentals on record. Job growth is currently outpacing the national average by 220 basis points. In Westshore Class A vacancy now stands at just 8.7% and net absorption for the first quarter was over 1 million square feet according to CoStar. Our 1.9 million square foot portfolio ticked up to 94.3% leased at the end of the quarter. Our local team is very active, completing approximately 87,000 square feet of leases, including long-term early renewals with key customers like AT&T, Thompson & Knight and Bracewell at 816 Congress, San Jacinto and 1011 Congress respectively.

In Charlotte, we remain encouraged by metro-wide fundamentals. Class A asking rents set a new high watermark representing a 21% increase compared to the previous cycles peak in 2008. And our team had a relatively quiet quarter though as our 3.1 million square foot portfolio is 99% leased with limited near-term expirations.

However, as we have discussed in prior quarters, we will be getting back 50,000 square feet from Dimensional Fund Advisors at Fifth Third Center when we delivered new build-to-suite dimensional space in December of this year. The team is seeing some solid preliminary interest as the space is regarded as one of the most attractive blocks available in Uptown Charlotte today.

Now on to Phoenix where office vacancy for CoStar's core and 5-star products has dropped to 4.4% in Tempe, home to our 1.3 million square foot Phoenix portfolio. The market is benefiting from employment growth, it is double the national average, and is projected to be one of the Top 4 markets for office using employment growth in the nation over the next few years. Our Tempe portfolio has benefited from these supply and demand tailwinds posting the highest weighted average rent roll-up since the Parkway merger in the fourth quarter of '16. You may have notice that the occupancy temporarily dropped at Tempe Gateway with Limelight giving back one floor. But this will tick up during the second quarter as house has already backfilled that space. Our portfolio in Tempe is currently 97% leased with modest near-term expirations and given the healthy forecast for growth in Phoenix, we believe our assets are in terrific shape. To highlight the strength of the market, our team recently executed a $45 per square foot lease at Hayden Ferry which to our knowledge is a record high in Phoenix.

Moving to Florida, Tampa has hit a record low for Class A office vacancy at 6.7% this quarter per CoStar, few by moving job market and a development community that continue to demonstrate great discipline. In WestShore, our core submarket, there is only one new office tower to have 250,000 square feet under construction. The project is currently 60% pre-leased, PWC and we understand retains the option to expand into the remaining 100,000 square feet until mid-2019. Across the company, Tampa was our busiest market on the leasing front this quarter with 136,000 square feet of executed leases. The largest was 108,000 square foot early extension and expansion with [Greenway Hill] at Corporate Center, which is now 98% leased.

Amgen occupied another 18,000 square feet from their original lease this month and the remaining 37,000 square feet will be occupied by the fourth quarter. The only material block of space available in our Tampa portfolio is a 60,000 square feet at Harborview that we previously disclosed, will be coming back from Laser Spine Institute. Activity on this space has been quite strong and our local teams has been in conversations with multiple interested prospects.

I'll wrap up by providing a few updates on our development activity. First, as you may have noted in our supplement, the estimated stabilization on our 120 West Trinity project has been slightly delayed. The City of Decatur has indicated that they will likely now require a certificate of occupancy for 100% of the next lease project before our development partner Emily can begin moving residents in the park. We are still hopeful that the City will revisit this position, but we felt that it was appropriate to go ahead and update the supplemental. As a reminder, we are just a 20% investor in this project. So 1 to 2 quarter delay on stabilization will have minimal impact on our financials.

Next, we delivered 864 Spring Street, otherwise known as Phase 1 of NCR's corporate headquarters campus in the Midtown submarket of Atlanta. Our team did a fantastic job of designing and delivering a cutting-edge, best-in-class assets totaling approximately 500,000 square feet on time, and importantly, more than $2 million under budget. We have received great feedback from NCR and their experience to date and we look forward to delivering the second phase of the project in November of this year.

