Yahoo Finance Cousins Properties Incorporated (NYSE:CUZ) Q1 2024 Earnings Call Transcript
Cousins Properties Incorporated (NYSE:CUZ) Q1 2024 Earnings Call Transcript April 26, 2024
Cousins Properties Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Cousins Properties First Quarter Conference Call. At this time, all lines in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, April 26, 2024. I would now like to turn the conference over to Pamela Roper, General Counsel. Go ahead.
Pamela Roper: Thank you. Good morning and welcome to Cousins Properties first quarter earnings conference call. With me today are Colin Connolly, our President and Chief Executive Officer; Richard Hickson, our Executive Vice President of Operations; 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, 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, cousins.com.
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, including the risk factors set forth in our annual report on Form 10-K and our other SEC filings. 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 supplemental package posted 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 Colin Connolly.
Colin Connolly: Thank you, Pam. And good morning, everyone. We had a strong start to 2024 at Cousins. To summarize, we delivered $0.65 a share in FFO, which beat street consensus, and we raised our full year guidance. We reported same property net operating income growth of 6.6%. We leased 404,000 square feet with a positive cash rent roll up of 5.3%. This marks our 40th consecutive quarter with a positive cash rent roll up. We ended the quarter with net debt to EBITDA of 5.25 times, which is among the lowest in the office sector. Importantly, as Gregg will mention in more detail, we received a BBB debt rating from S&P and a Baa2 debt rating for Moody's. Both are solid investment grade ratings that significantly enhance our access to capital and financial flexibility.
These achievements highlight the strength and resiliency of our leading Sun Belt lifestyle office portfolio and best-in-class balance sheet. Before discussing our priorities at Cousins, I will start with a few observations on market fundamentals. First, the return to work and lifestyle office properties continues to accelerate. Many employers continue to require greater office attendance. Since just last quarter, UPS, NCR and Truist have all announced a five day a week in-office policy here in Atlanta. More are likely to come. As a result, our parking garages are filling up and demand for our space is increasing. Second, there remains little customer or capital demand for the oldest CBD towers or suburban commodity properties. As a result, office vacancy is highly concentrated in a small subset of buildings.
According to JLL, just 30% of office buildings comprise more than 90% of the overall vacancy across the country. These properties will stagnate until they are repriced and then either repurposed or torn down. The process has already begun. Third, new supply is shutting in. The math for new development just does not work in today's higher cost and higher interest rate environment. Not surprising, groundbreakings have fallen to all-time lows. As a result, the overall inventory of office buildings in the United States is contracting just as leasing begins to improve. Much like the retail sector last decade, market forces are rebalancing the office market in real-time and there will be divergent outcomes. Lifestyle office will thrive with improving demand and reduced competition, while the lowest quality commodity office disappears.
Turning to the capital markets, asset level debt and equity for office remains limited and expensive. As a result, the investment sales market is soft. Conversely, the public markets show signs of improvement. Liquidity has grown and spreads have tightened, especially in the unsecured debt market. We hope this is a positive early indicator. Cousins remains very well positioned as the cycle improves. Today, we own the premier lifestyle office portfolio in the Sun Belt. Our lease expirations through 2025 are among the lowest in the office sector. Our balance sheet is undoubtedly the best-in-class. Our strategy has proved resilient even amid the disruption from the COVID pandemic and the impact of higher interest rates. Strategically, our team remains focused on driving earnings growth through leasing and investments while enhancing our geographic diversification, mitigating future large lease expirations and maintaining our financial strength.
Let me highlight a few of our key priorities. First, we intend to drive occupancy back to stabilized levels in the intermediate term. As you know, the office business can be lumpy, so this metric can bounce around from quarter-to-quarter due to a large move out or a large commencement. The Bank of America exploration in Charlotte next year is an example of this. However, on a multi-year basis, we are optimistic that we can return occupancy in our portfolio back to normalized levels. The return to office, Sun Belt migration, flight to quality, and the flight to capital are all secular trends that will support our efforts. We have multiple competitive advantages and we plan to grow market share. Second, we intend to allocate capital thoughtfully and accretively on a stabilized basis.
