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spk01: Good morning, and welcome to the Cousins Properties fourth quarter conference call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Pamela Wilker, General Counselor, please go ahead.
spk00: Thank you. Good morning and welcome to Cousins Property's fourth 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 Greg Adzima, our Chief Financial Officer. The press release and supplemental package were distributed yesterday afternoon, as well as furnished on Form 8K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website, 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.
spk04: Thank you, Pam, and good morning, everyone. 2021 was a strong year for Cousins. While managing the impact of the COVID variant from Delta last summer to Omicron this quarter, our teams performed extremely well, and we were hopeful for a bright 2022. Before addressing the longer-term outlook and some positive office trends, I want to provide a few highlights of our strong fourth quarter financial results. On the earnings front, the team delivered 69 cents per share in FFO. Same property NOI on a cash basis increased 2.1%. In addition, we leased 743,000 square feet with a 6% increase in second generation cash rents. Note that our leasing volume was the highest since the second quarter of 2019 and the second best over the past five years. It is an interesting time in the office market. The Omicron variant is showing signs of slowing and our customers with more conviction are firming up plans for a phased return to the office. It is worth noting how much the media headlines on the future of office have changed since the start of the pandemic. Remote first has more recently been replaced by hybrid work, and the direction is still fluid. Based on conversations with our customers, we believe that hybrid over time is likely to transition to flexibility, which has a minimal impact on office demand. A booming stock market fueled by low interest rates, can mask growing organizational challenges. After two years, forward-thinking companies are recognizing that culture, collaboration, and innovation are best done in person. As a result, our leasing pipeline is strong. At Cousins, we have a unique and compelling strategy. We strive to be the preeminent Sunbelt office company. It's that simple. and we execute that business on four core principles. First, to own the premier Sunbelt office portfolio with concentrations of trophy quality properties in the leading urban submarkets across our geographic footprint. Second, maintain a disciplined approach to capital allocation with a focus on new investments where our platform can add value and generate attractive returns. Third, Preserve our best-in-class balance sheet to provide financial flexibility so we can execute quickly when opportunities arise. And fourth, leverage our strong local operating platforms that take an entrepreneurial approach to customer service, local market relationships, and deep community involvement. Our strategy benefits from several macro trends. Let me walk you through them. The US population continues to migrate to the Sunbelt in search of a lower cost and pro-business environment. To compete in the war for talent, users of office space are increasingly choosing to upgrade the quality of their work environment with an emphasis on an energizing daily experience that promotes culture and collaboration. As these trends take shape, our Trophy Sunbelt portfolio is exceptionally well positioned for today's office market. During the pandemic, these trends have accelerated and gained widespread acceptance. Importantly, at Cousins, we have been executing on our Sunbelt strategy for over 10 years. We were ahead of the curve, and we have made great progress in positioning the company and the portfolio to capitalize on these tailwinds. Let me highlight some of our recent activity. We had a terrific leasing quarter with some significant wins. In Austin, we signed a 330,000 square foot lease with Amazon at our Domain 9 development project. We began the development on a speculative basis in June of last year and have now leased 100% of the office space in less than six months. We also leased 92,000 square feet at our 100 mil development in Tempe, And here in Atlanta, we leased two floors at 10,000 Avalon and an additional floor at 1,200 Peachtree, which we have now renamed Promenade Central. The office component of 10,000 Avalon is now 100% leased. Promenade Central is now 44% leased, a strong start given Norfolk Southern's full building lease expired less than two months ago. Turning to our investment activity, we sold 816 Congress in Austin for a gross price of $174 million. As a reminder, we purchased 816 Congress for $102 million in 2013. It was an exceptional investment for shareholders. We redeployed the capital from 816 Congress to acquire our partner's 50% interest in 300 Colorado, also in Austin, for a gross price of $162.5 million. We also acquired Heights Union, a highly amenitized property in the heart of downtown Tampa's historic Heights neighborhood for $144.8 million. Looking back on 2021, Cousins invested over $1 billion in new acquisitions and development. We added Heights Union, 300 Colorado, 725 Ponce to the portfolio and commenced construction on Domain 9 and Newhoff. All are interesting and experiential properties that are representative of the office of the future. At the same time, we harvested older vintage assets, including 816 Congress, Burnett Plaza, and OneSouth. In a very busy year, we upgraded the quality of the portfolio, entered Nashville, and reduced our CapEx profile. Importantly, we are positioned to generate attractive value-add returns through a healthy blend of strategic acquisitions and compelling new development. And we maintained our balance sheet flexibility by executing the transactions on a leverage-neutral basis. Looking ahead, Cousins is poised for growth. We have an unmatched portfolio in fast-growing Sunbelt markets. Organically, we have a great opportunity to drive rental rates and occupancy in highly desirable properties. The office component of our $759 million development pipeline is 78% pre-leased. Further, the balance sheet remains rock solid and positions Cousins for external growth opportunities as well. Given the growing demand for Sunbelt Trophy office product, We are optimistic we will identify new development starts in 2022, and as we have proven in the past, some unique acquisition opportunities as well. Before turning the call over to Richard, I want to thank our talented, hardworking Cousins team who bring outstanding service to our customers each and every day. They are the foundation of the company's success. Thank you. I'll turn it over to Richard.
