Q1 2022 Cousins Properties Inc Earnings Call
Good day and welcome to the cousins properties first quarter conference call.
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I would now like to turn the conference over to Pamela Ruppert General Counsel. Please go ahead.
Thank you good morning, and welcome to cousins properties first 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 granted Dana our Chief Financial Officer.
The press release and supplemental package were distributed yesterday afternoon.
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 measure 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 of our website hasn't 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 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.
Bold declaration regarding forward looking statements is available in the supplemental package that just yesterday and a detailed discussion of some potential risks is contained in our filings with the SEC with that I'll turn the call over to Alan.
Thank you Pam and good morning, everyone.
Before addressing the longer term outlook I want to provide a few financial highlights.
As we have discussed in the past 2022 is a transitional year for cousins and I'm pleased to report that we are off to a strong start.
On the earnings front the team delivered <unk> 67 per share in SFO.
In addition, we leased 324000 square feet with a 15% increase in second generation cash rents.
Turning to the outlook I will share a few facts.
The sunbelt represent only 26% of the National office inventory and yet accounted for 58% of new to market leasing in 2021.
Over the past few quarters.
Buildings built since 2015 accounted for 62 million square feet of National net absorption.
On the flip side buildings before built before 2000 accounted for negative net absorption of over 100 million square feet.
The Tech industry has added 372000 office using jobs nationally since February 2020, leading all other industry sectors.
Utilized top U S markets to watch in 2022, our Nashville, The research Triangle, Phoenix, Austin, Tampa, Charlotte, Dallas and Atlanta.
As you know cousins has invested in each of these cities.
Eight fires 2022, Investor Survey ranked Atlanta, and Austin as number one and number two respectively for top global global cities for investment to.
To emphasize this is not a U S ranking.
This is a global ranking by very sophisticated investors.
Collectively these two markets account for 68% of our portfolio NOI.
Why do I shared this data.
Does it highlights the trends driving the office market.
Office demand is migrating to the sunbelt in a significant way.
He is focused on the highest quality and most interesting products and is largely being driven by the tech sector.
These trends make logical sense.
Select cities in the Sunbelt have meaningfully urbanized over the last decade.
These markets now offer an exciting alternative to gateway cities at a much lower cost.
Not surprising employers are following the talent.
The COVID-19 work from home era has intensified the flight to quality.
Culture collaboration Mentorship relationships and trust all suffer in a permanent remote setting.
To attract their teams to come together in person more companies are shifting to exciting space and highly dynamic locations.
The goal is to offer a more attractive daily experience than the convenience of the dining room table.
Simply put a growing percentage of office users are focused on a narrowing percentage of high quality inventory.
Demand and rents are rising for the best properties in Midtown Atlanta, Buckhead Atlanta downtown Austin, the domain Tempe, the south end of Charlotte The Heights in Tampa to name just a few.
Conversely, commodity or suburban products dressed up with a pickle ball court just won't cut it with Amazon Google or Microsoft.
Cousins is poised to capitalize on these tail wins.
We have been proactively assembling our sunbelt trophy portfolio for over a decade.
In the last two years alone, we have sold $1 $2 billion of less relevant properties and reinvested the proceeds into the development and acquisition of 300, Colorado and domain nine and Austin.
New horse in Nashville seven.
725 pilots in Atlanta.
Hi, its union in Tampa, and a rail yard in Charlotte.
These are all highly differentiated and.
In a monetize properties.
Others are now recognizing the powerful Sunbelt trophy trends and trying to replicate our successful path.
However that is easier said than done.
And it will require lots of buys and sells and noise.
At cousins, the heavy lifting to position our portfolio for the future is largely behind us.
For this reason I have never been more excited about the power of our platform to drive earnings and increased shareholder value.
Let me share some specifics.
Our 19 million square foot portfolio is the highest quality and most differentiated office product in the sunbelt today.
It was approximately 87% occupied at quarter end due to recent known expirations.
Creating our largest organic growth opportunity in roughly 10 years.
And NOI growth has been derisked and it's not far away.
A highlight.
The portfolio is approximately 91% leased as a result of recent leasing wins.
In total we have executed over 1 million square feet of new and expansion leases that will commence in earnest at year end and into 2023.
In addition, our lease expirations through 2024, total just 17% which is among the lowest in the office sector.
Our current development pipeline totals $566 million and the office component is 69% leased.
And we have a strong pipeline of potential new investments, including the first phase of our domain central mixed use project, which.
Which is a transformational development opportunity in the heart of the domain.
There is nothing else like it in Austin, and we plan to start late this year.
Looking across our footprint. We are confident that we can continue to pare strategic acquisitions with attractive new developments to generate blended value add returns.