We have a track record of identifying creative investment opportunities and funding them with the most efficient sources of capital, debt, equity, property sales and JVs. As I mentioned earlier, liquidity and pricing is more advantageous in the public market today relative to private financing. This creates a compelling environment for a REIT like Cousins. Near-term, acquisitions appear more likely than development. We will remain focused on Sun Belt properties that are or can be repositioned into lifestyle office. We are in active discussions with several owners and lenders and are evaluating opportunities across the capital stack. Medium and longer term, the development of market leading lifestyle, office and mixed use projects will remain a key part of our growth strategy.
Our development and redevelopment projects will be meaningful contributors over the next few years and highlight the value of our development platform. In closing, there are many competing forces in today's market. However, we built Cousins to thrive during all economic cycles. And today, we are in a strong position relative to other office companies. We are in the right Sun Belt markets. We own a trophy lifestyle portfolio with modest near-term lease expirations. We have a fortress balance sheet with minimal near-term debt maturities and great access to capital and we have a well-covered dividend. I believe we have a unique opportunity and optionality in front of us. Before turning the call over to Richard, I want to thank our employees at Cousins who provide excellent service to our customers.
Their dedication, resiliency, consistency and hard work continue to propel us forward. Thank you. Richard?
Richard Hickson: Thanks, Colin. Good morning, everyone. Our operations team had a fantastic start to the year, delivering another great quarter. Before walking through our operating results, I want to provide an update on WeWork. As a reminder, we have four WeWork locations totaling 169,000 square feet in Atlanta and Charlotte, representing 1.1% of our annualized rent. Our expected outcome at each of the locations remains substantially unchanged. At this point, we have completed a modification of our WeWork lease at Terminus in Atlanta which reduced the location size by one third or 24,000 square feet and restructured the rent obligation. We are actively working to do substantially the same thing at 120 West Trinity in Atlanta where we are 20% owner and expect to complete that modification shortly.
At our 46,000 square foot location at 725 Ponce in Atlanta, we are still electing not to negotiate with WeWork and anticipate the lease will be rejected. Interest in that space from traditional office users remains strong. Last, we still expect WeWork will assume the railyard lease in Charlotte without modification. As a reminder, we have meaningful letters of credit supporting the leases at both 725 Ponce and 120 West Trinity. Now on to our results. For the first quarter, our total office portfolio weighted average occupancy and end of period lease percentages were 88.4% and 90.8% respectively. Our lease percentage was essentially unchanged relative to last quarter, and our occupancy increased by 80 basis points. The occupancy increase was driven largely by the commencement of Apache's expansion premises at Briar Lake Plaza in Houston.
Looking forward, with WeWork’s give-back spaces soon to be fully vacated and the recent long expected move out of NASCAR at 550 South in Charlotte, we expect occupancy to move slightly lower in the second quarter. However, with our favorable 2024 lease expiration profile and over 500,000 square feet of signed new and expansion leases set to commence during the balance of this year, we expect occupancy to remain relatively flat in the second half of the year. Importantly, we are projecting our occupancy to end the year higher than at year-end 2023. During the first quarter, our team completed 37 office leases totaling 404,000 square feet with a weighted average lease term of 7.1 years. I'm very encouraged that this quarter represented our highest level of signed activity in a first quarter since 2020.
Further, 25 of our completed leases this quarter were new and expansion leases, representing a solid 71% of our activity on a square footage basis. I would also note that expansion activity alone accounted for an impressive 24% of our total activity. We believe this highlights a broader market dynamic that companies appear increasingly confident in expanding their office presence. This quarter, among the customers that renewed or expanded with us, we recorded a collective net expansion of 95,000 square feet. And this included eight unique expansions and only one contraction. With regard to lease economics, second generation cash rents increased yet again in the first quarter by a healthy 5.3%. Our average net rent this quarter came in at $36.06, the third highest quarterly level in our company's history.