spk05: Thanks, Colin. Good morning, everyone. Our operations team closed the year running at full stride, delivering terrific fourth quarter operating results as we continue to enjoy broad economic tailwinds in our Sunbelt markets. While the pandemic remains a factor in our operations, with the Omicron variant generating incrementally more delays to office returns, we remain encouraged by the overall long-term oriented demand we see for high quality office space. As we all know, the Omicron variant led to a rapid increase in COVID cases over the past couple of months, which, along with holiday seasonality, put a temporary ceiling on further recovery and office utilization. Despite that, our portfolio parking revenue increased quarter over quarter, and we anticipate a solid uptrend in utilization and parking as the year progresses. Turning to fourth quarter operating results, our total office portfolio leased percentage was largely unchanged this quarter. ending at a solid 91.5%. Our weighted average occupancy in the fourth quarter came in at 89%, representing a 110 basis point decline relative to the third quarter. Our lower reported occupancy in the quarter was largely driven by the previously disclosed move out of Smith Gambrell at Promenade Tower in Midtown Atlanta. As an aside, Colin already mentioned the renaming of 1200 Peachtree to Promenade Central, And Promenade Tower is a slightly new name as well. This past quarter, in conjunction with the kickoff of our redevelopment of 1200 Peachtree, we rebranded the adjacent 1200 Peachtree and Promenade properties. Their new names are reflected in our earnings supplement. Now back to results. Our team produced extraordinary leasing results this quarter, continuing a consistent upward trend in activity throughout the past year. we executed 44 leases in the quarter, totaling over 743,000 square feet with a weighted average term of 9.1 years. This included 639,000 square feet of new and expansion leases, representing 86% of our total leasing activity. Rent growth remained solid, with second-generation net rents increasing 6% on a cash basis. I would note that all of our core markets produced increases in cash rents this quarter, with only our non-core property in Houston posting a decrease. Excluding our Houston activity, our portfolio level second generation cash rents increased 10.2%. Finally, net effective rents in the fourth quarter were a company record at $28.69, which is 18.9% higher than our trailing four quarter average. Global pandemic or not, these are outstanding leasing results. We also remain very pleased with the amount of overall activity in our leasing pipeline. It is worth noting that the Omicron variant did create some logistical disruption to the leasing process in late 2021, but it is too early to tell if that will impact our first quarter completed leasing volume. With that said, initial inquiries and interest are on the upswing since the start of the year, and our early stage leasing pipeline is healthy. We are also thrilled that only 4.9% of our annual contractual rents expire during 2022, and our largest expiration this coming year, a known move out, out of 73,000 square feet at Colorado Tower in Austin, is already completely backfilled. Beyond what we are seeing in our own portfolio, U.S. office statistics illustrate that demand for high-quality office space is high. According to CBRE research, more companies are expanding their footprint than they are contracting, suggesting long-term confidence in the office. Across 2021, there was an uptick in corporate relocation activity into Sunbelt markets. We have clearly seen this manifest in our own activity. From our 123,000 square foot new lease with Visa at Promenade Central in Midtown Atlanta to Amazon's 330,000 square foot new lease at Domain 9 in Austin, not to mention the 63,000 square foot expansion by Amazon at our 100 mil development in Tempe. Additionally at 100 mil, LiveRamp, a growing technology company based in San Francisco, signed a new 32,000 square foot lease, creating a new hub and marking its entry into the Phoenix market. Coincidentally, subsequent to quarter end, we signed an additional 32,000 square foot new to market headquarters lease with yet another technology company leaving California. With that lease, 100 mil now stands at 92 percent lease. Net absorption in the Phoenix market ended the year on a strong note, and CBRE cited in its latest quarterly office report that the fourth quarter has seen its strongest quarter since early 2020 for tenants in the market. We executed a solid 95,000 square feet of leases in Phoenix during the fourth quarter, and our operating portfolio is 92.2 percent lease. In Atlanta, We posted 227,000 square feet of quarterly leasing activity, and our portfolio increased to 89.1% lease. Looking at the local economy, the picture is very positive. Atlanta's employment has almost fully recovered from the pandemic, and unemployment is the lowest in our hometown's history at only 2.4%. Not surprisingly, the flight to quality trend continues to be significant here in Atlanta, with JLL research noting that 84% of leasing activity in the fourth quarter was in Class A or Trophy product. JLL research also showed Midtown and Buckhead posted positive net absorption in the fourth quarter. We believe Atlanta is poised for another strong year, likely driven by continued corporate expansions and in-migration. In Austin, leasing activity has increased to near pre-pandemic levels due to a variety of factors, including skilled labor migration and large corporate expansions, also from JLL Research. This has made Austin one of the fastest-recovering metro areas in the country. The market's office-using job growth has been especially pronounced, with CoStar pegging white-collar workforce growth at close to 13% since the onset of the pandemic. Our overall leasing volume in Austin was very strong last quarter at 360,000 