Q2 2022 Cousins Properties Inc Earnings Call
Good morning, and welcome to the cousins properties second quarter Conference call.
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I would now like to turn the conference over to Pamela Roper General Counsel. Please go ahead.
Thank you good morning, and welcome to cousins properties second quarter earnings Conference call with me today are Colin Connolly, our President and Chief Executive Officer, Richard Hickson.
Decorative vice president of operations, and Greg <unk>, our Chief Financial Officer.
As it relates to the supplemental package were distributed yesterday afternoon, as well as furnished on form 8-K.
Elemental 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 do.
Did not receive a copy these documents are available through the quarterly disclosures and supplemental SEC information on the Investor Relations page of our web site Hudson 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.
Company does not undertake any duty to update any forward looking statements, whether as a result of new information future events or otherwise.
Declaration regarding forward looking statements is available in the supplemental package posted yesterday and a detailed discussion of potential risks is contained in our filings with the SEC with that I'll turn the call over to Colin Connolly.
Thank you Pam and good morning, everyone.
Before providing some observations on the macro environment and trends I wanted to provide a quick overview of our second quarter financial highlights on.
On the earnings front the team delivered 70 cents per share in F. F. L. <unk>.
Importantly, we leased 588000 square feet during the quarter with an 11, 6% cash rent roll up.
These are strong results and we remain encouraged by the leasing pipeline in front of us.
Looking at the macro environment I'll highlight three important trends.
First as we all know unprecedented fiscal and monetary stimulus supply chain disruptions from COVID-19 or in Europe, and an extraordinarily tight labor market have created inflation levels not seen in decades.
Accordingly, the federal reserve has begun tightening financial conditions there.
The result is higher interest rates and a slowing economy.
Not surprisingly many companies are announcing plans to slow hiring and in some cases layoffs.
Second.
The return to office, particularly Premier office.
Continues and is likely to accelerate.
Ceos are growing frustrated with remote work.
Sure camaraderie.
<unk> are deteriorating.
Financial results in stock prices have weakened and attrition is at record levels.
At the same time younger workers and recent college graduates are increasingly looking for an in person experience.
Want to build relationships they want to be trained and they want to be mentored they are the future and their employers are listening.
Encouragement to return to the office is growing from the tops of organizations to the bottom and now from both sides as the job market softens.
Let me paraphrase a recent statement from shopify as they laid off approximately 1000 employees.
We placed a bet that the channel mix the share of dollars that traveled through e-commerce, rather than physical retail would permanently leap ahead by five or even 10 years.
It is now clear that that didn't pay off.
What we see now is the mix reverting.
So roughly where pre COVID-19 data would have suggested it should be at this point.
I see parallels in this statement to the current narrative regarding the office market.
Many have made similar new normal declarations regarding regarding remote work.
Will they be right or wrong.
Will the office market also eventually revert to the mean.
Well I can't speak for commodity or suburban office.
We believe that Premier office will remain critical for innovative companies to build culture collaborate solve problems and grow talent.
Lastly, the flight to quality is becoming even more pronounced.
Trophy assets continued to experience greater resiliency and outperformed the broader market.
To illustrate net.
Net absorption since 2020 for buildings built since 2015 is positive 181 million square feet.
On the contrary net absorption since 2020 for buildings built prior to 2015 is negative 327 million square feet.
That is a staggering difference the market is speaking loudly.
So what does this all mean for cousins and our strategy.
Market and financial conditions will likely become more challenging we are not immune to the impact of rising interest rates or a weakening economy how.
However, we built cousins to thrive during all phases of the economic cycle.
We are exceptionally well positioned today, let me highlight why.
First we own the leading Sun Belt Trophy office portfolio in the best Submarkets of Atlanta, Austin, Charlotte, Tampa, Phoenix, Dallas and Nashville.
We believe that we will continue to get more than our fair share of leasing demand as we benefit from both sunbelt migration and the flight to quality.
Second our $566 million development pipeline.
With our share of the office component approximately 70% pre lease is.
Is appropriately positioned for the current climate.
We will benefit from meaningful incremental NOI during 2023 and 2024.
While only having a modest amount of speculative leasing risk.
Yes.