We are mindful of potential near term risks from inflation.
Rising interest rates and geopolitical tensions.
Notwithstanding we have a tremendous opportunity in front of us at cousins are.
Our unique and compelling strategy positions us at the intersection of powerful market trends.
Our customers have accelerated their return to office.
We own the Premier Sunbelt portfolio.
We have attractive organic and external growth opportunities.
And we have a best in class balance sheet and team to capitalize on the moment.
Before turning the call over to Richard I want to thank our entire cousins team who are the foundation of our success, providing excellent customer service skill and dedication to their jobs each day. Thank you.
Richard.
Thanks, Colin good morning, everyone.
Our operations team carried the positive operating momentum from the end of last year into 2022, and once again delivered great quarterly results as Colin referenced our first quarter performance demonstrates the strong and resilient demand for high quality office space and the best Sunbelt markets.
As you May recall on our February call I noted that omicron variant has muted office utilization in the preceding months.
I'm happy to say that we have seen a market improvement primarily since mid March a po.
A particular note is that larger corporate users, namely in the technology and financial services sectors kicked off previously announced returns to the office in that timeframe.
Whether a cousins customer or not this is positive on a number of levels.
While this activity started later in the quarter and did not have a meaningful impact on our first quarter results. It should bode well for the balance of the year.
Now onto our quarterly operating results are.
Our total office portfolio lease percentage and weighted average occupancy was 95% and 87, 4% respectively. Please note that our operating portfolio composition changed this quarter with the addition of 300, Colorado from our development pipeline and the removal of promenade central while it is in <unk>.
Redevelopment.
Those portfolio changes had a modestly negative impact on our leased status and occupancy regardless, our weighted average occupancy declined 160 basis points quarter over quarter.
In square footage terms nearly 75% of our occupancy decrease came from two vis expirations in Austin.
I'm pleased to say that both of those blocks of space are completely backfill with two great technology companies at a weighted average 21% higher cash net rent and both are expected to be in occupancy in the fourth quarter of this year.
As a reminder, we expect our reported occupancy to decline modestly next quarter, and then began to rebound as we move through the second half of the year.
As Colin touched on as of today, we have just over 1 million square feet of signed new and expansion leases and our existing portfolio that have not yet commenced to be clear. This does not include the signed 340000 square foot full building lease for our domain nine development in Austin.
These leases have a weighted average commencement date in late November 2022, and an average starting the implied gross rental rate of $47 and 78.
<unk> $8, 7% above our current in place gross rents.
With only 11, 3% of our annual contractual rent expiring through the end of 2023, we see this as a strong level of embedded occupancy and rental revenue growth in our portfolio as we move into 2023.
Our team also delivered solid leasing results in the first quarter, we executed 37 leases for a total of 324000 square feet, 20% higher compared to the first quarter of 2021 and with a weighted average term of over eight years.
This included 224000 square feet of new and expansion leases, representing 69% of our total leasing activity.
Rent growth in the quarter was fantastic as well with second generation net rents increasing 15, 4% on a cash basis.
Like in the fourth quarter of 2021, all of our core markets produced increases in cash rents this quarter.
Finally average net rent per square foot on all activity in the quarter was a strong $35 and 45 sets the second highest quarterly prep for that metric in our company's history.
While net rents were exceptional this quarter leasing concessions defined as the sum of free rent and tenant improvements were elevated at $8.70 per square foot per year.
This is about a dollar higher than what we posted in the last half of 2021.
There's no doubt that upward pressure in tenant improvements is a challenge and we expect this to continue however, I would note. The concessions this quarter were disproportionately affected by one new lease for first generation space at our 92% leased 100 mill development in Tempe. This week had higher cost.
On a per year basis, because it was only for a five year term shorter than normal for first generation space. Despite that we determined that it was a smart investment and the occupancy of a likely fast growing technology company.
But for this week's concessions in the first quarter would have been similar to levels seen in the last half of 2021.
Most importantly, though our average net effective rent in the quarter was a solid $23 and 74 sets generally in line with net effective rents in our operating portfolio activity during 2021 and pre pandemic.
Similar to utilization I noted in February that omicron variant led to logistical disruptions in the leasing process, primarily tours in late 2021 and into the new year.
Fortunately the disruption was short lived and activity has been robust sets.
Beyond our reported first quarter leasing activity here, some metrics that demonstrate the health of our leasing pipeline.
The total square feet of activity in our late stage pipeline is about 40% higher than this time last quarter.
The number of lease proposals outstanding at the end of the first quarter was 49% higher than at the end of the prior quarter.
There were also 25% more space tours in the first quarter compared to the prior quarter and 40% more compared to the first quarter of 2021.
These are encouraging trends.