square feet in our portfolio stands at a healthy 95.5 percent least. Demand for office space at the domain is as strong as ever, with our 1.9 million square foot existing portfolio in the core of domain at 100 percent least. Charlotte is certainly poised for a solid economic recovery as well. Unemployment there has dropped to 3.3 percent. And since the beginning of 2021, more than 45,000 new jobs have been added to the metro area. In the Charlotte market, our 1.4 million square foot uptown and south end operating portfolio remains well leased at 96.3%. We could also not be better positioned in the immensely popular south end submarket with two fantastic development sites to market. Last, I'll touch on Tampa. Truist Securities recently published research showing that some of the nation's best year-over-year job growth was in Florida. Like Austin, Tampa now has more jobs than before the pandemic began. Further, JLL recently noted that absorption soared in the fourth quarter to approximately 365,000 square feet, with nearly all submarkets recording positive absorption. We executed over 30,000 square feet of leases in Tampa in the fourth quarter, and our portfolio net of our not-yet-stabilized Heights Union acquisition held steady at 93.1% least. Before handing it off to Greg, I want to thank our exceptional team that made 2021 such a successful year. They continue to produce great results, and we look forward to a fantastic 2022 together. A heartfelt thank you to our entire team. Greg?
spk07: Thanks, Richard. Good morning, everyone. I'll begin my remarks by providing a brief overview of our financial results. Then I'll move on to a discussion of our development efforts. followed by a quick review of our capital markets activity before closing my remarks with initial earnings guidance for 2022. As you can tell from Colin's remarks, the fourth quarter continued a string of very active quarters for us here at Cousins. Since the onset of the COVID pandemic in early 2020, we've started $600 million in new developments, acquired $900 million in new properties, and sold $1.2 billion of non-core assets. all while maintaining a best-in-class balance sheet. However, we don't want all that positive transaction activity to take attention away from our solid operating performance. Starting with leasing volume, as Richard just discussed, a tremendous fourth quarter closed out a very busy year in which we signed almost 2.1 million square feet of leases, a 48% increase over 2020. Better yet, leasing velocity ramped up during the year, After starting with only 271,000 square feet of leasing in the first quarter, we signed 484,000 square feet in the second quarter, 597,000 square feet in the third quarter, and finished the year with 743,000 square feet in the fourth quarter. Although this metric can be a little lumpy quarter to quarter, that's a very encouraging trend. COVID has also impacted our parking revenues over the past couple of years. But again, the recent trend is positive. For context, parking revenues comprise between 5% and 6% of our total property revenues. During the fourth quarter, parking revenues increased 8% over the third quarter, and we're up 14% from their trough in the fourth quarter of 2020. They're still about 20% below pre-COVID levels, which leaves plenty of room for growth. and we project parking revenues will continue to gradually improve throughout 2022 as customers and their guests return to the office. Rents on expiring leases rolled up 15.1% on a cash basis during calendar year 21, which follows a 13.1% increase in 2020. Notably, we rolled up rents on a cash basis during every single quarter of the COVID pandemic. Customers are coming to and expanding in our Sunbelt markets, and they want new and efficient office space. As Colin outlined at the outset of the call, we've spent years building a portfolio to take advantage of these trends, and our ability to increase rents during a global pandemic is a strong validation of the positive economics of our strategy. Before turning to our development activity, I wanted to highlight a financial metric that is often overlooked. Funds available for distribution, sometimes called AFFO, while not followed as closely as FFO, is nevertheless a critical metric to analyze the performance of an office company on its own, as well as compared to its peers. It's important because FAD reflects a company's true cash flow and ultimately drives its ability to pay dividends. We provide a detailed calculation of FAD in our quarterly supplement, and we have for years. As most of you know, the largest difference between FFO and FAD is second-generation CapEx. As we have sold older non-core assets with significant CapEx requirements and replaced them with new efficient acquisitions and developments, our FAD has grown materially faster than our FFO. In 2021 alone, our FAD grew per share 11.3 percent over the previous year. Second-gen CapEx represented only 17 percent of total NOI in 2021 versus 20 percent in 2020. I encourage you to keep an eye on FAD as you analyze office companies. It's very easy to underestimate the significant differences in CapEx requirements across office portfolios. Turning to our development efforts, the current development pipeline represents a total Cousins investment of $759 million across 1.9 million square feet in four assets. While the development assets are unchanged from last quarter, our investment in these assets has increased due to the purchase of our joint venture partners' 50 percent interest in 300 Colorado during the fourth quarter. On the capital markets front, we sold 2.6 million shares using our ATM program for gross proceeds of $105 million. These shares were sold on a forward basis and we expect to settle the contracts during the first half of 2022. The proceeds of this issuance fund our recent acquisition of Heights Union in Tampa on a leverage neutral basis. I'll close by providing our