Lastly, I want to highlight that pre-development is ongoing at 300 Colorado in the Austin CBD and we remain on time to break ground in December of this year. We've identified a potential opportunity to upsize the project by approximately 50,000 square feet, which could create attractive expansion space for partially energy and/or other customers within our Austin portfolio with growth needs. As we finalize the building design and total project costs, we will update the development schedule and detailed supplements accordingly.

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

Thank you, Colin. Good morning, everyone. I'll begin my remarks by providing an overview of our financial results, including same property performance. Then I'll move on to our capital activity and its impact on our balance sheet. Before closing my remarks with an update of our 2018 earnings guidance.

As you can tell from Larry and Colin remarks, we had a solid first quarter. Property level performance was outstanding, and we closed several large transactions that we believe will generate significant value for our shareholders. Overall, net income was $0.04 per share and FFO was $0.15 per share.

Within our same property portfolio, which comprises approximately 90% of our total NOI, year-over-year cash NOI was up 9.4%, driven by 8.1% same property revenue growth. These are powerful numbers, and there's no doubt that office fundamentals in our markets remain healthy. But these numbers benefited from a low prior-year comp.

During the first quarter of last year, several large customers within our same property portfolio received approximately $2.2 million of free rent that it since burned off. Adding this free rent back to last year's first quarter numbers, reduced the same property NOI year-over-year cash growth to 5.4%, a better indicator of our current run rate. That being said, we were fully aware of this free rent when we provided 2018 same property guidance, and we matched our same property expectations for the first quarter.

Looking forward, we still anticipate achieving our full-year 2018 guidance of between 2% and 4% GAAP NOI growth, and between 3.5% and 5.5% cash NOI growth. We also increased our quarterly dividend during the first quarter by 8.3% to $0.065 per share. It's a safe, well-covered dividend based on a conservative FAD payout ratio that has been below 70% for the past 7 years.

With that, let's move on to our capital activity and balance sheet. We sold one small noncore parcel of land during the first quarter, generating a gain of $330,000. We have more noncore land left on the books, but not much. Majority of our current $23 million land inventory is comprised of the 3 core office sites Larry discussed earlier, 1 each in Dallas, Atlanta and Tampa. In total, land represents less than one half of 1% of our enterprise value. So we have significant capacity to pursue additional strategic office sites before we approach our stated goal of between 2% and 3% of total value for land.

We also recast our unsecured credit facility during the first quarter, increasing the size to $1 billion and improving the pricing. As of quarter end, we had nothing drawn on this facility and we had over $100 million in cash on the balance sheet. Our net debt to EBITDA was 3.77x, and our fixed charge coverage ratio was 5.4x. The weighted average interest rate on our debt was 3.76%. Our weighted average maturity was 6.1 years, and we have no debt maturities of any significance until 2021. Our only debt maturity this year is our Carolina Square construction loan, which matures early next month. This loan has 2 1-year extensions and we are in the final stages of executing the first extension, taking the maturity up in May 2019. By any metric, this is a rock solid balance sheet, and supporting Larry's earlier comments, it is also been a consistently strong balance sheet over time.

With very few exceptions, we've maintained a net debt to EBITDA ratio below 4.5x for over 4 years. Over that same period, we have pre-funded all of our development commitments with either asset sales or equity issuances, taking any financing risk off the table and locking in the value creation upfront.

In addition, we have purposely laddered our debt schedule to smooth out maturities and avoid any significant refinancing risk in any 1 year. A consistently, conservative balance sheet has been and will continue to be a core tenet of our strategy. I'll wrap up my comments today by updating our 2018 FFO guidance.

As we outlined in our first quarter earnings release, we continue to expect full-year 2018 FFO in the range of $0.59 per share to $0.63 per share. All of our assumptions are unchanged, with the exception of our fee and other income assumption, which we are increasing from between $10 million and $12 million to between $11 million and $13 million. This was driven by an increase in forecasted termination fees to $1 million. For clarity, any termination fees we receive are included in this line item. We do not include termination fees in property level NOI.