Switching gears I think it is important to address what is arguably the most important trend in our business today, which is the flight to quality, but office users both market data and our specific experience showed that this trend is significant as.
As with most things, though there are nuances one important nuances that this trend does not only apply to new product, though that is an incredibly important part of it but it also applies to older product that is well located amenity rich and has been properly modernized.
A perfect case study is our recently completed redevelopment of Buckhead Plaza in Atlanta.
We started the project.
In late 2020 during Covid and have since completed 262000 square feet of leasing activity and we anticipate signing another 42000 square feet imminently. This activity will bring the project from 73% leased at its lowest point prior to the redevelopment to approximately 93.
Percent leased not to mentioned at record rental rates.
This was a fantastic success story for our team and our shareholders, especially in the midst of a pandemic.
Our experience with Buckhead Plaza also makes us that much more excited that a sizable portion of our remaining portfolio vacancy is located at promenade Central Promenade tower and $33 50 Peachtree in Atlanta. All of these properties are currently undergoing similar redevelopments that are scheduled scheduled for completion by the end of 2000.
'twenty two.
Looking ahead, we have optimism about the remainder of 2022 and beyond cousins has the only large scale high quality office portfolio located in the very best Sunbelt markets as our country continues to hopefully get back to a renewed sense of normalcy, we expect to see even more customers returning to the office and <unk>.
Another acceleration and the critically important flight to quality trend.
Before handing it off to Greg I want to thank the entire cousins team regardless of the functional area. They work in they demonstrate resilience hard work and dedication every day, we thank all of you for everything you do Greg.
Thanks, Richard and good morning, everyone.
I'll begin my remarks by providing a brief overview of our quarterly financial results, including some detail on our same property performance.
Our parking revenues our transaction activity.
And our development pipeline.
Followed by a quick discussion of our balance sheet.
Before closing my remarks with updated information on our outlook for the balance of 2022.
Overall as Colin stated upfront first quarter numbers were solid.
Notably the 15, 4% increase in second generation cash net rents.
Marked the 13th straight quarter. This metric has increased.
It's averaged almost 13% over that period.
We were even able to raise rents throughout the COVID-19 pandemic with positive second generation cash rent growth every single quarter since the beginning of 2020 as.
Average of 13, 5%.
Despite this strength, we still believe we can roll up rents in the coming quarters.
Focusing on same property performance cash net operating income increased 0.1% compared to last year driven.
Driven by <unk>, 8% increase in rents.
And a 2% increase in expenses.
These numbers include two properties here in Atlanta.
$33 50 and bucket.
And prominence Howard Midtown.
Richard just talked about the moments ago.
That have each had a large recent move outs and are undergoing significant redevelopment as we take advantage of the temporary vacancy to uptake both properties.
Despite this work, which many of you have seen in person. We've kept these buildings in our same property pool <unk>.
Excluding these two buildings same property cash NOI would have increased two 9% during the first quarter, a better reflection of the underlying fundamentals within our portfolio.
Also as Richard mentioned earlier, while physical occupancy at our properties has accelerated we did experience a pause during the first quarter driven by the most recent COVID-19 variant.
As a result parking revenues were essentially flat quarter over quarter.
For context parking revenues comprise five between five and 6% of our total property revenues and they remain about 20% below pre COVID-19 levels.
Subsequent to quarter end, we acquired our partners, 10% interest in the two Atlanta properties located here in Atlanta for a little over $43 million.
This price included the payment of a promote to our partners.
Who controls the development sites and it represented a negotiated value of $301 $5 million.
Our Unlevered return.
After payment of the promote was.
It was a very healthy 18, 4%.
When a terrific investment for our shareholders.
Before turning to our development activity I wanted to quickly highlight F. A D, which increased again this quarter.
I know, it's not followed as closely as FFL. However, it's nevertheless, a critical metric that we focus on here at cousins and I encourage you to focus on as you analyze us as well as other office companies.
We provide a detailed calculation not F N D on page 33 in our quarterly financial supplements.
Turning to our development efforts as Richard mentioned earlier, one asset 300, Colorado in Austin was moved off our development pipeline schedule during the first quarter.
The remaining development pipeline represents a total cousins investment of $566 million across one and a half million square feet in three assets.
Our remaining funding commitment for this pipeline is approximately $300 million, which is more than covered by our existing liquidity and future retained earnings.
Looking at our balance sheet.
Debt to unappreciated assets at very low 28%.
Fixed charge coverage was a healthy five six times.
Our debt maturity schedule as well later in our weighted average interest rate is.
Is three 2%.
Net debt to EBITDA at 528 times, while still very low relative to our office peers is up from last quarter driven by a decline in EBITDA.