initial 2022 earnings guidance. We currently anticipate full year 2022 FFO between $2.70 and $2.78 per share. This guidance includes the settlements of the forward equity contracts I just discussed. It does not include any operating property acquisitions, dispositions, or new development starts. We're not providing quarterly earnings guidance, but I did want to point out that our quarterly run rate will not be evenly distributed across 2022. Quarterly earnings, in large part driven by occupancy, will be lower in the first half of the year. primarily due to two items. First, Expedia recently consolidated their operations at the domain into our newly developed D11 building. We helped facilitate the leasing of the space they were leaving and intending to sublet at our D2 building to Amazon. This was a clear win for us. Not only did we get a substantial term fee from Expedia, we also signed a new direct lease with Amazon that rolled up the rent and extended the term from Expedia's prior lease. However, we will experience six months of downtime in the first half of the year as Amazon completes their tenant improvements. Second, Norfolk Southern recently moved from our Promenade Central property in Midtown Atlanta to the new headquarters we built for them a few blocks away. As of January 1st, we've taken Promenade Central offline to execute a transition to a multi-tenant building. As Richard indicated earlier, we've already executed two leases for over 40% of Promenade Central, with the largest new customer, Visa, beginning their phased move-in during the fourth quarter of 2022. Amazon moving into D2 and Visa moving into Promenade Central, combined with steadily increasing parking revenues and the stabilization of two recently completed development properties, 100 Mill and Heights Union, will drive earnings higher as the year progresses. With that, let me turn the call back over to the operator for your questions. Operator?
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Anthony Powell with Barclays. You may now go ahead.
spk02: Hi, good morning. Thanks for the question. Just curious, you did a lot of leasing last year, so the leasing volume was very strong. We're two years into COVID. Theoretically, if office tenants were changing their behavior during COVID, you would start to see it. last year. Did you really see any signs of a tendency to downsizing, changing their layouts, or responding in a negative way to COVID, or is it kind of still all systems go?
spk04: Good morning. It's Colin, and I appreciate your question. I guess what I would say, probably contrary to what you might read in the media headlines, we have seen, I'd say, very little change in how our customers are thinking about the layout of their space or any significant changes. I think Richard alluded to a study done by one of the major leasing firms that indicated we're actually seeing more customers expand than contract. And so there's been This has been a topic that I think has been carefully studied over the last couple years by users of office space, and I think as we inch closer, hopefully, to a more broad-based return to the office, I think many are concluding to not make significant changes within their space. I would say the biggest change that we've seen over the course of the last two years is more conviction amongst users users of office space to, as they try to bring their teams back, to focus and emphasize on the highest quality properties. And you're really seeing the flight to quality accelerate. And companies who are excited to bring their teams back want to, again, create an environment that their teams are excited to spend their day together.
spk02: Thanks. And maybe one on capital allocation. So you mentioned that you want to do some development starts and maybe acquisitions this year. You funded deals last year with asset sales and a bit of equity. How do you look at issuing equity right now, given low cap rates for high-quality office and, I guess, the relative higher cap rates for office stocks? And looking forward, should we continue to expect dispositions at the same percentage of acquisitions as you did in 2021?
spk07: Hey, Anthony.
spk02: It's Greg. Good morning.
spk07: Good morning. Well, first off, rest assured, we'll fund whatever new investments we uncover on a leverage-neutral basis. We've been running the company kind of between four and a half and five times net debt to EBITDA for years, and we continued to do that last year, and we'll continue to do that going forward. It can be a little lumpy quarter to quarter because sometimes you can't time things perfectly, But over the broad span of quarters and over the broad span of years, we'll continue to fund whatever we uncover on a leverage-neutral basis. In terms of which type of funds we use for those new investments, it'll depend on what's available at the time and what the cost of that capital is at the time. And sometimes it makes sense to fund it with non-core asset sales, and sometimes it makes sense to fund it with external assets. incremental capital. And that's something that we look at every time when we look at an investment. So I can't commit to you what we'll use as a funding source in 2022 and beyond, but I can commit we'll do whatever we do on a leverage-neutral basis.
spk02: Great. Thank you.
spk01: Our next question comes from Jamie Feldman with Bank of America. You may now go ahead.
spk11: Great, thank you and good morning. I guess just sticking with the, you know, capital question or portfolio question, you know, as you think, you know, you talked about selling 816 Congress, redeploying into 300 Colorado, and it sounds like you'll, you know, can you give more color on, you know, what you think is still non-core in the portfolio and what you think, you know, fits into kind of the older commodity versus, you know, office of the future so we can get a better sense of, you know, dispositions going forward?
