Q3 2020 Cousins Properties Inc Earnings Call
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Please note. This event is being recorded I would now like to turn the conference over to Pam Roper General Counsel. Please go ahead.
Good morning, and welcome to cousins properties third quarter earnings Conference call with me today are Collin Connolly, our president and Chief Executive Officer, Richard [laughter], Our executive Vice President of operations and Greg Yeah, Our Chief Financial Officer.
It's really a 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 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 SBC information links on the Investor Relations page of our website cousin Dot 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 variety of risks uncertainties and other factors, including the risk factors set forth in our annual report on form 10-K, and our other SEC filings.
Ticket, where there are significant risks and uncertainties related to the scope severity and duration of the Cabot Nike Inc. and data along with the direct and indirect impacts at the pandemic and related mitigation effort, including governmental requirements and private sector responses may have on our financial condition and operating results and those of our customers. The company does not undertake.
Any duty to update any forward looking statement, 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 discussions of potential risks, including those those back up in 19 is contained in our filings with the FCC with that I'll turn the call over to college.
Thank you Pam and good morning, everyone.
At cousins, we firmly believe in our dedicated employees provide excellent service for our customers Our company will drive strong results for our shareholders.
We have stayed true to this guiding principle, even under the toughest circumstances.
Over the past three quarters I have been so proud that we have easily navigated a challenging coded environment.
While providing our customers with the excellent service they expect from US every day and caring for the cheap.
But before discussing our long term outlook I want to quickly highlight our third quarter results.
We reported FFO of 69 cents per share.
We collected 98% of total revenue, including 99% from office customers.
We leased 255000 square feet with a weighted average lease term of over six years.
We increased second generation cash rents by 9%.
The office component of our 1.9 million square foot development pipeline is 82% leased.
And lastly, we closed the quarter with net debt to EBITDA.
4.24 times and more than 1 billion of liquidity.
In a normalized environment these would be solid results.
In a global pandemic.
These are terrific results and reinforced the quality of our markets our portfolio and our customers.
Well, new leasing was slower during the quarter due to a summer spike in the sunbelt coded cases.
Since labor day, we have seen an encouraging uptick in leasing tours and discussions across our portfolio.
In addition, economic development agencies in Atlanta, Austin, Charlotte, Dallas, Phoenix, and Tampa are all active with potential prospects looking to redistribute employees out of the northeast Midwest.
In California.
While the duration of COVID-19 is likely to impact the office market into 2021.
The combination of both in market and out of market activity gives us optimism for sunbelt outperformance in the quarters to come.
I'll now turn to the trends shaping the office business.
In doing so I believe it is critical to separate short term trends and long term trends.
As I mentioned last quarter.
Many are continuing to speculate about the implications of work from home on the office sector.
At cousins, we have a unique vantage point on this topic as we have spent considerable time discussing the future of the office with our customers.
Interestingly the headlines which.
Which are often driven by companies, whose businesses benefit from a virtual world are disconnected from what we hear on the ground in the sunbelt from users of Trophy office space.
Let me share some of the feedback from our customers.
First.
They are not working at home by choice.
As out of necessity due to a global pandemic.
Corporate leaders are increasingly worried about the erosion of corporate culture.
Productivity employee loyalty and wellbeing over an extended period of remote work.
Second.
When it is safe our customers are generally eager and enthusiastic to return to the office.
Flexibility is likely to grow.
The collaboration and Mentorship drive long term corporate success and are done best in person.
Thus far working from home has proved serviceable due to near Universal adoption of remote working in cities largely remaining in lockdown.
Pandemics do end, however, and we believe this trend will likely prove to be temporary.
If you want to a glimpse into the future of office utilization in the United States market.
Looked a leading international cities in Asia that had more effectively contained the virus and have largely returned to in person work.
At cousins, we're constantly evaluating where the market is headed.
Again, we look to our customers for feedback on how their office needs are changing.
Let me share their perspective on the long term trends that we believe will drive the office sector.
First corporate migration to the sunbelt in search of a business friendly climate lower taxes, lower cost of living and most importantly, a strong and diverse talent pool.