Largely attributable to Norfolk Southern's move out from prominent central to the New headquarters building, we developed for them a few blocks away in Midtown Atlanta.
As well as Expedia as move out from domain two in Austin into their new space in our domain 11 property.
As a quick reminder, and as Richard covered earlier, we released 40% of the Norfolk Southern space at prominent central primarily to visa and 100% of Expedia space in domain two to Amazon.
Although it can be a little lumpy from quarter to quarter.
We've managed our balance sheet between four and a half and five times net debt to EBITDA since 2014.
And we expect it to return to that range by the end of the year.
I'll close by updating our 2022 earnings guidance. We currently anticipate full year 2022, <unk> between $2 70.
And $2 78 per share unchanged from our prior guidance.
This guidance continues to include the settlement of approximately $100 million forward equity contracts issued to fund our recent Heights Union property acquisition in Tampa on a leverage neutral basis. It also includes the Athlon transaction that I discussed earlier in the call. It does not include any speculative operating property acquisitions dispositions or new <unk>.
Development starts.
Our guidance includes the impact of rising short term and long term interest rates include the impact of operating expense pressure driven by macroeconomic factors as well as an increase in physical occupancy.
And it includes the impact of supply chain challenges on both our and our customers' construction activities.
Our customers in particular don't deal with architects and general contractors for a living like we do.
And are often experiencing frustrating delays in <unk>.
Completing their tenant improvements.
Which can delay our ability to recognize revenues.
As to earnings cadence as I said in our February call.
We expect <unk> to be a little bit lumpy, but generally increase as the year progresses.
The visa moving into prominent central and Amazon moving into domain to later in the year combined with steadily increasing parking revenues and the stabilization of two recently completed development properties 100, Melon Heights Union will.
We will drive earnings higher.
Through 2022.
With that let me turn the call back over to the operator.
Okay.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Anytime you question, that's been addressed and he would like to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Blaine Heck with Wells Fargo. Please go ahead.
Great. Thanks, Good morning, maybe for Colin or Richard is the cash rent spreads were very strong this quarter and higher than than in many of your recent quarters is there anything to kind of unpack around that number were there any specific markets that we're dominant in the leasing you did or anything particular about those leases or would you say that the results are.
Representative of the portfolio as a whole.
Yeah, Hey, Brian Good morning, This is Richard.
I'd say, one it's a balanced quarter for us.
In terms of leasing activity. So we saw good results in every market.
I said in my remarks every market had some level of roll up.
I'd say as usual Austin is certainly Purdue.
Producing higher cash rent roll ups than than most of our markets on average, but I'll tell Ya Atlanta is still very strong every market.
Has been very very encouraging and I think the only other thing I'd mentioned about this quarter's activities that Phoenix.
Kind of punched above its weight in terms of volume we had some really good activity in Phoenix relative to our portfolio size.
And had some very healthy roll ups there too.
Great. That's helpful and maybe just sticking with you Richard can you talk a little bit about the Atlanta market. It seems as though a midtown continues to see a lot of activity, but buckhead has been maybe a little bit slower to recover or is that a fair characterization characterization and do you think we're anywhere close to a point where buckhead.
It's to look more attractive from a rent perspective, and we could see some interest from the tenants that have been been growing in Midtown in the Buckhead market.
Sure.
Midtown no doubt has been a great sub market and kind of a leader in Atlanta and it continues to be very encouraged by the demand and activity that we're seeing there.
But but buckhead is as healthy too where we're still very very much fans of buckhead and and I think what you need to do.
Do is it like any some market frankly these days as we talk about flight to quality and the kind of products that that office users are looking for you have to drill down and look at the different quality and locations of assets I'd say.
It's not a coincidence I highlighted buckhead plaza in my remarks, we've seen incredible activity there both in terms of rent growth.
Our strongest rent growth frankly in our entire portfolio and in terms of total activity. So I think it's highly specific as to the products that you're you're leasing.
We're super encouraged about the progress we're making on our redevelopment project at $33 50, Peachtree is getting to a point where.
Prospects can really see what the end product is going to look like so.
So we feel good about about buckhead.
Great. That's helpful. And then just one more for me Colin you talked about strategic acquisitions as part of the plan going forward can you just give a little bit more color on what you guys are looking for whether it's tilted more towards core properties or something that has a bit of a value add component in and have you seen any effect on pricing.
As we've seen rates increase this year.
Well good morning, Blaine our.
And I think our acquisitions history has been focused on.
High quality assets that are strategic.
Strategic too.
Our portfolio as a whole and so when we see assets that.
They are in close proximity to other assets that we own and can create some some synergies there or add additional flexibility for our customer base.
Those are all.