Before moving on to your questions, I wanted to close my remarks by announcing the departure of Marli Quesinberry, our VP of Investor Relations. Many of you on this call have interacted with Marli over the past 5 years, and are very familiar with her tremendous professionalism, her deep knowledge, and her positive character. She's been a joy to work with, and we will genuinely miss her as she moves on to spend more time with her 2 young sons.

As sad as we are to see Marli leave, we're equally excited to announce that Roni Imbeaux will assume Marli's Investor Relations responsibilities. Roni has been with Cousins for almost 6 years and is currently our VP of Finance. As you will soon learn Roni is terrific and her knowledge of the industry and the company will make the -- will make the transition seamless. Roni will be with us at NAREIT's REITWeek in June, and we hope you'll take the time to come by and say hello.

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

(Operator Instructions) Our first question is from Dave Rodgers of Baird.

Wanted to look at one thing, and I guess, with regard to leasing, it sounds like there's a lot of leasing demand for new development, larger blocks of space commitments to new projects. And I don't think you guys are alone, but new leasing volume kind of at the start of the year was weak for office generally, I would say. What kind of tendered those conversations in terms of trying to lease existing space? Do you think the spaces aren't right, you think there was some kind of choppiness just to start the year, that caused people to pause in terms of kind of their more traditional commitment?

I guess I'd start with kind of putting in context where the portfolio sits today at 94% leased. And so that obviously influences the product that we have available to lease. That being said, we still have got some great opportunity in front of us, and I characterize the tender across all of our markets as very strong and as we indicated in our remarks, we feel particularly good about the availabilities that we have here in Atlanta, both existing as well as some of the space that will get back in 2019. So I think as those expirations get a bit closer, I think the actionability of new leasing on that space certainly will increase. So I don't think that terms of the amount of new leasing in this particular quarter is certainly anything to look at from a negative standpoint and again, I think we're really optimistic about what's in front of us, the activity that we've got, both for some of the available sites. Larry mentioned, but the existing product as well.

I would add that -- just echo what Colin was saying. The big blocks of space that we have to lease are primarily just becoming available in 2019. And so that's the prospect versus there and now we're beginning to move into the time that people will start committing to that space. So I would say it was a quarter that certainly met our expectations here, when we looked at both the level of leasing that the portfolio exists, in terms of 94%, but also just sort of the timing of some of the expirations with some of the larger blocks we have and the existing portfolio, particularly in Atlanta.

That's helpful. And then maybe moving to the leasing spread comment. I think Colin you kind of made the point of 10% is what you're looking for going forward. Larry, I think you said something in your comment about 8% to 10%, maybe below market. Is that 8% to 10% near term or is that kind of how you view the portfolio as a whole moving forward in terms of marketing it to market?

Dave, I'd say that -- certainly that [8% to 10%] is represented across the entirety of the portfolio, and we would certainly think that the long-term average should certainly reflect those levels. I think quarter-to-quarter, you could see some variability depending on the particular mix of leases in any given quarter, but long term, if you were to look at kind of multiple quarter average, we think over time, that should trend to that 8% to 10% range.

Great. Last one from me on the development. Sounds like you have a lot of activity. You mentioned kind of 5 specific pieces of land, 3 you own, 2 you're going to buy. When you think about kind of funding that long term, I know there's no commitment there and so it's hard to say. But how do you think about that in terms of maybe debt bringing in joint venture partners, equity and just kind of cash flow, there's a broad thought process that will be helpful?