This quarter, average leasing concessions defined as the sum of free rent and tenant improvements were $9.25, which were higher than what we posted in 2023. Despite that, our average net effective rent this quarter came in at $24.20, essentially in line with our full year 2023 results. From some perspective, our average net effective rent in 2023 was the highest in our history with the exception of only 2021, which included the full building lease for domain nine. At the market level, our Neuhoff mixed use development in Nashville once again contributed to quarterly activity where we completed a 31,000 square foot office lease with a leading offer. We are also in lease negotiations with two additional office users, both strong names in the professional services sector, totaling 51,000 square feet.
We continue to be encouraged by the leasing pipeline at Neuhoff and the project's unique competitive position in the national market. In Atlanta, the team signed 229,000 square feet of leasing this quarter, which included some important expansions. Notably, we completed an early renewal and expansion of Workday at our newly redeveloped 3350 Peachtree with Workday more than doubling in size to 113,000 square feet. This represents an important validation of Atlanta and specifically Buckhead as a top place to attract and retain great talent. At Promenade Tower in Midtown, also newly redeveloped, we were thrilled to complete a 23,000 square foot expansion of Deloitte, increasing their footprint by nearly 25%. In Charlotte, we signed 31,000 square feet of leasing in the quarter, all at our Fifth Third Center building in Uptown.
As a reminder, Bank of America occupies 317,000 square feet of that building and has shared that they would prefer to locate Charlotte corporate employees in properties owned by the bank where possible. Based on that, we view the bank as a probable move-out at their expiration in July of 2025. Fifth Third Center has timeless architecture, a great presence directly on Tryon Street in Uptown, and excellent access and parking. As a complement to those strengths, we are moving forward with plans to re-energize this property with amenities and upgrades similar to those we have successfully completed at projects across our Sun Belt portfolio. Feedback in the market regarding our redevelopment plans has been very positive and we are excited about what the future holds for this project.
Our Phoenix team completed 66,000 square feet of leasing this quarter, including a 34,000 square foot new lease with Pulte Homes at Tempe Gateway. Once again, a great example of strong demand for well amenitized and newly redeveloped lifestyle office space. This demand only increases our excitement around the redevelopment of our Hayden Ferry project, also in Tempe. This redevelopment is now well underway and includes a total transformation of the entire exterior, hardscape and landscape, two of the three building lobbies and amenities, and also the addition of a new standalone restaurant. Interest in Hayden Ferry overall continues to be strong but especially in the 200,000 square foot availability at Hayden Ferry One created by the departure of SBB Financial.
Overall, our leasing pipeline continues to be healthy and we are encouraged by the trends we are seeing as the year has progressed. The early stage leasing pipeline, namely initial inquiries and tour activity is especially encouraging, having noticeably increased just in the past 30 to 60 days. As always, early stage demand typically takes multiple quarters to translate into signed leases. I also want to note that because we have so few expirations through 2026 and therefore likely lower renewal volume to complete, this could translate into lower total volume in any given quarter in the near-term. Before closing, I want to reiterate another important market dynamic that Colin has already touched on, that is the growing scarcity of new office development.
Per JLL, 7.8 million square feet of new office space was delivered in the first quarter, the lowest volume of completions in the past several years. And in the first quarter we saw less than 300,000 square feet of office construction starts nationally, the lowest in nearly 40 years. As we continue to see an increase in demand for the highest quality lifestyle office product, this shutdown of new office supplies should prove very beneficial to owners of the best existing office product. As always, I want to thank our talented operations team whose skill and hard work have us off to a great start to the year. We look forward to continuing the momentum together during the balance of the year. Gregg?
Gregg Adzema: Thanks, Richard. Good morning, everyone. I'll begin my remarks by providing a brief overview of our results, spending a few moments providing some detail on our same property performance. Then I'll move on to our capital markets and development activity followed by a discussion of our recently assigned investment grade credit rating before closing my remarks with an update to our '24 earnings guidance. Overall, as Colin stated upfront, our first quarter earnings were solid and the economics behind them were encouraging. Second generation leasing spreads were positive, leasing velocity was excellent during a seasonally slow period and same property year-over-year cash NOI was strong. It was also a very clean quarter.