The known move outs by Norfolk, Southern at Promenade and anthem at $33 50, Peachtree are behind us.
While the recession, if it were to happen could extend the timeline to complete the re leasing of these attractive properties. Our overall portfolio is on solid footing.
Our lease expirations through 2024 total just 14, 3% among the lowest in the office sector.
Lastly, our balance sheet as best in class.
Our net debt to EBITDA at the end of the second quarter was four nine times.
This compares to the office sector average of approximately seven three times.
We have evaluated many deals over the course of 2022.
In anticipation of a changing market.
We have remained disciplined and kept our powder dry <unk>.
Notwithstanding the potential accretion to short term earnings.
Many recently announced deals in our markets, which were priced in the spring.
And I've had cash cap rates in the high 4% ish range on our underwriting.
Hey, just a few months later the pricing looks much more attractive we.
We believe compelling opportunities are on the way and we will be ready.
At cousins, we have a unique and compelling strategy.
The preeminent Sun Belt Office company.
The key ingredients of this strategy include.
A pure play portfolio of premier highly and monetize properties and dynamic sunbelt markets.
A leading development platform that creates value through the development of innovative office residential and mixed use properties.
A strong balance sheet with low leverage and ample liquidity and.
And local operating teams with a creative and entrepreneurial approach.
We have been executing this strategy for over a decade, and we remain committed to it.
Looking forward.
We will continue to prioritize selling less relevant properties, which at this point is a modest percentage of our portfolio and.
And reinvest the capital into strategic acquisitions unique developments and our own stock if that is the most compelling us to accomplish our long term goals.
In the near term the bar for new development will be higher.
While demand is quite strong for new products.
Material Escalations and construction cost has compressed development yields so they look less attractive today compared to acquisition cap rates and the implied yield on our own stock.
We expect construction costs will moderate so we will be back in the development game soon enough with some exciting projects as development yields rebalance.
In closing, we are mindful of the potential impact of higher interest rates and a slowing economy on short term results. However over the long term, we are optimistic that premier office will separate into its own asset class with improved investor sentiment.
Cousins is in a very strong position we are in the right sum right Sunbelt markets.
We own a trophy portfolio we have.
Have a dedicated and talented team.
Our balance sheet is prime for opportunities.
Before turning the call over to Richard I want to thank our entire cousins team, who provide excellent service to our customers as well as their skill and talent to their jobs every day.
Their creativity resilience and hard work will continue to propel US ahead Richard.
Thanks, Colin and good morning.
Despite the current macroeconomic backdrop, our operations team was able to once again produce solid quarterly results in particular, our leasing activity. This quarter is a clear indication that the quality of our portfolio is resonating well with office users in our sunbelt markets.
Diving right into results, our total office portfolio leased percentage and weighted average occupancy, we're 91% and 87, 5% respectively.
Our weighted average occupancy was virtually unchanged quarter over quarter, increasing 10 basis points.
We also saw physical utilization move incrementally higher during the quarter.
With regard to leasing the quarter was outstanding we executed 52 leases for a total of 588000 square feet with a weighted average term of seven nine years, our volume in square foot terms was up 82% over the first quarter and up 12% relative to our run rate and two.
'twenty one.
Besides <unk> count this quarter is especially notable and represents our highest quarterly transaction count ever tied with the third quarter of 2016.
New and expansion leases, representing 45% of total leasing activity this quarter and our activity was diverse in terms of industry mix with traditional professional services, leading the way only 18% of our activity. This quarter was with customers in the technology sector.
Rent growth in the quarter was strong with second generation net rents, increasing 11, 6% on a cash basis.
Our portfolio is in place gross rents also increased yet again to $44 40.
In addition to strong rent growth leasing concessions defined as the sum of free rent and tenant improvements were $6 32 per square foot per year more than $2 lower than what we posted last quarter and 60 cents lower than in 2021.
Despite lower concessions or net effective rents came in modestly lower compared to last quarter at $23 37.
More in line with levels seen in the first half of 2021 <unk>.
This decrease relative to recent quarters was primarily due to our geographic we seen mix.
Going forward I'm also pleased to say that we continue to have a healthy weight stage lease pipeline that to date has shown no signs of disruption, it's well balanced among our markets and is anchored by a diverse group of traditional professional services companies.