In a very positive attributes, but we're looking at we're always looking to upgrade the quality of our portfolio. If we can find opportunities to really leverage our platform.
To create additional value.
Those are those are in focus for us and if you look over our track record you know some of those acquisitions have been highly value add others of those have looked more core like but again had been strategic to our portfolio within a given market.
And I think a competitive advantage for us here at cousins is we can also complement those acquisitions with a really strong.
<unk> platform and so on.
Collectively our acquisitions and development activities had blended some to some really attractive value add returns and at the same time. It has allowed us to upgrade the overall quality of the portfolio and build some some really attractive concentrations in the best Submarkets.
Very helpful. Thanks, everyone.
Our next question will come from Anthony Powell with Barclays. Please go ahead.
Hi, good morning, you've talked about the benefit of companies moving to sunbelt markets, but I'm curious about how some of your longer tenure tenants who've been there for a while or are behavior. When it comes to renewing or are you seeing any change in there.
They're a space utilization and their demand for space their square footage as they renew their leases and a more hybrid environment.
Good morning, Anthony.
I would say to date, we've seen kind of less of the change than one might think given a lot of the discussion about hybrid.
Workplace.
We've seen many customers within our portfolio expand we've seen a handful of companies contract as they oftentimes that contraction has been.
Probably more specific to there and underlying.
Our business outlook.
I think one thing, that's particularly differentiated in our urban and highly of monetized portfolio. As you mentioned hybrid I do think flexibility that won't be something that that is we will need to be offered by by companies, but in urban and highly a monetize setting.
Our underlying users by and large our knowledge workers.
That that are looking to come together again for the collaboration and the creativity and and I think in the urban context hybrid means the office.
And some.
Some flexibility I think in a more suburban commodity setting.
We're seeing customers make the eight and a more of a separate decision which is the.
The office or remote and so to date kind of in our portfolio. I think we have not seen kind of companies adopting a hybrid strategy, which is flexible and requiring folks to be in the office a majority of the time and much less of an impact on demand and perhaps youre seeing out and as I said more so.
Urban commodity product.
Okay. Thanks, and then maybe when it comes to acquisitions now.
Just talk about your markets or are you kind of happy with your current markets or would you like to expand to one or two thinking, particularly about south Florida.
Amy or for west palm or markets like that where you're seeing a lot more I guess.
Productivity recently.
Yes, we're always evaluating at cousins go to new markets and.
And new opportunities I think for us.
Any decision to expand into a market, we really look at it through a lens of.
Does it have.
Certain structural.
Advantages that create kind of macro tailwind for growth in recruiting.
New companies and talent and at the same time, we look for markets that has got enough size to you on that we feel confident that over time, we can.
We can create critical mass in that market. So that we can justify.
A team on the ground in that that local operating platform and that entrepreneurial approach has really been a differentiator for us so as we look across the <unk>.
The sunbelt footprint today I think we're really excited about all of the markets that we're in we just recently.
Entered the Nashville market last year, we're excited about that and over time, we'd like to continue to grow our presence in that particular market.
And and I'd say don't feel opportunity constrained across the markets that we're in today, whether it be Atlanta, Austin, Charlotte Tampa Dallas out in Phoenix. So again, we'll continue to look for opportunities, but we're happy with kind of where we are we're happy to have entered Nashville, and I don't see anything.
Two two broadly imminent as it as it relates to new markets.
Alright, thank you.
Our next question will come from Jamie Feldman with Bank of America. Please go ahead.
Great. Thank you and good morning.
I think in your initial comments, he talked about actually being able to push rents or rent growth in your markets.
Can you talk more about the kind of pricing power you do have I'm the leases youre signing or how much you think rents are actually increasing in some of your markets.
Yes, Jamie if you if you look back over kind of the last year.
We have been able to to drive topline.
Rental rate growth I'd say kind of in the mid single digits.
Percentage basis within our market.
And I do think that.
While we've been able to drive topline rental rate growth I think in some instances, we've been able to compress.
Free rent.
Which has helped US drive our overall net effective rents, but as Richard alluded to and we continue to see some pressure.
<unk> as construction costs have grown.
And so.
Our customers are looking for us to kind of share in those increases in costs, but we've been pleased within our portfolio and how we've been able to drive rental rate increases, but again as Richard said earlier.
Not all buildings, even in an urban context are created equal and as I mentioned, we are seeing a growing percentage of the demand focused on a narrowing percentage of the inventory even in places like Midtown Atlanta or here in buckhead or downtown Austin and so.
Those properties at the very top we're able to drive rental rate growth and those that are in the kind of the the commodity and lower Geo properties I think are continuing to suffer.
Okay. Thank you.
