Cousins Properties Incorporated

Good morning, and welcome to the Cousins Properties third quarter 2023 conference call. All participants will be in a listen-only mode, and 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 touchtone phone. To withdraw a question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Pamela Roper, General Counselor. 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 Azema, our Chief Financial Officer. The press release and supplemental package were distributed yesterday afternoon as well as furnished on Form 8K. In a 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 risks 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 strong third quarter at Cousins. On the earnings front, the team delivered $0.65 per share in FFO, and same property net operating income increased 4.6% on a cash basis. We leased 548,000 square feet during the quarter with a 9.8% cash rent roll-up. New and expansion leases totaled 189,000 square feet. In addition, we executed key renewals in Atlanta and Tampa. These are terrific results in any market. I will start with a few observations on the macro environment. To tame inflation, the Federal Reserve has rapidly raised interest rates more than 500 basis points over the past 18 months. The impacts of higher rates have been slow to materialize, but they are now upon us. The economy is slowing and financial conditions have tightened. Real estate debt and equity are less available and significantly more expensive. As a result, a meaningful bid-ask spread has emerged and the investment sales market has temporarily frozen, leading to few relevant data points for asset pricing. None of this should be a surprise. This is all typical behavior in a rate tightening cycle. The macro narrative for the office sector is likely to get worse before it gets better. Media will focus on rising vacancy rates and accelerating loan defaults. This reporting will not be wrong. However, it will be a significant overgeneralization. As I said last quarter, where and what you invest in matters. Over the last 12 years, Cousins has intentionally focused on investments in premier lifestyle office and mixed-use properties located in vibrant and well-amenitized Sunbelt neighborhoods. This is an entirely different strategy than commodity office in older downtowns in nondescript suburban locations. Despite the challenging macro environment, we are seeing some positive trends in our portfolio. I'll highlight a few. First, The return to work is gaining momentum. CEO sentiment around remote work has shifted. Company announcements mandating three, four, and in some cases five days a week of in-person work are accelerating and finally require compliance. In-person activity has increased within our portfolio and we are seeing patterns begin to normalize in many properties. As it turns out, lifestyle office properties are full of professionals whose lifestyle is centered around working in the office, at least most of the time. Collaboration, mentoring, and serendipity are key to advancing their careers. Come visit one of our properties and you'll see a very different story than the next headline with Castle Data, which as an aside, is proving to not be representative of Trophy Properties. Second, the flight to quality is becoming more pronounced. Newer vintage product is commanding most of the demand. Over the last 12 months, according to JLL, office properties built since 2010 have accounted for 114 million square feet of positive net absorption. Properties built before 2010 account for 346 million square feet of negative net absorption. This statistic clearly captures the story. Third, the flight to capital is increasingly more important. Historically, landlords evaluated the credit of prospective customers. Today it goes both ways. Prospective customers and their brokers are now evaluating the credit of their landlords. Sponsorship is more important than ever. Not surprising, owners like Cousins with sound capital structures are growing market share. Fourth, there is little to no capital availability for older vintage, lower quality office properties or for speculative new development. So what are the implications for the office sector? There is a bifurcation in the market. It is not a one-size-fits-all answer. Many traditional offices are emptying and will stagnate until they are repurposed or torn down. At the same time, lifestyle office is filling up and will thrive over the long term. As I have mentioned previously, the office is not dead. Obsolete office is dead. Said another way, the office market is not oversupplied. Commodity office is under demolished. The market and the media continue to under appreciate this. There is opportunity for investors who do. What does this mean for Cousins? Early green shoots are taking shape for our Sunbelt Trophy portfolio. Our customers are returning in greater force. Accelerated obsolescence is reducing competition. The development pipeline is shrinking and demand remains firmly focused on the best lifestyle properties in the best submarkets. While it will take time, the market has begun the rebalancing process. Longer term, the office sector is likely to reshape. Financial constraints are already creating pressure on many real estate platforms. Thus, market players are likely to change. In addition, we believe that investors and the media will increasingly differentiate lifestyle office from commodity office. the fundamentals are just too different to be aggregated together. And if capital remains constrained, private market pricing will need to converge with public market valuations to find liquidity. Similar public-private pricing resets have occurred in past cycles. Such a scenario would create a unique opportunity for a well-capitalized public REIT like Cousins. In closing, We are realistic about the potential negative impacts of higher interest rates on the economy and our earnings. However, we built Cousins to thrive during all phases of the economic cycle. And today, we are in an advantageous position relative to many of our other office peers. We are in the right Sunbelt 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 we have a well-covered dividend. I believe that we have unique optionality at Cousins and will see compelling opportunities across our Sunbelt footprint. However, the downward repricing of assets in the private market is still playing out. Thus, we will remain patient, disciplined, and continue to prioritize driving cash flow and maintaining a strong balance sheet. We are watching closely, though, and we will be ready. Before turning the call over to Richard, I want to thank our entire team at Cousins who provide excellent service to our customers. Their dedication, resilience, and hard work continue to propel us forward. Thank you. Richard?