With oil prices remaining at an elevated level, we are seeing interesting activity interesting market activity in Houston.
A quick reminder, that our 835000 square foot Brier Lake project in Houston remains a noncore holdings.
While lease economics in Houston going forward will almost certainly not screen well relative to our stronger core markets new activity in Houston will be a welcome net positive to our holding there and to our overall portfolio.
Despite our strong recent activity and healthy pipeline, we are closely monitoring macroeconomic conditions and acknowledged that any further deterioration would almost certainly have some negative impact on leasing activity in the back half of this year we.
We simply are not seeing that in our portfolio yet.
As Colin highlighted in his remarks, we do continue to see the impact of the flight to quality trend, there's probably no better market to look for an example of this trend and Tampa. According to J O. L research. The overall market has posted negative net absorption of 532000 square feet year to date.
However, the class a segment and the highest quality CBD and west shore Submarkets, where our properties are located has.
Posted positive net absorption of 278000 square feet.
Our same property portfolio in Tampa is currently 92, 5% leased and our lease pipeline is filled nicely during the past quarter.
The migration and flight to quality trends are also clear in Atlanta, where we completed an impressive 323000 square feet of leasing this quarter, including over 48000 square feet of new and expansion leases at promenade central in Midtown with a blended cash rent roll up of 38%.
According to J O L. Atlanta's office market leasing activity has surpassed the 2016 to 19 three year average leasing activity in three of the last four quarters and the first part of 'twenty two great companies like visa Walmart Mackenzie Nike have all committed to creating new hubs in Atlanta.
Broader rent growth has also resumed in Atlanta after remaining relatively stable since 2020 with eight out of Atlanta is 10 sub markets showing average asking rents above pre pandemic peaks.
Austin has also benefited greatly from these trends.
Austin led the nation in return to office occupancy levels. This quarter. According to castle systems data as the market continued to realize net occupancy gains with over 472000 square feet of positive absorption.
Average rental rates in Austin were at a record high last quarter. According to CBRE and they remained at those levels. This quarter like Atlanta, our Austin leasing activity was strong this quarter, including a 94000 square foot early renewal and expansion of cadence design systems at our research Park Plaza property in the northwest sub.
Market.
This was a fantastic transaction that rolled up rents and stabilize that property's rent role for many years to come.
There's no doubt that rising interest rates and high inflation could put pressure on the economy and health of the office market.
Nevertheless, we believe leading companies will continue to seek out high quality office space in our core markets over the long term.
It also bears repeating what Colin said earlier, we're credibly encouraged that only 14, 3% of our annual contractual rent expires through the end of 2020 for the larger explorations of the past couple of years are behind us and we are in an enviable position of stability.
As economic headwinds threatened before.
Before handing off to Greg I want to thank the entire cousins team as always your hard work is the foundation of our success Greg.
Thanks, Richard and good morning, everyone.
I'll begin my remarks by providing some detail on our same property performance in our parking revenues.
I'll move on to our transaction activity or capital markets activity and our development pipeline.
All led 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 second quarter numbers were solid despite the economic volatility and uncertainty.
Focusing on same property performance cash net operating income decreased zero, 2% compared to last year.
Driven by a one 6% decrease in revenues and a four 1% decrease in expenses.
These numbers include two properties here in Atlanta.
$33 50, Peachtree in Buckhead and prominent tower in Midtown.
That have each had large recent move outs.
And are undergoing significant redevelopment as we take advantage of the temporary vacancy to update both properties.
Despite this work we've kept these buildings and our same property pool.
Excluding these two buildings same property cash NOI would have increased one 9% during the second quarter, a better reflection of the current underlying fundamentals within our portfolio.
For the first six months of 2022 same property cash NOI, including $33 50, Peachtree Promenade tower is flat compared to last year.
We expect this to improve over the final six months of 'twenty to Andy.
We anticipate positive same property cash NOI growth for the full year.
A large driver of this improvement is Amazon's lease commencement on July one.
For our entire domain two property as a quick reminder, this building has been empty and generating no revenues since the beginning of 2022 as Expedia moved out to consolidate their operations at our newly developed domain 11 building.
Prior to this move out we signed a lease with Amazon that rolled up the rent and extended the term from Expedia as prior lease.