And then in Amazon's earnings last night, they talked about maybe getting more efficient with real estate.
Do you have you sensed any change from them I know you have.
Exposure than obviously in several markets.
Do you.
Have you heard anything about what this means for office.
Or any sense of a change in tone or behavior.
We really haven't seen any any change in tone or bad behavior.
From Amazon I'd say, our understanding of their comments is that was more direct did towards kind of industrial space, Yes, obviously theres been a pretty.
Pretty rapid growth in.
And online retail activity with Amazon and perhaps.
I think and perhaps over <unk>.
Extended as it relates to industrial.
Space that we have not seen that directed towards the office market.
Okay.
And then as you think about you also made the comment about you have done the heavy lifting to kind of prepare the portfolio. How should we think about what you still may want to sell.
Is that still a pretty big pipeline or youre kind of there in terms of getting rid of noncore.
Yeah, Jamie I think we have done a lot of the heavy lifting particularly over the last couple of years, but certainly over the.
The last decade, we've been kind of very carefully trying to cultivate curate this portfolio of Sunbelt Trophy prop.
Properties and as we sit here today.
We do believe that that's largely behind us if we were.
I'd say at this point, we don't feel any pressure to sell an asset that we don't think.
We will fit into our view of the future of office, but certainly as we see new investment opportunities compelling investment opportunities whether that be an acquisition.
Or development.
And the best source of capital as a disposition, we'll absolutely look at it.
<unk> and in recycling.
<unk> in that manner, but again I think we feel very pleased that our portfolio is in great shape and I would say certainly.
The assets for us that we look at I mean, we're less than 10% now of the portfolio of things that would probably qualify for essence is noncore.
Okay.
So if you're going to continue to recycle when you find opportunities does that suggest that.
You feel like the portfolio is at the maximum size or at the right size.
You wouldn't want to actually gross square footage.
No again I think it.
When we see and identify new compelling investment opportunities again, we're going to look for the.
The best source of capital I think where we sit today that would likely be.
And asset sale, we can also evaluated joint venture.
In the not too distant past the equity market and the stock price had been there to justify a growing the company and so again when we when we see those compelling investment opportunities. We will look at all of our different funding.
Sources of capital and try to make the best.
Capital decision that's going to.
Not only create shareholder value, but also balance our.
Our earnings trajectory as well.
How do you how would you gauge that.
Or God.
Characterize the appetite for JV partners.
Is there a decent bid right now.
Yes, absolutely.
I think for US again, we're in a great position with the balance sheet and the portfolio that we've got.
But we've certainly demonstrated in the past that there is a strategic and compelling reason.
Q2, two <unk>.
Venture of an asset or a development, we've been willing to do that in the past, but it's typically it's not been driven for us for a need for capital its been driven by compelling.
Reason.
Two strategically joint venture an asset.
Okay.
Sounds good thank you very much Greg.
Okay. Thank you Jamie.
Our next question will come from Vikram Malhotra with Mizuho. Please go ahead.
Thanks, so much for taking the question.
I guess just building upon some of the previous questions. You mentioned, obviously, you've done a lot of heavy lifting over the last few years and just recycling.
I guess lower quality may have put pressure on <unk>.
Same store or maybe it is its really total earnings given.
Given the process tends to be dilutive at least historically, so I'm wondering as you look forward longer term call. It three to five years, what is the sustainable sort of cash NOI and earnings growth, whether that's F or F N b in your mind.
Hey, Vikram good morning, it's Greg eczema.
I appreciate the question I think it's a great question, but we don't provide specific earnings guidance out beyond the current year, so I'm going to going to be a little reluctant to provide you guidance three to five years, but I think the macro message that the matic message from what common talked about and some of the Q&A earlier on was that the heavy lifting.
Is behind us and there's noise associated with that and some of the noise associated with that can be dilution in earnings. It doesn't typically affect the same property pool, because that just adjust to what's happening in the overall pool, but it can be dilutive to.
To earnings you typically sell higher cap rate properties and reinvest in either a development pipeline that takes a while.
Capture the higher going in cap rate or into acquisitions, which might come right out of the gate at a lower cap rate. So can it can be dilutive and like we've said a lot of that is behind us. The portfolio is in terrific shape. The number of noncore assets is very low and to the extent that asset sales remain the best source of capital for.
Vestment opportunities going forward now.
Now that we've got very few noncore assets, the cap rates and the assets, we sell will come down.
And that can be pretty powerful going forward. So so it has been a drag the combination of recycling the portfolio over the last few years as well as some kind of lumpy fees that we've had most prominently the Norfolk southern fee it really kind of.
<unk>, our true core earnings growth.
But the line of sight now to clean.
Accelerated earnings growth is much shorter and much clearer going forward and we're excited about that.