spk04: Yeah, good morning, Jamie. As I laid out in my prepared remarks, it's a strategy that we've been undertaking here at Cousins for quite some time. And that is a focus on the office building of the future, the assets that are more interesting and more experiential and attract growing companies. And so we have funded that over time with the sale of ultra-vintage assets. And so that recycling blended with some compelling developments has allowed us to generate attractive value-add returns and at the same time upgrade the quality and reduce the CapEx profile. We have made significant progress in that recycling effort. If you look back, as I mentioned over the last year, we sold Burnett Plaza We sold one south. We sold 816. And so as we look across the portfolio today, what I would characterize is older vintage non-core assets is a much smaller percentage of the portfolio. Kind of an interesting statistics. The average age of our portfolio today is about 2004. And so we've made great headway there. But again, we still do have a handful of non-core assets. We've talked about Houston in the past. My sense is at some point in the future that that will be an asset that we'll likely harvest. But that will be entirely a function of identifying compelling new investment opportunities, whether that's an acquisition or a disposition. Again, because the balance sheet's in great shape. We don't need to sell anything for the sake of selling anything. And we'll potentially look at some of those asset sales as we identify new growth opportunities.
spk11: So are you able to quantify, you know, percentage of square feet or NOI that fall into that bucket? You mentioned Houston.
spk04: Yeah, we certainly do a lot of that work. And we always, from quarter to quarter, you know, put together a list. I'm not going to provide a specific percentage, but rest assured you've seen the dispositions that we've made not only last year, but over the last several years. It's a pretty small percentage today of the portfolio. We feel terrific about the properties in the portfolio we've been able to assemble.
spk11: Okay, that's helpful. And then just thinking about the guidance, Can you talk a couple of different questions? I guess first, can you talk about the parking income and other short-term income and where you think it is versus a normalized run rate that you could grow to and how much of that was included in guidance? And then similarly, leasing spread, you had some moderation in the fourth quarter. How should we think about your mark-to-market across the portfolio and leasing spreads in 22?
spk04: Yeah, Jamie, it's Colin. I'll start with the... Mark-to-market question and then I'll turn it over to the team in terms of the parking and other components and how that impacts same store. This past quarter, as you mentioned, our mark-to-market was at 6%, but as Richard described, excluding Houston, it was a double-digit mark-to-market for us on a cash basis, which is a terrific result You know, we've always said in the past that that number will vary from quarter to quarter based on the mix of leases and the properties that we execute. And I think this particular quarter, again, a sizable lease in Houston weighed on that. But, again, the underlying statistics is great. And I think if you look at it over a broader spectrum, you know, we've said that consistently we think we can achieve kind of 8% to 10%. Over the course of 2021 in its entirety, we delivered over a 15% same store or cash mark to market on second generation leases. So we've been able to, you know, again, produce really, really strong leasing results given the quality of the properties we've got.
spk07: Jamie, it's Greg. In regards to parking, as I said in my opening remarks, it has gradually gotten better after kind of troughing in the fourth quarter of 20, so a year ago it troughed. I mean, we're up 14% from that kind of bottom point, but there's room left to go, about 20% to return to pre-COVID levels. So there's still some opportunity for cash flow growth on the parking lot item for us, which is a little bit larger, I think, than some of our more suburban peers. I mean, we have some you know, paid parking, whether it's transient or permanent customer parking at the buildings. And in terms of the run rate, I mean, you know, it's going to build as the year progresses. We obviously start lower in the first quarter, and it's all driven by physical occupancy, and physical occupancy has been dependent upon, you know, kind of the impact of COVID on our customers' approach to office use. So it'll grow steadily as the year progresses, and it's one of the reasons. It's not the reason, but it's one of the reasons that our FFO progression during 2022 starts lower and increases as the year moves on.
spk11: Sorry if I missed it. Did you say what your occupancy guidance is for year ends?
spk07: No, we didn't provide that. And we've never provided occupancy guidance, Jamie, even before COVID. That was not a line item we provided guidance on.
spk11: Okay. But I guess, do you think, like, for your guidance, is the parking normalized by year ends?
spk07: Yeah, we believe in the second half of 2022, it'll be darn close to where it was pre-COVID.
spk11: Okay. All right. Thank you.
spk07: Thanks, Jamie.
spk01: Our next question comes from Blaine Heck with Wells Fargo. You may now go ahead.
spk10: Great. Thanks. Good morning, everyone. Colin or Richard, can you just talk a little bit more about the Austin market? You've got a lot of tech exposure there, especially in the domain, which has been great for you guys. But as we've seen in San Francisco, the tech companies have been a little bit more open to flexible working arrangements and a little slower to come back to the office. Are you seeing the same from them in Texas?
spk04: We are, Blaine. And again, I think a lot of the the demand for office in Austin is coming from California. And we've continued to have really strong success. And when you look at this quarter's results, the leasing results, Austin accounted for almost 50% of our leasing activity. And again, a lot of that was technology companies. I think it was an important validating statement to see a company like Amazon lease 330,000 square feet and effectively take all of domain nine. And again, I think that should signal how they think about their business and the importance of being together and culture and collaboration. And so While today they might say it looks a bit hybrid, even in a hybrid environment without significant hoteling, they still need a significant amount of office space. But I think it should also signal over the long term, as I mentioned, perhaps hybrid becomes more of a increased flexibility in time. And that's not an overnight, but I think over the course of several years, perhaps that's what the technology companies are telling you, not by what they say, but what they're doing.