Never we've had six months of downtime as the transition to Amazon takes place.
As Richard mentioned earlier physical occupancy at our properties has increased and our parking revenues have grown along with it they're up 9% compared to the first quarter.
For context parking revenues comprised about 6% of our total property revenues.
And despite the recent improvement they remain about 11% below a stabilized run rate.
Turning to transaction activity early in the second quarter, we acquired our partners, 10% interest in the two Avalon properties. We developed that are located here in Atlanta for $43 $4 million.
This price included the payment of a promote to our partner who control the development sites originally and represented a negotiated value of.
$301 5 million.
Later in the quarter, one of our joint ventures with Hines sold its interest in a parcel of land located in the victory Submarket of Uptown Dallas for $23 1 million.
This was a terrific piece of land and a Dallas sub market, we had identified for growth.
We bought it early and we bought it well however, since our purchase dislocation has emerged as more of a residential and retail area rather than office and the highest and best use of the site is now high rise multifamily.
We initiated a sales process and we generated a great outcome our share of the gain from the sale was $4 $5 million.
On the capital markets front, we closed on a new unsecured credit facility during the first week of May.
Maximum capacity remains $1 billion.
With improved pricing and similar financial covenants.
A five year commitment and the new maturity date is April 32027.
So really terrific execution at this point in time.
Near the end of the quarter, we settled two 6 million shares of our common stock sold on a forward basis during the third and fourth quarters of 'twenty one at a gross price of $39 32 per share. It's another terrific execution for our shareholders. The proceeds of this issuance funded our prior acquisition of <unk> unit in Tampa on <unk>.
Average neutral basis.
Turning to our development efforts all three projects 100 mill in Phoenix domain, nine and Austin and new often Nashville.
Remain on budget, a remaining funding commitment for this pipeline is approximately $240 million.
<unk> has more than covered by our construction financing.
Our existing liquidity and future retained earnings.
We entered this period of uncertainty with a relatively small highly derisked development pipeline.
Looking at our balance sheet, we purposefully reduced leverage during the second quarter as Colin stated earlier net debt to EBITDA is now just four nine times are.
Our financial position is rock solid as we navigate these challenging economic times.
I'll close by updating our 2022 earnings guidance.
We currently anticipate full year 'twenty to <unk> between $2 67.
$2 73 per share with a midpoint of $2 70.
This is down four pennies of one 5%.
The prior midpoint of $2 74 per share.
This four send adjustment is driven by a negative variance of eight pennies due to higher interest rates, partially offset by three pennies from the victory land I discussed earlier as well as one penny of improved property NOI.
Focusing on interest rates, we use the forward LIBOR and sofa curves to forecast short term rates and the forward 10 year Treasury curve plus credit spreads to forecast long term rates.
As I stated on our first quarter conference call. The guidance, we provided at that time already reflected increases in rates that had taken place earlier in the year.
Since March both short and long term actual and forecast rates have moved even higher.
For example, the forward the forward curve for.
For 30 day LIBOR at year end 'twenty, two as moved from one 5% to.
The three 5% an increase of 200 basis points.
Coupon in fixed rate 10 year issuance has moved from the high threes.
The low to mid fives and increase of about 175 basis points.
Applying these increases generates about $12 million more in interest expense.
During 2022 or eight pennies per share.
Beyond 'twenty two I'd encourage you to look at the forward curves and credit spreads as you update your 2023 earnings models for us.
Turning to property NOI were currently anticipating about one cent per share are improvements over our prior 'twenty two guidance.
This is primarily driven by higher parking revenues.
And lower property operating expenses.
With that I'll turn the call back over to the operator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question will come from Anthony Powell with Barclays. Please go ahead.
Hi, good morning, Thanks for taking the question.
Jay you mentioned that you had a pretty diverse set of no tenants leasing this quarter I wanted to focus a bit more on tech.
Are you hearing from you or from your current I guess, yeah, and you're a tech company than pipeline how are they reacting to the current environment and kind of given a lot of incremental demand.
Markets was driven by Tech what do you think the sort of incremental incremental demand will be in your markets going forward.
Good morning, Thanks for the question.
