Cousins Properties Incorporated

Good morning and welcome to the Cousins Properties third quarter 2022 earnings conference call. All participants will be in listen-only mode. Should 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 Pam Roper, General Counsel. Please go ahead.

Thank you. Good morning, and welcome to Cousins Property's third 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 security 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 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. We had a very strong third quarter at Cousins. On the earnings front, the team delivered 69 cents per share in FFO and same property net operating income increased 1.5% on a cash basis. Importantly, we leased 431,000 square feet during the quarter with a 4.8% cash rent roll-up and 7.3% excluding our non-core asset in Houston. Additionally, we sold our 50% interest in Carolina Square, a mixed-use property in Chapel Hill, North Carolina, for $105 million, recognizing a gain of $56.3 million. These are terrific results. Before providing an update on our strategy at Cousins, I will share a few observations on the macro environment. Despite the current inflationary environment that Federal Reserves and other central banks around the world have rapidly raised interest rates to slow economic growth. Financial conditions have tightened. Layoffs are growing. The probability of a recession has increased. This unwinding process will likely take some time to play out. What are the implications for real estate? First, leasing demand is likely to soften and or slow across all product types. Second, the availability of capital, both debt and equity, has decreased while also becoming more expensive. As a result, the bid-ask spread between buyers and sellers has widened and the investment sales market has dramatically slowed. Amidst this challenging market, there's some real long-term silver linings taking shape for Cousins. First, our customers are returning in greater force. Within our portfolio, we have properties with a physical occupancy well above 70%, effectively pre-COVID levels. Remote work became widely accepted in an era of pandemic lockdowns and massive government stimulus. Understandably, many workers do not want to lose the convenience of a dining room commute. However, labor productivity has fallen to historic lows, attrition has increased, mentorship is down, and not surprising, cultures are fraying. Financially, profits are declining and many stock prices are back to 2019 levels or lower. Corporate leaders are now more clearly recognizing the shortcomings of a remote workforce. We anticipate more firm directives for teams to work physically together, at least most of the time. Second, the flight to quality continues. Since the onset of COVID-19, Properties built since 2010 have recorded 84 million square feet of positive net absorption nationally. During the same period, properties built in the 1980s recorded 89 million square feet of negative net absorption. This is a staggering bifurcation. Effectively, a growing percentage of leasing demand is now exclusively focused on trophy properties. The outperformance of these premier workplaces, which represent the top of the market, is becoming even more pronounced. At the same time, the obsolescence of commodity office is accelerating. At Cousins, we have a unique and compelling strategy. Build the preeminent Sunbelt REIT. We have been executing on our plan for over 10 years. Most recently, we completed a transformational merger with the purchase of Tier Reef in 2019. During 2020 and 2021, we accelerated our asset recycling. We sold 1.2 billion of less relevant properties and reinvested the proceeds into the development and acquisition of the rail yard in Charlotte, 300 Colorado in Domain 9 in Austin, Newhoff in Nashville, 725 Ponce in Atlanta, and Heights Union in Tampa. These are all highly differentiated properties in vibrant neighborhoods. Looking forward, market and financial conditions will likely become more challenging. However, we build 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 portfolio of premier workplaces in the best submarkets in Atlanta, Austin, Charlotte, Tampa, Phoenix, Dallas, and Nashville. With a third of our properties less than five years old or recently redeveloped, we believe that we will get more than our fair share of leasing demand as we benefit from both Sunbelt migration and the flight to quality trends. Encouragingly, Our existing customers are growing. Looking at our 2022 renewals through the third quarter, we've had more customers expand than contract. Importantly, our lease expiration through 2024 totaled just 12% of our annual contractual rent, among the lowest in the office sector, and this positioned us favorably to grow occupancy over time. Next, our $569 million development pipeline with the office component approximately 70 percent pre-leased, is appropriately sized and positioned for the current climate. We will benefit from incremental NOIs during 2023 and 2024 while we have only modest speculative risk. Today, we have approached 2022 with caution. Importantly, we have wisely prioritized our best-in-class balance sheet over new investments thus far. Our net debt to EBITDA at the end of the third quarter was 4.75 times. This compares to the Green Street sector average of 7.9 times. After quarter end, we closed a $400 million term loan and have locked rate on a $221 million mortgage at our Terminus property in Atlanta. Upon closing of the Terminus mortgage, we will have no significant loan maturities into 2024 and less than $100 million outstanding on our $1 billion revolving credit facility. 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 Workplaces will separate into its own asset class with improved sentiment. Cousins has uniquely strong positions. We are in the right sunbelt markets. We own a trophy portfolio. We have a fortress balance sheet. Importantly, we have significant liquidity and capacity to pursue new investments at a time when many of our competitors do not. Our talented and creative team will be ready. Before turning the call over to Richard, I want to thank all of our employees at Cousins who provide excellent service to our customers as well as their skill and talent to their jobs every day. Their dedication, resilience, and hard work will continue to propel us ahead. Thank you.