Hey, Dave, it's Gregg, good morning. So as Larry mentioned, we've got several sites that we're looking at now we're moving quickly toward potentially bringing online. So how do we fund those? There is kind of 3 pieces of that puzzle. The first piece would be retained cash flow. We kick up, give or take $40 million a year of retained cash flow after servicing the dividend and everything else. So if we were lucky enough to start some of them next year they would take 2 years, 2.5 years, 3 years to bring to fruition, so there's $100 million right there of retained cash flow. And then we've stated publicly that our long-term goal in terms of leverage is 4.5x net debt to EBITDA. We've been running below that for the last several quarters.

A big driver of that was our sale of our Orlando and Miami in the fourth quarter of last year. We didn't have an immediate use of those proceeds, but we thought it was a good time to sell those assets so we are sitting on cash. So we have extra capacity actually to take the leverage back up to our long-term goal of 4.5x. So we retain cash, incremental leverage to get back up to our goal, and to the extent that we needed more than that, we would look at what equity was available to us at the time that we needed it.

As we've mentioned, joint ventures are always available something we try not to use unless our partner brings something to the table other than cash because we have cash. I mean they have a land site, they have the expertise and then we would look at asset sales and equity issuance depending upon what the respective prices were at the time.

Our next question is from Blaine Heck from Wells Fargo.

Just wanted to follow up on that last question. Are there any pricing details you can give on both the Atlanta and Tempe sites? And then maybe what's the square footage you guys think you can construct at each of those?

The site if we've got on the contract in Midtown Atlanta, we could bill 400,000 square feet to 450,000 square feet of office space on it. It's a terrific site, because its proximity to Georgia Tech and MARTA and all the activities going on in Midtown market, it's interesting if you look Midtown, really all of the newbuild activity has been in that -- this cycle has been in that certain part of Midtown and this site is right in the heart of it. Our team did a remarkable job in getting this site under control, because it had multiple property owners and required a lot of effort over the last year really to control it. The site at Tempe, which is also a site that has a fair amount of complexity to it and we're just thrilled to now have that under control. We could build there 250,000 feet plus or minus. We will have part of the cycle have either a hotel or apartments on it and so that would be the size of those 2 different opportunities.

In terms of pricing, we really don't get into that -- the pricing of the land in particular, because those are under contract and we won't disclose that. But when we -- I think if you look at this cycle, we've been consistently you know I think prudent on when to go on new developments and our optimism on particularly a couple of these office and positions that we have that we have outlined, it's really just based upon existing customer or new customer demand for folks that need sort extra space or want to be in a submarket that we can put our hands on and are having discussions with that give us the consistency. We continue to shoot for sort of a [mid 8%] return in terms of what we look at these developments across our portfolio, cap rates sort of are in the 5.5%, to 6%, a little bit higher Tampa, but we're still seeing a nice spread that we're able to get between existing cap rates, and where we can do that development deals. So that would be the color I could share on those 2 sites.

Just as a quick follow-up on that, is it fair to assume that you guys have kind of significant pre-leasing prospects on each of those parcels or are they kind of more opportunistically in place with the mindset that there are plenty of prospects in those markets?

I would say yes to both. We look at these lands both ways. We look at where we're feeling demand from the customers in the market in terms of where we invest our pre-development activity. We certainly at this point in the cycle don't anticipate starting any new development without really solid pre-leasing. We don't have a set threshold as to what that is. But we are not in any of these cases going out and acquiring a site where we have a 100% build-to-suite lease in our pocket and we're just going to find site. But it's optimistic based upon a lot of conversations with folks in demand if we can put our hands on.

And then just switching gears to the AIG space at Northpark, it's pretty large chunk of space. So I guess, when do you think they need to make a decision by to actually give them enough time to move out by January next year?

As I mentioned in my prepared remarks, we continue to have conversations with AIG, They are still evaluating their long-term space plans and needs and looking at their market options. I don't want to get too far into those discussions and kind of out in front of our customer this time, but again it's not a long way off and so we continue to have those conversations. And we have more to share, we will mean. But again, I just want to be careful and cognizant of our relationship with AIG.