Okay. That's helpful and just to ask on the again related to earnings you mentioned D. I then I.
I guess maintenance capex, it will depend partly on cost of construction as well or inflation.
But we've seen obviously capex.
As a percent of NOI move up over the last call. It seven years I'm just wondering for the for your portfolio given the quality like what what should we expect as a good sort of run rate for <unk>.
Maintenance capex going forward.
Maybe a percent of NOI or a range is that something you could share.
Yes.
Not sure how you define maintenance Capex, we defined capex into kind of two buckets first Gen and second Gen.
So second generation Capex, which I believe is what you are talking about.
We measured in totality and for the last few quarters, it's been in the low 20 millions each quarter and we also measure it's not just an absolute basis, but as a percentage of total NOI and it's been running by and large in kind of the upper teens.
For the past many years, if you look at it.
Last year, it was 17% of total.
NOI for.
For the past five years its averaged 17, 5% total NOI. So it's been a pretty consistent metric.
Theres been talk I know a lot lately about an increased cost associated with making sure that your properties are attractive to customers we've done that for free.
For years now so so our our kind of run rate on what Youre, calling maintenance Capex, what we call second generation Capex has been pretty darn consistent and remains consistent.
Okay, Great and then just one more.
We've talked obviously a lot about the quality divide from lot of your peers in your markets in other markets. It just seems pretty consistent so I'm wondering if you can share.
Okay.
<unk> or anecdotes just to get a better sense of the pipeline and maybe the top two of your markets.
Of customers looking for new expansion space, maybe you can quantify it by industry or if theres specific names you can talk about in terms of just how big is the pipeline.
In this post COVID-19 environment over the near term.
Well, yes.
And again, Richard can touch on.
Current.
Pipeline.
The deals that are in advanced negotiations and I think there is certainly as strong as that.
That number has been since the start of Covid and in fact is really back to.
Pre pandemic levels.
And that's really coming broad based across all of our markets, but again in particular.
If you look at Atlanta, and Austin as an example, right you've seen over the course of the last two years in the middle of a pandemic major announcements from companies like Microsoft Amazon, Google Meta Oracle Tesla et cetera that you've kind of the list goes on and on.
But large national international growing companies that are choosing the sunbelt for for their their growth and their expansion. So.
It's pretty it's pretty exciting.
I am here in the Sunbelt and I, Thank all of our economics.
Development agencies across our footprint would share with you that their pipeline of activity in particular office using pipelines.
It's never been stronger.
Great. Thanks, so much.
Our next question will come from Michael Lewis with Truest. Please go ahead.
Thank you.
Greg I might've missed this but what was in the interest and other income this quarter that was about $2 $3 million.
Past quarters, that's been kind of a negligible mine item.
Yes.
The thing that moved that the most this quarter was a payment for was residual interest that we had in a joint venture that developed residential lots I mean, you may remember a longtime ago cousins was actually involved in residential lot development, a long time ago and.
Typically happened through joint ventures, and when we liquidated one of those joint ventures, we retained.
Residual interest and future lot sales.
And so that's a one timer.
The one timer.
And just to put a bow on this discussion our joint venture partner came back to US recently really out of the Blue and said Hey, you know you've got this residual interests.
Can we buy you out of it and so we sold them a residual interest and that's that's what's running through that line item.
Okay got it.
You know you guys gave some encouraging leasing numbers.
I agree with you on the flight to quality in the Sunbelt I think all that makes a lot of sense.
When I look at the portfolio the occupancy and leased percentage was down sequentially in Atlanta, Austin, Charlotte Phoenix, Houston pretty much everywhere with Dallas and Tampa when I looked year over year, you leased up Charlotte, but I think you're down.
Just about everywhere else.
There are small differences, but.
How should we think about that and.
Maybe what do you think about the occupancy or lease percentage you know, what's the assumption in guidance for the rest of the year do you expect that to improve.
So this is Richard I want to clarify one thing.
With how our occupancy as reported in this quarter I mentioned that we had some ins and outs in the portfolio one of which was the promenade central asset coming out, which is obviously, 100% leased and occupied went to zero as it's going into redevelopment.
That that's actually making the way we report our occupancy looked like it went down in Atlanta, where it actually modestly went up so a little bit of a weird nuance with how we calculate those those numbers relative to Atlanta.
Austin you already talked about the fact that those two leases that are already back filled and we'll re occupy in the back half of the year.
Are really driving that difference.
Or at least the majority of it and then as you said the others are really.
They are down but they are fairly negligible differences in more kind of typical movements that we see any given quarter.
Yes.
Macro level.
And Michael I would just share I think the decline in occupancy has been again, a large driver of it has been some very specific.