spk10: Great. That's helpful. Switching gears a little bit here, can you talk about land values, Colin, and what you're seeing in the market? Have they continued to increase, and how might that affect your
spk04: appetite for future purchases and then you know on the land bank that you guys have now where would you peg the market value of that land versus where you're carrying it at book value well I it's a great question I think relevant in the market today because we are absolutely seeing land prices increase and in some cases materially so you know I think here in Atlanta The record land price in Midtown was just announced yesterday, and we've seen kind of record pricing in Austin as well. You know, we'll continue to look for opportunities. I think, you know, what that's telling you is land prices increase. You know, I think it's indicating that, again, customers are focused on high-quality, kind of more interesting, in some cases, newer vintage buildings and have demonstrated, as we just did in our our last quarter, that customers are willing to pay for that quality. So as we look, you know, we'll continue to be active in the market. If we find kind of the right site that we think is strategic, you know, we'll potentially look to add to our land bank. That being said, we feel very fortunate that over, you know, the last two, three years, we have been active in the market. And today we've got a terrific, portfolio of land that really has at least one strategic site in each of our markets that allows us to be active in the discussion with new customers migrating to our market. And as I mentioned, it could allow us to kick off some additional development this year. I certainly don't want to be reluctant to give a specific mark to market on that land. But again, I think there's been, you know, there's been material increases in the price. And I think there's, you know, very good upside on, you know, our land bank relative to, you know, what's on our books today. Okay, that's fair.
spk10: Last one for you. WeWork and Regus remain kind of in your top 20 tenant list. I think they're your numbers 14 and 15. So I wanted to get your latest thoughts on the co-working or flexible space providers and your comfort with their existing footprint in your portfolio and whether you'd consider signing additional leases with them.
spk05: Yeah, this is Richard. Yeah, we feel and we've always felt like the flexible office operators are a nice component of our portfolio and can serve a kind of a mutually beneficial purpose for our customers. So we view it as something where it's specific to the assets and its location in a market where it might make sense. So it doesn't make sense everywhere, but it does make sense some places. And at this point, I'd say our percent of our portfolio has been really stable for the past two, three years. It hasn't changed much. You're right, WeWork is a large component, Regus, and also Industrious. So we have a good, diverse portfolio of operators. They're actually doing... very well coming out of the pandemic. Their performance that we see has been positive over the last six, 12 months. So we feel good about that part of our business.
spk10: Great. Thanks.
spk01: Thanks, Blaine. Our next question comes from Dave Rogers with Baird. You may now go ahead.
spk09: Yeah, good morning, everybody. Richard, maybe just wanted to start with you. You've got about 900,000 square feet of leases still expiring after the move out at Colorado Tower. I wanted to understand, is the move out at Colorado Tower the largest expiration or just the largest known move out? And can you give us a sense of kind of how the rest of that 900,000 is progressing in terms of your conversations and how you look at kind of the occupancy track? I know Greg doesn't want to give guidance, but how you kind of feel like where that stabilizes given the sharp reduction in occupancy over the last year?
spk05: Sure, that's a good question. Let me take a run at this. I'd say to clarify, it's both on the expiration at Colorado Tower. It's both our largest expiration and our largest known move out. And it happened at the end of January. But as I said, we've already backfilled it 100%. So we're going to have some downtime there, kind of five, six month period that's very customary for our new customer to build out and reoccupy. I'd say The balance of the, if you just took the large expirations, which again, they're below that kind of 73,000 square foot level, they're more generally 50,000 or less, are generally bunched up in the back half of 2Q and into the third quarter. There are very few that are in the fourth quarter. So you've got a fairly balanced expiration profile at the beginning, or excuse me, the middle of 2022. Okay.
spk09: And do you have pretty good visibility on those at this point? If they're still kind of three, four, five months out with a weighted average duration, you should be getting a sense, I would think, at this point, how those are going to shake out.
spk05: Yeah, we do have fairly good visibility at this point. They're really just ahead of us, and we've made good progress. Obviously, we've backfilled the first and largest, and we have good activity on all the rest. We feel good about our position.
spk09: Okay. Thanks for that. And then, Colin, I wanted to go back to the development starts in 22. Maybe can you give us a sense of where you're comfortable in the portfolio starting speculatively and maybe where you would be more confident and just kind of waiting it out for a tenant, if you have any thoughts around that.