Second a flight to quality with a greater focus on newer more amenitized and more experience actual properties.
Third a decrease in office density to address health concerns and employee does that dissatisfaction with overly dense open floor plans.
If these trends sound familiar they are made.
Many years ago, we crafted our strategic plan to position cousins at the intersection of these trends.
We prioritize the trophy sunbelt portfolio.
Complemented by a best in class balance sheet, and leading local operating platforms.
We have made great progress on our strategic priorities, 100% of our properties are already located in the sunbelt, 100% or glass today and our portfolio is among the newest vintage in the office sector with an average building age of 2002.
While we do not anticipate a new paradigm post code that we.
We do believe these long term trends will accelerate.
And as our customers move faster it is critical that we appropriately adapt our investment strategy to meet their changing office needs.
As we identify attractive opportunities, we plan to recycle older vintage more capital intensive assets.
Enter newer more amenitized and less capital intensive properties in the best locations.
Fortunately, we have a platform that allows us to both by existing assets that are consistent with the office of the future.
And to develop a state of the art properties for growing customers on our attractive land sites.
We won't always be able to time, our buys and sells concurrently.
But to be sure. If you see us by were sell you can expect the other will likely follow.
Our financial strength affords us the flexibility to manage timing differences, while maintaining a conservative financial profile.
In short, we can keep the balance sheet strong and powder dry for larger strategic opportunities.
Overtime, we are confident that we can enhance our already unmatched trophy portfolio reduce second generation capex and generate attractive investment returns.
Our sunbelt markets are a clear tailwind.
Our trophy assets fortress balance sheet and creative team are differentiators.
We will stay focused and disciplined on our compelling strategic plan.
Before turning the call over to Richard I want to thank the talented cousins team, which continues to work diligently each day and all of our markets.
I appreciate your dedication customer service ethic, and hard work I'm proud to be part of cousins Richard.
Thanks, Tom and good morning, everyone.
Following up on Collyns remarks, I'm happy to report that was continued hard work from our team and a best in class Sunbelt portfolio, we were able to deliver solid third quarter operating results, but before I move into operating results I want to update you on general business conditions relative to the pandemic first.
First an update on physical occupancy where utilization of our 19.4 million square foot portfolio by our customers as you will recall from the first phase of the pandemic through the summer utilization of our properties was consistently well below 10%.
Since labor day, However, we have seen a steady increase with utilization currently at an average of 20% across the company.
I would also note that some properties are operating a utilization of 50% or more.
The recent utilization trend is decidedly positive, but our sense is that utilization will not move materially higher from here until sometime in 2021.
Once again I'm pleased to report that rent collections remain solid.
We collected 98.2% of rent from all customers and 98.7% of rent from office customers in the third quarter.
100% of our top 20 customers paid rent this quarter.
Additionally September was our strongest collections month since the pandemic began in October it currently stands at 98% collected.
As in prior quarters. These numbers reflect the impact of rent deferral agreements completed to date.
With regard to rent deferral activity in short, there's very little happening at this time.
As a reminder, the total cash rent deferred in the second quarter was $7.5 million or 1.1% of annualized contractual gross rents.
And the third quarter, we added 0.1% to this total such that total cash referred is now 1.2% annualized contractual gross rents.
As of today, what little deferral and restructuring activity that is going on is with retail and flexible office customers.
Both of these customer segments represent a very small portion of our annual rental revenue.
Now on to operating results.
Our total portfolio ended the third quarter at 91.9%, we used with our same property portfolio at a solid 93.6% waste. In addition, total portfolio and same property portfolio weighted average occupancy increased to 90.6% and 91.9% respectively.
In place gross rents also increased again to a record $39.72 per square foot.
We view these as fantastic headline portfolio statistics, especially in the current environment.
As expected.
Dan Dimicco impacted our leasing volume in the third quarter. It all we signed 255000 square feet of leases about half of our three your quarterly run rate. However activity was only down 16% sequentially showing the decline has slowed.
Given the clear drop and new leasing demand, 23% of leases signed in the third quarter were new and expansion leases. This compares to a year to date level of 49% and a three year run rate of 58%.
Despite lower volume and the unusual lease mix the quality of our leasing activity held up very well.