(Operator Instructions) Our next question is from Michael Lewis of SunTrust.

My first question, I wanted to ask kind of about the maybe AIG aside, about the path of occupancy into 2019. And as I look at some of these move-outs, where you have -- we know about Bain and CBRE, but I believe you have a tenant that's phasing into Northpark as well. When it moves to Tampa, you've got the Laser Spine move-out, but I believe Amgen is phasing into space. And then you've got this big gap between occupancy in the lease percentage in Phoenix. As we look at kind of the path of occupancy from here, should we expect a deep dip with some downtime as we head into 2019, or do you think maybe there is potential with the puts and takes here that it's a little, maybe flatter than people might expect?

Yes, Michael, a good question. And as you mentioned, there are a lot of kind of gives and takes there. As you mentioned, we do have some move-outs that we discussed in our remarks, the largest being the -- largest expirations being CBRE and Bain in totality about 140,000 feet. But I would remind you from a Cousins standpoint that is under the 50-50 venture. So as we think about our weighted average occupancy, it's roughly half of that from an impact. And then there is the AIG expiration out there. So those would be the kind of the potential out. If you look on kind of the other side equation, we do have some good move-ins over the course of the year. There is another -- WestRock does have another floor to move in and we also have additional move-ins from Amgen within Tampa. There's also an occupancy pickup at Terminus with -- we were SAP out of Avalon. We've mentioned at least last quarter expansion we did with the other day.

So when all is give and takes, Michael, we would expect over the course of the year from our current occupancy to certainly stay no less than flat. I think there's an opportunity to tick that up over the course of the year.

My second question is about the same property stats, which just got a lot more interesting now that you've got -- the bigger pool has rolled in. There's a lot of talk on the revenue side with the positive rent spreads and we just talked about occupancy, I wanted to ask about the expense side, it looks like expenses grew about 6.2% year-over-year. Should I assume that that's mostly property taxes and what's the risk kind of on the expense side?

Hi, good morning. It's Gregg. So the 6.2% year-over-year growth in expenses during the first quarter are being driven by real estate taxes. Real estate taxes during the quarter on a year-over-year basis were up 9.1%. So if you pulled out real estate taxes, the number would have been 4.6%, something a little more -- passes the smoke test a little bit more. Just to give you a little color behind that, in Austin real estate taxes we're up 12% year-over-year and in Tempe real estate taxes were up almost 40% year-over-year. What happened in Tempe was we had a [chipwood] on Gateway Tempe that expired, which is just a tax abatement that expired. So that's not an indication of anything other than increase these taxes, but there was a chipwood as well. But looking forward, yes, I think that 6% number because of the property tax increases is a decent run rate for the balance of the year.

The next question is from Jamie Feldman of Bank of America Merrill Lynch.

Can you guys just talk a little bit more about the Buckhead vacancy, just kind of what the leasing pipeline looks like for Bain and the CBRE space?

Jamie, you're always first, I'm trying to adjust to your question so late in the call. But as I mentioned earlier, we felt like the pipeline at this point looking forward to 2019, it's very strong, as we're getting closer to that space being available and coming back the interest from customers has certainly picked up, these are some -- really some of the best space in the entirety of Buckhead. And with no other construction underway, with Three Alliance behind us, we feel very bullish on that and there's really a mix of interest from some fairly large users to some really attractive full-floor and multi-floor options. And it's really across the spectrum. We've been pleased historically Buckhead has been thought of really the fire submarket with financial institutions, insurance real estate, others and we've seen quite a bit of a pickup in the technology space in Buckhead, which has been really encouraging to our team.

And then, last quarter you gave some really helpful color on where you think rent growth is in your market. Do you mind walking through that again or giving an update?