There were no unusual or nonrecurring items of note. Focusing on same property performance for a moment, we added two properties to our same property pool during the first quarter. 100 Mill in Phoenix and Heights Union in Tampa, and this pool now comprises 97% of our total NOI. These new properties have an average age of only three years and average gross rents of almost $50 per square foot. With these additions, excuse me, we continue to improve the quality of our core office portfolio. Looking at the quarterly numbers, both same property GAAP and cash NOI increased 6.6% compared to last year. This continues a string of positive same property numbers that began in early '22. And importantly, this quarter represents our best same property cash performance since the second quarter of 2021 and our best GAAP performance since the second quarter of 2017.
Before moving on, I also want to point out the continued positive trend in parking revenues we saw during the first quarter. Overall, total parking revenues were up 10% compared to the first quarter of last year, a strong sign of performance which continues to exceed our internal forecasts. Turning to our capital markets activity. In January, we entered into a floating to fixed interest rate swap on the remaining $200 million of our $400 million term loan maturing in March of '25. With this swap, the entire term loan is now fixed at an underlying SOFR rate of 4.48% through initial maturity. Looking at our development activity, the current pipeline is comprised of a 50% interest in Neuhoff and Nashville and 100% interest of Domain 9 in Austin.
Our share of the remaining estimated development costs is $66 million, which will be funded by a combination of our Neuhoff construction loan and our operating cash flow. Before discussing our updated guidance, I wanted to take a moment to highlight the assignment of an investment grade corporate credit ratings from Moody's and S&P. Subsequent to quarter end, Moody's assigned a Baa2 rating and S&P assigned a BBB rating to Cousins Properties LP. Both agencies distributed their write-ups yesterday, so their full thoughts on our credit ratings are available online. Overall, both agencies discussed the quality of our lifestyle portfolio, highlighted by above average rents, healthy occupancy and modest near-term lease expirations, as well as our strong balance sheet and conservative financial policy.
In the near-term, these ratings allow us to receive more favorable pricing on our $1 billion credit facility and $750 million in outstanding term loans. At our current debt ratings, this saves us about 12 basis points in interest expense. On a longer term basis, these ratings provide us with another important option to access the capital markets as we execute our strategic plan. I'll close by updating our '24 earnings guidance. We currently anticipate full year 2024 FFO between $2.60 and $2.67 per share with a midpoint of $2.635. This is up $0.015 per share from the original guidance we provided in February. The increase is primarily driven by higher parking revenues and termination fees. The increase in termination fees is due to a customer at our North Park property in Atlanta, with the lease expiration in '27, notifying us of their intent to move out in early 2025.
We didn't provide notice until March, so the impact on our first quarter results were immaterial. Concerning WeWork, although negotiations continue, the math is generally settled and included in our guidance. We believe there is no downside risk in our assumptions and a small upside potential. Our guidance remains clean. There are no significant one-time non-recurring items and no property acquisitions, property dispositions, development starts, or capital markets transactions. If any of these do take place, we'll update you accordingly. Our guidance also continues to not include any payment of our unsecured claim in the SBB bankruptcy case, which we currently estimate to be just under $10 million. The exact amount and timing of recovery against this claim is not yet known, but unsecured SBB bonds are currently trading around $0.50 on the dollar, so we anticipate there will eventually be significant value in this claim.
Bottom line, our first quarter results are excellent and we are increasing our earnings guidance. We now forecast full year positive FFO growth in '24, a rarity among public office companies. Our best-in-class leverage and liquidity positions remain intact, and we have added one more valuable tool to our capital markets toolbox. With that, let me turn the call back over to the operator.
Operator: [Operator Instructions] Your first question comes from Blaine Heck from Wells Fargo. Please go ahead.
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