Average lease term was a healthy 6.1 years and lease concessions defined as free rent and tenant improvements were only $2.80 per square foot per year materially lower than our rolling eight quarter average of $5.11.
One item of note is that almost a quarter of our leasing activity took place in our noncore markets of Fort worth and Houston.
Almost all of which was one long term renewal of a 49000 square foot customer of Burnett Plaza.
This was a great renewal for the property and for cousins, however, rental rates in fort worth or low relative to our other markets. As a result, our average net effective rent in the third quarter came in lower at $21.46 excluding activity in our non core markets. Our average net effective rent was at higher.
$23.13 much more in step with our rolling eight quarter average of $23.72.
I'm also pleased to report that rent growth remains exceptionally strong with second generation net rents increasing 8.9% on a cash basis again, excluding our non core markets second generation net rents increased 15.8% on a cash basis, there's a strong rent growth either way you slice it.
Given the unique time, wherein I also want to address our leasing pipeline.
Looking forward the size of our late stage pipeline is screening quite a bit better than this time last quarter at about 60% larger.
While not back to pre pandemic levels. This stage of our pipeline is certainly signaling an encouraging trend.
We also feel good about the vast majority of our late stage pipeline converting to signed leases over the next couple of quarters.
Our late stage pipeline is also revealing a rebound in new and expansion we see.
Currently representing 47% of total activity again, our three year run rate on this metric is less than 10 percentage points higher.
Last but not least cash net rent growth in the late stage pipeline is consistent with the solid growth we've posted in our recent signs of activity.
In terms of earlier stage activity, we have seen clear improvement that initial inquiries and tours in the past month or so.
As an illustration one of our third party leasing partners noted and then update last week that quote medium sized touring activity has definitely picked up due in part to travel restrictions being lifted and people being able to fly into town for tours. This.
This holds true in all of our core markets.
We're also seeing a pick up in large and new to market surgeons as of today, we are actively tracking or responding to one or more large user requirements, whether new to market or not in every one of our core markets are market leaders are also consistently hearing from economic development groups that their teams are as busy today is there.
Ever been.
These are encouraging signs that we're not in play just a couple of months ago.
Please keep in mind, though that this kind of early stage activity does take time to evolve and even more so during the pandemic.
Beyond demand all eyes are clearly trained on sublease availability and rightly so.
Like many we flagged this trend last quarter and similar to last quarter. We remain most focused on sub we supply in the CBD of Austin.
Which costar puts at 6.4% of class a inventory at the end of the third quarter.
We believe much of this new availability was space previously earmarked to accommodate robust hiring and that companies are now attempting to adjust for lower growth.
More broadly and not just as it relates to Austin Theres also some market speculation about how much of this new subway supply represents tenets fishing for an easy or short term income when but were not necessarily highly motivated to transact.
Only time in an eventual recovery will tell on that front.
In general we still view the amount of sublease space in our other target submarkets across the sunbelt as notice, we elevated but manageable overtime.
As we look forward cousins is incredibly well positioned with a truly phenomenal team an unequaled Trophy office portfolio with only 16.6% of contractual rents expiring in 2021, and 2022 and a fantastic sunbelt footprint that should prove to be a great tailwind as we navigate.
Date and emerge from this pandemic with that I'll hand, the call over to Greg.
Thanks, Richard Good morning, everyone.
I'll begin my remarks by providing a brief overview of our quarterly financial results and activities, including some detail on our same property performance, our receivables data and our development pipeline.
Followed by a quick discussion of our balance sheet dividend for closing my remarks with updated information on our outlook for the remainder of 2020.
All things considered third quarter numbers were solid new held up relatively well since the onset of pandemic drill little perspective third quarter FFO was down about 4% from last year.
Year to date same property cash NOI remains positive at 2.1%.
And we've continued to roll up rents on a cash basis over 15% during the first nine months of 2020.
Based on our recent share price performance you might have led been led to think that sunbelt fundamentals have deteriorated.
Much more severely than they actually have.
Turning to our same property performance cash net operating income during the third quarter declined 3% compared to last year.