Sure, Jamie. It -- I'd say it is been relatively consistent since the color we gave last quarter. I would kind of bookmark that as the low end of the spectrum called 4%, at the high end of the spectrum at 8%. Really the leader over the last 12 months has been Charlotte at kind of that 8% level. Austin has been, call it, the lower end at 4% was really just a function of -- there was so much growth prior that within Austin that while growth is still very positive, we've seen that trajectory slow just a touch and then Atlanta and Tampa, and Phoenix, has been in that kind of plus or minus 5% range. So it's still really, really positive and without really any ramp up in construction, we are encouraged looking forward.

And then just finally for Gregg, just thinking about the guidance. So I mean you guys gave some pretty upbeat color on the fundamentals and tenant demand in leasing. You did have the termination fee and the new termination fee added to your numbers, but your guidance has changed. Were there some offsets to that $1 million? I know you guys have a pretty big share count, so it's hard to really move the needle. Were there some office -- that's positive $1 million or maybe you guys are still being conservative, just how do we think about your perspective on keeping guidance where it was?

So termination fees a $1 million is just [a quarter of a penny] for the year. So it's not enough to actually move the guidance. it's as you mentioned a lot of shares outstanding. It will take more than that to move guidance. There was no offsetting negative to it, it was just too small to move the needle. And in terms of whether our guidance is aggressive or conservative, we provided what we think is the best guidance for 2018 and it's unchanged. We master expectations as we said during the first quarter, so we've kept our guidance unchanged.

If you were to get any leasing done for the -- I guess the second question would just be, what could move it higher, do you feel like the year's pretty baked in at this point?

Jamie, it's Colin, and I'll jump in there. In terms of -- we're very encouraged and enthusiastic about leasing pipeline that's in front of us as we sit here today on April 26 to not only execute those leases, but to build out space and get move in kind material size, to have a material impact on the numbers just definitely I believe a lot of time. But we continue to work on operating expenses parking, things like that we hope we can continue to find some upside in. And we could be surprised to the upside that we're able to get somebody who's got a very short time to and could take occupancy this year to do that. But it's really a function of where we sit today in the calendar relative to year-end.

(Operator Instructions) Our next question is from Jed Reagan of Green Street Advisors.

Appreciate Colin you going through kind of the rent growth range that 4% to 8%. I assume that would be on base rent growth that you are quoting. So I'm just curious, -- if you're looking at that on a net effective rent growth basis just factoring leasing costs. Would that be materially different than that? Part of what I'm getting at is just kind of what sort of trends are you seeing in leasing concessions across your markets?

Especially in California, as we look at those base rent and net effective the 4% to 8% range outlined what would be base rents. I would have characterized net effective rent growth call it 12 months, 18 months ago to be ahead of overall, the increases that we've seen on base rents because we did see, we have seen a nice move down in concessions whether it would be TIs coming down and/or kind of free rent starting to decrease. I'd say in terms of where those concessions are today, they're fairly steady from that kind of the TI perspective new deal that they consistently remain into that $5 a square foot, maybe a touch higher on new deals, but roughly half of that for renewal. And then as related to free rent. We've seen some of our markets go away entirely, in Austin, in Tampa we've seen that material decrease. So it's hard to really to move it beyond that. And so where we stand today I'd say that kind of 4% to 8% would roughly characterize net effective rent growth as well.

And there was a question earlier on the call that the tenure of conversations with tenants, I guess have you seen any change in that tenure particularly, just given the recent tax reform, anyone seemed like your customer base is responding to that in terms of greater leasing activity kind of growth momentum?

This is Larry. I can't point to anything where we can say we know that this activity we're seeing is driven by the tax change. I can say that we continue to see a lot of positive leasing demand, but we don't really have any color as to customer that I can point to and say they are specifically making this decision based upon renewed optimism or increased cash on the balance sheet that they can be a little bit more aggressive. I think it will probably take another couple of quarters to really see that if it indeed is driven by that. But I can't report anything today.

And then just last one for me, have you guys seen any changes in cap rates and values across your markets this year I guess especially with the tenure kind of pushing higher recently?