spk04: Yeah, again, I think if you look across our footprint in the markets that we're in, they're all performing well. pretty well. And I think importantly over the last couple years, you really haven't, you've seen very few kind of new starts. And so I think there's a potential attractive opportunity here where the migration kind of continues. We see it continuing into the Sunbelt. Not a whole lot of existing construction underway that's not significantly pre-leased. And so as I mentioned earlier, we feel very fortunate that we've got some terrific land sites across really all of our markets. I think as we look over the course of the year, we're going to be selective and move forward what we think are the most compelling. Again, we own some terrific land in Austin. We just leased our current development project, Domain 9. We've got really unique site that we call Domain Central, where we've got three paths that can accommodate over 900,000 square feet. So again, we continue to feel great about Austin. The activity here in Atlanta has been strong. Midtown Atlanta has been, I'd say, one of the best performers across the country and a lot of great economic wins in Midtown. And so they're That will be a market that we continue to look at. Tampa is performing very well. Richard alluded to a couple of really good sites in Charlotte. We're not going to start all of those, but over the course of the year, we do think with the inquiries and the demand and the conversations we're having with potential customers that we think we're optimistic that we could start one or more buildings over the balance of the year.
spk09: Thanks for that. Maybe last question. Greg, do you think about funding spec versus pre-lease development starts differently in any way? And do you have any assets in the market today for sale that would pre-fund any of these development starts?
spk07: We don't have any assets currently in the market today. Nothing being actively marketed. We haven't. So, you know, in terms of do we treat a spec development differently than we treat a pre-lease development? I mean, they both require capital, so the answer is generally no. As you know, historically, we're pretty risk-averse. Once you put a shovel on the ground and start a development, you're going to finish it. So although we don't pre-fund every single development, we try to take as much risk off the table as early as we can, and that's what we'll continue to do.
spk04: Dave, just kind of one follow-on to your question is as you look at the company and you roll forward to really the end of the first quarter, our 100 mil project, which is largely leased, will come off of our development pipeline. And so as we look at the company in totality, we'll have just about 5% of our total enterprise value in development. And that That pipeline is over 60% pre-leased as it relates to the office component. So, again, we're very well positioned, both in terms of the strength of the markets, relatively limited expiration schedule within the existing portfolios, some really terrific land, and, again, I think the company's exposure to development will be relatively modest. So we're not going to go take risks for the sake of taking risks. We're going to be very measured, as we always are, and try to position ourselves for the best opportunities. But at the same time, we do think there's some risk in not taking any risk.
spk09: Agreed. All right. Thanks, everyone.
spk01: Our next question comes from Michael Lewis with Truist. You may now go ahead.
spk08: Thanks. My first question for Greg, you know, I noticed the higher management fees this quarter. I know it includes some reimbursed costs in the JVs. Is that now about a million dollar higher runway going forward or was there anything one time in that line item?
spk07: It was a one-time item, and most of those management fees get netted out because they're just reimbursed expenses at the property level. So it's really not a material, as you know, line item that runs through a P&L at all.
spk08: Okay, great. And then my second question, I risk getting a little wordy on this because it's a big-picture question for Colin, but, you know, I'm a believer in the flights of quality, you know, the leasing velocity for not just Cousins, but the office REITs so far has been encouraging. But how attractive or unattractive is the office business and your business today compared to pre pandemic? Um, some might argue it was challenging before the pandemic, but you know, in this environment where you have, you know, certainly reduced, uh, demand, it looks like for class B and C space, um, CapEx is up, um, you know, you cited more expansions than contractions. I'd be curious that that number included, um, you know, contractions to zero, just companies that are leaving. You know, it appears there's more overall space available, whether it's sublease space. And so my question is really, you know, so far it looks like Class A is holding up well. Do you think the Class A market and Cousins could stay kind of segmented here while it looks like, you know, certainly because of the pandemic, it looks like there is probably some long-term, you know, demand reduction to office? So, you know, maybe just your thoughts on that.
spk04: Sure. Michael, so I would first just start off by pointing out, again, a couple of statistics that we've already highlighted, which was our leasing performance this year or this past quarter at almost 750,000 square feet was the second best leasing volume quarter we've done in the last five years. And at the same time, we delivered our highest net effective rent, which takes into account, you know, CapEx and leasing costs in the company's history. And so we feel like the business is performing well and we're able to create organic growth in the leasing economics. And at the same time, we've demonstrated ability to grow externally through, you know, our development capabilities You know, maybe Cousins is just in a unique, compelling position. Right here we are in the Sunbelt with a, you know, really an unmatched trophy portfolio. But what we're seeing in the market is, I'd say, a larger share of the office demand now highly focused on an even smaller share of the overall inventory. And so we're actually seeing, you know, some activity in our assets that are, you know, that's actually better than it was before the pandemic because of that dynamic I just described. And so I think for everybody who studies and evaluates and analyzes the office market, I think everybody's going to have to be a bit more detailed and granular in your work that, you know, what is described as Class A, you know, today by CoStar I think in many cases, you know, some component of that is no longer considered Class A by kind of growing innovative companies that are looking for kind of the best environment and the best experience for their teams.
spk08: That's great. Thank you. Helpful.
spk01: Our next question comes from Daniel Ismail with Green Street Advisors. You may now go ahead.