Which was consistent with my comments on last quarter's earnings call. This was driven by a 4.1% decline in revenues and a 5.8% decline in expenses.
The largest item driving our same property performance remains the fiscal occupancy within our buildings.
As Richard discussed earlier, while still well below pre coping levels physical occupancy did improve during the third quarter and our parking income followed suit.
After declining 30% during the second quarter parking income fell 18.4% this quarter compared to last still not great but.
But improving.
Excluding payment deferrals and parking income same property cash NOI increased 0.3% during third quarter.
Before moving onto our development pipeline I wanted to touch on customer receivables during the third quarter Africa was reduced by approximately $475000 due to a combination of rent write offs and an increase in our allowance for uncollectible rents.
This number is consistent with the same items from the first and second quarters of this year and is not materially higher than our historic run rate.
And as a quick reminder, these numbers are tied to specific customers and leases no general COVID-19 reserve has been taken.
Turning to our development efforts current pipeline represents a total cousins investment of $566 million in six assets.
The first of these assets began generating net operating income last quarter and all six will fully stabilize over the next 10 quarters at which point, we anticipate they will generate approximately $53 million in annualized GAAP NOI.
On the transaction front, we closed one acquisition during third quarter. The purchase of a 1.7 acre land parcel adjacent to our existing domain properties in Austin through a 90 10 joint venture for $11 million.
While a relatively small transaction.
This is a very strategic site that builds upon our already significant inventory of land and domain that to drive future growth in Austin for years.
Looking at potential future transactions.
Although we havent received formal notice yet we believe dimensional fund advisors will likely exercise their option to purchase our interest in the regional headquarters building in Charlotte during the first half of 2021.
As a quick reminder, we developed this property in a 50 50 joint venture with DSC, who.
Who occupies 100% of the office space.
The basic terms of district venture are outlined in our financial supplement as are all the terms of our joint ventures over.
Overall, the joint venture with DNA is highly structured very similar to the range that we've had with them. When we developed their corporate headquarters building in Austin several years ago.
As part of the agreement they have the option to buy us out two years after completion.
And the purchase price is not directly tied to current market value.
It is calculated based on a spread against the going in yield on our original cash investment, which was $46 million in only covered.
Yes building costs Difei paid for all tenant improvements.
And per GAAP DNA based costs are being amortized through revenues over the term of the lease.
Bottom line, we developed dimensional place to an eight in the quarter yield.
And we will likely sell it to DFS rate at a six and a half yield were 175 basis points spread.
If this sale occurs it will be terrific for our shareholders.
Turning to the balance sheet, we entered this period of volatility with outstanding financial strength, among the very best among among our office peers.
Not only do we have low leverage at 4.24 times net debt to EBITDA, our liquidity position of over $1 billion of the ended the quarter is more than enough to fund the remaining $136 million necessary to complete our development pipeline.
Our dividend also remains well covered and very safe support.
Supported by a low 65% and baby payout ratio.
Looking forward, our 2020 outlook remains in line with the information we gave in our previous two earnings calls importantly, these assumptions addressing the metrics. Both you and we currently most focused on spec.
Spec leasing rent.
Rent deferrals parking income.
Remained within the ranges we previously provided.
At the corporate level, we continue to take a hard look at our general and administrative expenses.
Prior to covert our DNA load was already exceptionally low and we've taken steps to reduce it even further.
Our current 2020 forecast assumes corporate Gina expenses net of capitalized salaries of between 25, and a half and 27 and a half million dollars.
This is down one and a half million dollars from the range, we provided last quarter and is down $7.5 million or 22% from the original range. We provided at the beginning of 2020.
On both an absolute basis.
And as a percentage of enterprise value.
This range represents exceptionally low cost to our shareholders.
And is among the very best within the office sector.
With that let me turn the call back over to the operator for your questions.
We will now begin the question and answer session.
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This time, we will oppose pause momentarily to assemble our roster.
The first question comes from Blaine Heck of Wells Fargo. Please go ahead.
Great. Thanks, good morning.
Can you guys just discuss the interests and the bank of America space and Charlotte I think you guys had around 40000 square feet come.
Come out this quarter and another 200000 or so at the end of the year I guess based on any interest.