We really have it. There's some limited in terms of the amount of our really Class A trophy assets that have been in the market over the last 12 months as you can see by any data source in terms of just the volumes. And the amount of capital sitting on the sidelines have continued to make -- there is a lot of interest in pretty frothy pricing at times, it was from our perspective. That's why we have been in the acquisition market for a few years that really see -- but we haven't seen any ticks in terms of asset pricing vis-a-vis the change in the tenure pricing.

Given that frothy pricing, does it make you want to test that market more than you might otherwise with some additional asset sales?

Well, that really was what we do with Orlando and Miami end of the quarter. It was just looking at the situation and saying, we certainly will take a little bit of FFO dilution and sort of roll on some cash, because it was prudent from a shareholders perspective to take advantage of that, that frothy pricing and we'll continue to evaluate that, because at the end of the day, capital markets change, numbers change, we have to make sure that our thinking is adjusting accordingly, we will.

(Operator Instructions) We have a question from John Guinee from Stifel.

Nice quarter guys. Big -- sort of big picture question, probably Larry, it looks like you all-in cost for Phase 1 of NCR is about $435 a square, Phase 2 looks like it will be about $462 a square and then your budget at 300 Colorado looks like about $566 per square. Can you sort of comment on total development costs and also tie that into the 2 sites you have under contract and what you think as of today, it would cost to develop the office portion of either site total development costs?

Hey, John, it's Colin. Let me try to tackle the different pieces of that. In terms of NCR, the Phase 1 versus the Phase 2 pricing I'd say a couple things influence that, certainly is a smaller project, which tend to kind of tick overall price per square foot up a touch in their office and incentives that we were able to receive on the first project. If we look at construction costs as a whole, over the last 12 months, our team would tell you we seen escalations kind of in the forward 6% range. And I think as we move over to the projects in front of us at 300 Colorado, it wouldn't be an apples to apples comparison on a per foot basis to the NCR projects here in Atlanta. Certainly land pricing in Austin is quite a bit higher and that there was the TI that we agreed to on kind of return on cost type deal with partially energy kind of factors into that overall cost.

As we look forward, the pipeline that Larry outlined in front of us, certainly here in Midtown Atlanta I think replacement costs would be in that kind of plus or minus $450 a square foot range. I think Tempe and Dallas et cetera, again urban sites with similar land pricing would be in that range. We do have an additional site at Corporate Center in Tampa as well as 10000 Avalon here and Atlanta. Those are lower density projects in more suburban areas where you're able to build, kind of precap that adjacent -- those projects would come in a little bit cheaper. And I think we have a kind of a [3-handle -- mid-to-high 3 handles] as it relates to replacement cost.

And then second, I think in the Amazon sweepstakes maybe your cities include Austin and Atlanta. I'm not sure if there are others. But can you identify for everybody the exact -- if that is correct first, and then the exact sites, which are being considered within both cities?

Hey, John, it's Larry. We also -- the Dallas market is being considered, which we have a site and as well -- in terms of the specific sites that are being considered in the cities, some cities have made those public and some cities have not. As you know, I'm involved in a leadership role in terms of the Atlanta bid and at least everyone involved in our bid is under nondisclosure agreements with Amazon. So I wouldn't feel comfortable commenting on the specific sites in Dallas and Austin. I'm not aware of whether or not those particular bills had made those sites public that they are utilizing.

Thank you very much. Ladies and gentlemen, that concludes the Q&A session. And I would now like to turn the conference back over to Larry Gellerstedt for any closing comments.

Thanks, everybody, for being on the call today. Hope you can detect our optimism and enthusiasm about where the company is in the markets that we're doing business in. We're going to miss Marli, we welcome Roni and we'll look forward to seeing everybody at NAREIT, if not before. Thanks.

Thank you very much, sir. Ladies and gentlemen, that concludes this conference call. You may now disconnect your lines.