You know again, 18% of our activity this quarter was Tac and a large piece of that was the renewal and expansion that I called out.
Austin with cadence design systems.
And really you look at it our first quarter activity.
<unk> was very small piece of our activity that you have to really look back to 2021 to see significant levels of tech demand in our in our completed activity.
It's very clear everybody is reading the headlines and is hearing what the big Tech contingent is doing right now. So I think the demand is certainly not showing up in 'twenty two like it was in 'twenty one for us but at the same time, a super encouraged by the fact that that we completed close.
600000 square feet of activity this quarter with very little.
Of that from the tech sector. So I think what we'll continue to see based on our completed activity in our pipeline that I look at today that we will continue to have strength in the professional services sector.
The good old fashion legal accounting consulting and other miscellaneous business services companies that the demand is encouraging in that area.
And then I'd just add that as you look at our markets like Atlanta, Austin, and Charlotte again very dynamic cities.
With.
Very diverse economies and while tech has been a large driver of growth over the last couple of years as Richard mentioned.
A lot of the traditional users of office space again, the accounting firms financial firms professional services really have not leased a lot of space over the last couple of years and are now returning to the office.
In greater numbers and so I do believe there is some kind of pent up demand.
In other sectors of the economy.
Got it thanks, and given your comments on development can you update us on domain central it seems like youre being a bit more cautious view on development. So is that still.
Potentially when we started it later this year.
Yeah look as I mentioned were the bar for new development is higher and.
As costs have gone up those development yields relative to our other alternatives have become less attractive.
It includes.
The main point.
In that commentary and I think over time, we need to see costs come down <unk> rents go up to for us to financially justify moving forward I'm actually optimistic that that's going to happen and faster than many believe and again the flight to quality in.
In the demand for new product I do think there is an opportunity even if the world becomes more recessionary GTC that rebalance again, the flight to quality being so pronounced but.
But I think it will need a little bit of time for <unk>.
For that to get to levels that.
That are attractive.
Alright, thank you.
Our next question will come from Blaine Heck with Wells Fargo. Please go ahead.
Great. Thanks, Good morning, So calling your comments suggest that you guys are delevering and building up dry powder for investment opportunities that you expect to emerge.
Can you just provide a little bit more color on what you guys are looking for and how you think the current stress on the market is going to play out and maybe.
Maybe where the best opportunities are likely to emerge.
Yes, great question and again the balance sheet now stands at about 4.9 times debt to EBITDA, So that does give us pretty substantial.
Capacity to take advantage of opportunities that we see in.
From our perspective from spring to hear here later in the summer.
Do think that as that has become less available and at the same time has repriced there could be interesting opportunities to acquire the high quality assets in our targeted submarkets at hopefully advantageous pricing and said I think we will be continuing to be on the hunt in.
Look out for those opportunities, which.
Which will likely come.
Kind of related to that.
You guys you guys have two multifamily properties in the portfolio are both currently at JV recently, and we've seen a number of your peers diversify away from office into other property types, including multifamily is that something you guys would ever consider in the future, taking non multifamily exposure or exposure to any other property.
Got it.
Yes, Brian Great question, and as you pointed out we do have quite a bit of experience in the residential sector in a mixed use context.
We are as I mentioned committed too.
Premier office, and think that that will differentiate itself over time.
But as we continue to see opportunities in our.
Urban Submarkets oftentimes, there's those opportunities are a mixed use.
Both office and residential and so we've executed on this in the past and I'm confident we'll execute on some of those going forward and we've got a terrific land bank today that would support.
Projects of that type added domain central that will be in office and residential project. We've got two sites in Charlotte that can accommodate both office and residential.
Dallas Midtown Atlanta, So we've got a great land bank.
The mixed use land and when those opportunities arise we will no doubt take advantage of them.
Great. That's helpful last one for me.
Around the decision to sell the victory land in Dallas that a mutual decision with you and your partner I think it was heinz or or was it driven more by the partner in the JV and then just wanted to get your thoughts on the Dallas market as a whole.
And kind of your level of commitment to that market given that you only have two operating assets at the moment and any thoughts on future development. There. If you are still committed to Dallas.
Yes, we're still committed to Dallas and it's it's a it's a large vibrant market in the sunbelt and we.