Have there do you have any sense of how long should we expect the backfill to take in and maybe how many tenants do you envision taking that space.
Sure Boyd good morning. This is this is Richard.
I'll start off with with this one.
Veeva, we've had we've had decent interest as the activity on our pipeline has picked up we have also seen some.
Some activity pick up there so.
We did sign one deal for partial floor.
It'd be they plaza in the third quarter.
Which was encouraging and say we have one full floor candidate in the pipeline right now.
The looks encouraging we've had tours for as much as a five for candidate recently, so I think the mix there ultimately as we as we lease that vacancy up is going to be pretty broad based.
I think I think we should overtime find that won't be able to find a larger user at least one and then we'll probably multi tenant.
So number floors. So so at this point, it's early we do but you're right. We got 47000 square feet back.
This past quarter, and we'll get the bulk or the balance of the.
The give back at the end of this year.
And we look forward to leasing it up over the next.
Year, maybe maybe a little more.
Subject to the pandemic, Okay, right now I mean I.
I'd just add its collyn that and again as we look at that and as you look at the Charlotte market. I think we are we're very encouraged that instruments.
Instruments some of the other.
Ultimately relocation opportunities out of the northeast into a market like Charlotte and DNA its position as one of the kind of unique large blocks of space that could accommodate.
User looking to move into the market.
Yeah. That's helpful. Thanks, guys.
And then the second question you know with that with the news that parsley energy is going to be acquired by pioneer have you guys had any recent discussion with them, partly about about their space needs and maybe any interest in subletting any additional space.
So let blaine its Collin and first I just start off by saying personally has been a just a terrific relationship in partner.
For for cousins and they certainly.
It should be proud of the execution.
They had at partially in the value that they've delivered for shareholders and we've got great relationships with their team. There we have been in contact with them. It's obviously very preliminary in their in their merger process.
With pioneer I think that being said I think the partially team will be strong advocates for keeping some presence in the Austin market given their success of recruiting engineering talent into into that market, but that I think time will tell on that it is interesting is that announcement has been made we have.
Receive some reverse inquiries is is to will there be opportunity to take some of that space, whether sublease or direct but again, that's all very preliminary but but again I think encouraging right as we think about build to suit set.
At cousins. We are we are always focused on high quality assets in great locations that will have interest.
And usability for many.
Many tenants Multitenant and and I think we feel we feel really good about our hand.
At that particular project.
Okay. That's good to hear lastly.
You guys have a very strong balance sheet, you guys have leveraged below that of peers.
Can you talk about the investment sales market, what you're seeing there.
And whether you guys are actively out there kind of looking for acquisitions and if so what types of assets around the market are you seeing only core buildings or is there value add and which way would you guys look for.
Blayne, Great Great question, and as you mentioned, we've put our balance sheet.
Together and created one that's both strong and has liquidity for unique.
Environments and opportunities in the market and I think clearly, we're likely to see opportunities coming out of there.
The current disruption in the market that being said, we are starting to see some assets come out into the market and im confidence in the investment sales market in particularly in the its kind of best urban Submarkets.
Submarkets of the South Sunbelt and I think we're going to see a diverse set of opportunities I think you will see some traditional kind of cousins value add acquisition opportunities I think we'll also see some opportunities to perhaps take advantage of some situations to acquire tenet, what I characterize this core but.
Strategic existing buildings that that we could perhaps care with some adjacent land and the combination to create really attractive value add type returns and I think as we get later into 2021.
We are already having some discussions with folks kind of 22 starts 23 starts or excuse me occupancy that are interested in new development and particular companies that are looking to relocate wanting to create and control their own environment. So so even if.
Office market conditions.
Do deteriorate further we do think there'll be continued interest in some some new development as the market in the world opens back up to get broad set of opportunities and we've got to get the balance sheet to take advantage of those.
Great. Thank you guys.
Again, if you have a question. Please press Star then one the next question comes from Dave Rodgers with Baird. Please go ahead.
Yes, good morning, everybody, maybe Richard the follow up on blamed comment would be evade maybe talk about the other two big spaces, you have Norfolk, southern an anthem and I mean do you really look at those as more of an opportunity because you have those larger blocks of space and.