spk06: Great, thank you. Maybe along those lines of being more granular, Greg, you mentioned CapEx as a percentage of NOI declining year over year, but I'm just curious if you guys have a normalized number in the back of your mind of what is a good run rate for second-gen CapEx for the current portfolio?
spk07: As you know, Danny, it can be bumpy over time, but when you look at it over the broad span of time, second-gen CapEx Both leasing-related costs and building improvements over the past decade have averaged, give or take, 17% of our total NOI. So it'll jump, but that's generally where it's been, and that's generally kind of where it is now.
spk06: Got it. That's helpful. And then maybe another one for you, Greg. I'm curious as to why do the ATM issuance on a forward basis and maybe some of the pros and cons of doing so?
spk07: Sure. The reason we issued that equity on a forward basis was because the asset that we purchased with it was not stabilized. So we wanted to go ahead and lock in the cost of the capital, but because, you know, that property right now, I believe, is about 35% physically occupied, and it'll stabilize later in 2022. So we're just trying to balance that against, you know, actually bringing the equity on our balance sheet. But we wanted to lock in a price, and that's why we used a forward.
spk06: Got it. And then this last one for me, going back to the parking discussion, I'm curious, as utilization rates pick back up, are you guys looking to push rates or rates pretty much in line to where they were?
spk05: Good question. We're absolutely always, whether COVID or not, looking at where and how we can optimize our rates that we're charging and As you can imagine, we have the most flexibility and opportunity in the transient parking rates. And so, yes, we're absolutely looking at that. Great. Thanks, everyone.
spk01: Our next question comes from Jamie Feldman with Bank of America. You may now go ahead.
spk11: Thanks. I just want to ask a quick follow-up. You had talked about, you know, you opened the call talking about customers firming a plan for a phased return to office. I just want to get your thoughts on, you know, how it differs by market and how it differs by tenant size from what you're seeing.
spk04: Yeah, Jamie, great question. And I guess what I would, I would generally characterize it, you know, 100% of our portfolio is, is in the Sunbelt, and I don't know that we see any kind of specific geographic kind of influences on the return to the office. I think it's been more attributable to, you know, what type of company and, frankly, the size of the company. You know, some of the large and international companies I think for a lot of logistical reasons have one-size-fits-all strategies as it relates to returning the office across the U.S. and around the world. They've been slower to return. We've now, though, seen, as I said, I think we're starting to see more conviction out of those customers, and many of them have begun to make announcements to start that phased reopening. Anywhere from February to March and April, As we get into smaller companies, mid-sized regional companies where there's some local autonomy, we've seen those pick back up quite significantly. The building that we're headquartered here, 3344 Peachtree, the occupancy and utilization in this building has been well over 50% for quite some time. We've got a lot of other instances in our portfolio that are just like that, but if you go to a You know, building down the street that might be 100% leased to, you know, a large international bank, it's still relatively quiet. Okay. Thank you.
spk11: And then I guess just thinking through the pace of things here, I mean, what do you think the risk is that six months, a year from now, companies actually decide they don't want as much space and there's just this lag based on the conversations you're having in terms of, you know, how are they using it, how are they thinking about it?
spk04: Yeah, I, you know, look, I think that, you know, the narrative and the discussion with our customers, I think, as we've gotten further into the pandemic, have been kind of increasingly more positive on the eventual kind of return to the office. And so the risk that you describe, you know, I guess that's there. That's probably always been there before. before or after a pandemic, but we are seeing companies, you know, share with us now kind of two years in. And I think many starting to recognize that, you know, with the amount of, you know, turnover that many have had that, you know, that they recognize that they've been kind of borrowing on the trust and the relationships that had been built prior to the pandemic. I think many are starting to worry about, you know, eroding cultures. One company had indicated it used to take them 90 days to onboard a new employee in a virtual remote world. It was taking them nine months. And I think in many cases, folks recognize that perhaps, as I said earlier, kind of a booming stock market was perhaps masking a lot of organizational challenges. And so over time, we do have confidence that customers are going to return. I don't think it's going to happen overnight. And I think you'll see many companies, and appropriately and smartly so, I think phase that, right? Maybe start at half the week and then over time let the market kind of dictate and I think likely push that higher.
spk11: Okay. Thank you. And then just last for me, thinking about your potential development starts, is it safe to assume that it would be on existing land? that you already own?
spk04: I think there's some, obviously, potential on land that we currently own, but we're always out in the market looking at new opportunities as well, and so I certainly wouldn't want to discount that as well. We try to be creative here at Cousins and find the best risk-adjusted opportunities for shareholders and And so we try to be creative and flexible. Okay.
spk11: All right. Thank you very much.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Colin Connolly for any closing remarks.
spk04: I want to thank everybody for your time today and participation in the call and interest in Cousins Properties. If you have any questions, please always feel free to reach out to myself, Greg, or Ronnie Imbo. We'll look forward to hopefully seeing some of you soon.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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