Civic known move outs.
And at the same time, we've been actively doing.
Covid repositioning a handful of <unk>.
Assets Buckhead Plaza is 112.
<unk> hundred Peachtree now promenade.
Central and $33 50 Peachtree here.
In Buckhead and so as we've been kind of going through that effort. We're obviously.
We think that were meaningfully upgrading the quality of the building and that the rents.
It should justify that investment so we've seen we've seen some move out of <unk>.
<unk> not willing to pay those rents, but we've had great leasing success behind it.
And have been moving rents up and creating a lot of value just creates a little bit of a timing issue.
Between signing of leases in occupancy and so again as we shared we've got over 1 million square feet of leases that are that have been signed and not yet commenced and that'll be towards the end of the year and into next year, but that really explains as you look at our statistics.
And over a 300 basis point delta between our percent occupied in our percent leased we hope that those those should converge here towards the end of the year.
Okay that makes sense.
I wanted to ask about the Avalon investment.
Earlier this month, so I use some of the numbers in your supplemental and I was coming out.
You know that you value that building out over 600 Bucks a square foot around might come about five cap something like that I don't know if those numbers are accurate, but maybe talk about that and kind of.
If they are accurate you know why that was unattractive.
You said some capital.
Well, Michael again, just to frame that project as a whole it's been it's been tremendously successful for cousins. It's just under 500000 square feet in two buildings and really what is probably the most dynamic kind of mixed use.
Projects kind of outside of the 285.
In town Atlanta, So it's been the project as a whole has been a homerun for us on the development side, we started both of those buildings on a.
Pretty speculative basis.
And as we as we came to an agreement with high is we obviously had some outside folks looking at value.
To determine what was a fair market price and from started that project today kind of a life of project return its.
Over 18% on an unlevered basis net of the promote so it's been it's been a huge homerun. We do think that there is further lift market rent grew.
Growth opportunity and as Avalon buildings, we already own 90% of it and so from our perspective that it made sense to consolidate the ownership in.
And those are 100%.
Okay. That's all for me thanks, guys.
Thank you Mike.
Again, if you have a question. Please press Star then one our next question will come from Daniel Ismail with Green Street Advisors. Please go ahead.
Great. Thank you.
A question on retention rates I'm curious, how you know now that we're post two years post COVID-19 .
Retention rates across the portfolio have trended and when you guys are.
Neither planning on making new acquisitions or planning out the rest of the year.
What do you think is a good number to.
To use is at historical for most companies to quality, we're generally around 50% to 60%, but I'm curious how that has trended over the past few years.
Yes, Danny.
I'd say, it's still kind of early.
To tell and.
We're just kind of an emerging from.
From the pandemic I think a lot of companies are still trying to figure out their exact strategy and I'd say our specific.
Against statistics, a lot of the expirations that we've had.
This year.
And last year.
Retention metrics are skewed by.
Several large known move outs that we're that we're moving to new construction, but as we look forward.
I think given the quality of the portfolio that we've got and the dynamic locations that they are in our view is that our portfolio.
Should should outperform the market as it relates to retention and occupancy and driving rental rates, but I'd say, it's still just a bit early too.
Find and ring fence exactly what to what.
Retention rate would be.
Got it and then.
I'm curious about life science across your markets you picked up a life science or a partial life science asset in Tampa.
Last year and over the past call. It two quarters, we've seen two of the largest owners in life science and through the Sun.
Sun belt, so I'm just curious.
Any new thoughts on that potential opportunity and how cognizant is evaluating it.
Yeah look at it historically life sciences, not been large part.
The market across the Sunbelt and we are starting to see that change and I think that's a positive.
For our overall markets and perhaps in time could create an opportunity for cousins, but if you look at downtown Austin and the addition of the Dell Medical School.
We're seeing some some activity here in Atlanta, and really a lot of that driven by.
Things happening at Georgia Tech and the CDC and so so there is more attention and focus.
To that end and so certainly that's something that that were we're educating ourselves getting up to speed and perhaps there could be.
<unk> for us to work with.
And really you know folks that have got long term life science experience, but perhaps need.
Once some of our kind of local expertise and relationships. So it's something that we're certainly studying and watching and but overall very encouraged that youre starting to see again, the same migration Yunnan and places in the northeast and the west coast across all sectors in all fronts really taking a hard look at what the sunbelt.
Has to offer today.
Got it thanks Tom.
Thank you Dan.
This.
A question and answer session I would like to turn the conference back over to Colin Connolly for any closing remarks.
I want to thank everybody for your time and today and interest in cousins properties were encourage where the company is and where we're headed and look forward to hopefully seeing many of you in person at NAREIT in June . Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.