I guess with tenants may be wanting to spread out a little bit more are you getting more or less interest in those spaces as people think about those coming available.
Yes.
That's a good question and I think there's it's a little early to tell at this point whether people are going to be explicit.
Explicit we asking for more space.
We think thats, that's where it's probably headed from a d. densification standpoint, but but again I'd say that the activity on the spaces that we have in Atlanta, both at 1200 Peachtree.
And at 33 50 Peach tree. The interest is is fairly similar to what it has been and.
It was I would say that there are multiple groups that have been through the buildings recently and and.
And we feel good about the activity given where we are and the overall macro environment yes.
Yeah, and I'd just add again both of those buildings are.
Great great locations and good amenities that had capital reinvested into those and so and in markets that don't have a lot of speculative space underway and so we do feel.
Optimistic again as the World begins to open up and we start to see more leasing activity that that we can continue to kind of take advantage of opportunities. We certainly like our basis in both of those buildings.
Yes, certainly bank of America, and the the anthem lease here in Atlanta, both of those leases are well below market.
With going to the expiring rents in the in the mid teens on a triple net basis. So so we feel like we've got the opportunity again to to drive value.
Grow grow grow the rents even in even in a in a softer market. So we're encouraged.
Okay that makes sense and I guess, maybe lastly, just in terms of the prospect list you talked about an even dovetailing into to Gregs parking comment.
I guess I think what you were saying is that all of that getting that right prospect list is better at the end of the third quarter than the second quarter.
And that parking was better in the third quarter than the second quarter, but but I wanted to verify that it wasn't just getting worse at a lower rate.
One and then two maybe Richard are you able to put some numbers around that to kind of put that in perspective of.
Square foot or square foot numbers relative to where the where you were a year ago or where you traditionally be at this point.
Well I'll kind of start at a high level is and maybe.
To follow up with in terms of some of the specifics that you are looking for but but I again I would characterize right. We want to be clear, we're certainly not at kind of pre pandemics levels, but at the same time we.
We are seeing improvement and that's that's not just kind of a deceleration.
The negative it's actually increase in.
Our our deal pipeline are.
Our existing leasing pipeline as well as again the parking numbers in the third quarter were sequentially higher than the second quarter again, driven by a slight uptick in the utilization and we think that uptick will continue although as Richard indicated I don't think we will see.
A material change in utilization until we get into next year and again I think until you see some of the hopefully near term announcements as it relates to breakthroughs on the therapeutic and vaccine upfront.
In terms of specific David again, if you could clarify perhaps.
Maybe some of the metrics you were you were looking for.
I think from a high level of you captured what I was looking for I guess, maybe the one metric if Richard has any any numbers to put around kind of the leasing pipeline.
From an absolute perspective, and how you guys think about that even at a high level at the corporate level versus last year at this time versus Twoq you. When you report. It if you have any of that and if not we can follow up offline.
Yes so.
And we'll just numbers again its the pipeline at this time last quarter relative to the pipeline today is 60% higher so it's it's roughly say rough math 120 550000 feet higher.
This time last quarter.
And.
Metrics I would say, there's without putting numbers around it I'd say to the metrics are much more consistent within our late stage pipeline.
We have the best villas visibility into that.
With activity prior to the pandemic, it's not quite there there are still some some differences, but its normalizing and on its way to normalizing.
I don't know if that helps answer the question.
Yeah that does that's what I was looking for so thank you all right.
That'll take again, a few more quarters for those are asked to kind of fully fully normalize, but again I think the uptick.
Has been encouraging and again, it's been it's been we're seeing in all of our different markets in the Sun belt.
And there's again some some end market activity in some out of market activity and so again, what we can continue to watch the virus and how that interplays, but.
But it seems to be trending in a positive direction.
Very helpful. Thank you yep.
This concludes our question and answer session I would like to turn the conference back over to Colin Connolly for any closing remarks.
Well again I want to thank you all for joining our third quarter conference call. This morning and.
And I will look forward to hopefully seeing many of you.
And they read and again, we appreciate your continued interest in cousins properties.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.