Cousins Properties Incorporated

Good morning, and welcome to the Cousins Properties second quarter conference call. All participants will be in a listen-only mode. Should you need any assistance today, 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 do note that this event is being recorded. I would now like to turn the conference over to Pamela Roper, General Counsel. Please go ahead.

Thank you. Good morning, and welcome to Cousins Property's second 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 Izvina, 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 link on the investor relations page or 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 risk 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 the potential risk is contained in our filings with the SEC. With that, I'll turn the call over to Colin Connolly.

Thank you, Pam, and good morning, everyone. Before providing some observations on the macro environment and trends, I want to provide a quick overview of our second quarter financial highlights. On the earnings front, the team delivered $0.70 per share in FFO. Importantly, we leased 588,000 square feet during the quarter with an 11.6% cash rent roll-up. These are strong results, and we remain encouraged by the leasing pipeline in front of us. Looking at the macro environment, I'll highlight three important trends. First, as we all know, unprecedented fiscal and monetary stimulus, supply chain disruptions from COVID, war in Europe, and an extraordinarily tight labor market have created inflation levels not seen in decades. Accordingly, the Federal Reserve has begun tightening financial conditions The result is higher interest rates and a slowing economy. Not surprisingly, many companies are announcing plans to slow hiring and in some cases layoffs. Second, the return to office, particularly premier office, continues and is likely to accelerate. CEOs are growing frustrated with remote work. Culture, camaraderie, collaboration are deteriorating. Financial results and stock prices have weakened, and attrition is at record levels. At the same time, younger workers and recent college graduates are increasingly looking for an in-person experience. They want to build relationships. They want to be trained. They want to be mentored. They are the future, and their employers are listening. Encouragement to return to the office is growing from the tops of organizations to the bottoms and now from both sides as the job market softens. Let me paraphrase a recent statement from Shopify as they laid off approximately 1,000 employees. We placed a bet that the channel mix, the share of dollars that traveled through e-commerce rather than physical retail, would permanently leap ahead by five or even ten years. It's now clear that bet didn't pay off. What we see now is the mix reverting to roughly where pre-COVID data would have suggested it should be at this point. I see parallels in this statement to the current narrative regarding the office market. Many have made similar new normal declarations regarding remote work. Will they be right? Or will the office market also eventually revert to the mean? While I can't speak for commodity or suburban office, we believe that premier office will remain critical for innovative companies to build culture, collaborate, solve problems, and grow talent. Lastly, the flight to quality is becoming even more pronounced. Trophy assets continue to experience greater resiliency and outperform the broader market. To illustrate, net absorption since 2020 for buildings built since 2015 is positive 181 million square feet, On the contrary, net absorption since 2020 for buildings built prior to 2015 is negative 327 million square feet. That is a staggering difference. The market is speaking loudly. So what does this all mean for Cousins and our strategy? Market and financial conditions will likely become more challenging. We are not immune to the impact of rising interest rates or a weakening economy. However, We built Cousins to thrive during all phases of the economic cycle. We are exceptionally well positioned today. Let me highlight why. First, we own the leading Sunbelt Trophy office portfolio in the best submarkets of Atlanta, Austin, Charlotte, Tampa, Phoenix, Dallas, and Nashville. We believe that we will continue to get more than our fair share of leasing demand as we benefit from both Sunbelt migration and the flight to quality. Second, our $566 million development pipeline, with our share of the office component approximately 70% pre-leased, is appropriately positioned for the current climate. We will benefit from meaningful incremental NOI during 2023 and 2024 by only having a modest amount of speculative leasing risk. Next, The known move-outs by Norfolk Southern at Promenade and Anthem at 3350 Peachtree are behind us. While a recession, if it were to happen, could extend the timeline to complete the releasing of these attractive properties, our overall portfolio is on solid footing. Our lease expirations through 2024 total just 14.3%, among the lowest in the office sector. Lastly, our balance sheet is best in class. our net debt to EBITDA at the end of the second quarter was 4.9 times. This compares to the office sector average of approximately 7.3 times. We have evaluated many deals over the course of 2022. In anticipation of a changing market, we have remained disciplined and kept our powder dry, notwithstanding the potential accretion to short-term earnings. Many recently announced deals in our markets which were priced in the spring and have had cash cap rates in the high four percentage range on our underwriting. Today, just a few months later, their pricing looks much more attractive. We believe compelling opportunities are on the way and we will be ready. At Cousins, we have a unique and compelling strategy. Build the preeminent Sunbelt office company. The key ingredients of this strategy include a pure play portfolio of premier, highly amenitized properties in dynamic Sunbelt markets, a leading development platform that creates value through the development of innovative office, residential, and mixed-use properties, a strong balance sheet with low leverage and ample liquidity, and local operating teams with a creative and entrepreneurial approach. We have been executing this strategy for over a decade, and we remain committed to it. Looking forward, we will continue to prioritize selling less relevant properties, which at this point is a modest percentage of our portfolio, and reinvest the capital into strategic acquisitions, unique developments, and our own stock, if that is the most compelling use to accomplish our long-term goals. In the near term, the bar for new development will be higher, While demand is quite strong for new product, material escalations and construction costs have compressed development yields, so they look less attractive today compared to acquisition cap rates and the implied yield on our own stock. We expect construction costs will moderate, so we will be back in the development game soon enough with some exciting projects as development yields rebalance. In closing, We are mindful of the potential impacts of higher interest rates and a slowing economy on short-term results. However, over the long term, we are optimistic that premier office will separate into its own asset class with improved investor sentiment. Cousins is in a very strong position. We are in the right sunbelt markets. We own a trophy portfolio. We have a dedicated and talented team. And our balance sheet is primed for opportunities. Before turning the call over to Richard, I want to thank our entire Cousins team who provide excellent service to our customers, as well as their skill and talents to their jobs every day. Their creativity, resilience, and hard work will continue to propel us ahead.