We remain focused and disciplined on finding the right opportunities for us in Dallas.
It relates to the transaction at <unk>.
Victory as Greg pointed out we came to the conclusion that the highest and best use of that site was what was multifamily and it was a joint collaborative decision and discussion with Hines to ultimately became.
The was the buyer with a capital partner as they do have a high rise residential platform.
I think for US is as I pointed out earlier, we're absolutely open and willing to invest.
In multifamily development, but I think it will tend to be in conjunction with our larger mixed use sites. So we felt at that time it was appropriate.
Heinz had interest to move forward with the multifamily at an attractive price and so we felt like the right decision for us was to exit at attractive pricing.
Makes sense thanks Colin.
Thank you Blayne.
Our next question will come from Jamie Feldman with Bank of America. Please go ahead.
Great. Thank you. Good morning. So I was just hoping you can maybe get more color on just your floating rate debt philosophy or strategy can you just break out.
Hey, do you plan to take that number down in the future.
To avoid these kind of moves in <unk>.
And earnings from rates and secondly, if you were to break out your debt.
Balanced by kind of like.
Development.
<unk> redevelopments in process versus kind of.
Just longer term balance sheet debt, how does how do you think about that.
Sure Good morning, Jamie It's Greg.
So currently we've got about 30% floating rate debt as a percentage of total debt on our balance sheet and this is a little higher than it normally is typically if you look over the last decade, we've maintained it closer to 20% of total debt and this was a purposeful decision that we made to provide us with some optionality.
Alrighty.
As you know and as I stated earlier in the call. We've got about $300 million of debt that matures at the end of this year and the beginning of 2023.
And one of the options on the table to refinance that debt was for us to do an inaugural unsecured bond deal.
And to do it right you need more than probably $300 million and so we built up some balance on our credit facility over the last couple of quarters. So that we'd have a use of the full proceeds if we decided to go down that route but clearly the macro economics have gotten in the way of that and we're not probably not going to do in <unk>.
The secured bond deal. So we'll do something else in there is liquidity in the market for other types of debt.
Bank term loans.
Insurance private placements.
And we will get that refinanced in the next quarter or two and in the process, we will lower our floating rate debt down closer to where it historically.
Okay, and what's that level.
Right right right around 20% if you go back and look at our balance sheet over the last decade, it's been very close to about 20% pretty much every quarter.
Okay.
And then.
Can you talk more about the guidance raise from asset sales like you think numbers and they have to come down if you get anything done that youre thinking about.
Okay.
Well Jamie.
The.
Certainly as we sit today I would say theres a lot less liquidity in the investment sales market and over time that that could certainly change and if that does change and we see opportunity to sell.
We consider to be less relevant.
Not core to us and we will take advantage of those opportunities My hope would be again the balance sheet is very strong. My hope is if we were executing such a sale that we have an attractive use of those.
Proceeds again, we can't always time everything perfect the ins and the outs, but.
But I think.
Philosophically we're focused on.
Trying to trying to match match up.
Sources and uses as best we can.
Yeah, Jamie I think it's important to know changing we don't need to sell anything at this point that would be a choice to sell.
We talked about with sub five net debt to EBITDA the balance sheets in terrific shape.
Okay.
And we do think as I said, I think interesting acquisitions out opportunities theyre going to come along.
And there is also a new there's also.
In alternatives today, we could look at or we can look at our own stock.
If we felt like we had a source of capital from a from a noncore sale.
Alright that makes sense and then finally your comment on pausing on new development until.
You see better economic conditions I mean, what are you watching for given it's kind of a two year lead time to from start to finish on an office project.
Okay.
Yeah look at it.
What we're looking for our development yields that are that are attractive relative to our other alternatives I think as we sit here point in time today I want to be very clear that.
There is good solid.
Leasing demand for for new development.
But at the same time.
We don't want to lock ourselves into escalated construction costs, and therefore compressed yields and just build a building to get it out of the ground, we want to build the building to get out of ground and make our make an.
An attractive return and so I do think it is going to rebalance.
We believe over the second half of the year, absolutely going to moderate and I think youll see.
Some customers push higher on rents to get into new product and so that will rebalance and when it does at cousins, we got a great land bank and our hope will be that we're first out of the ground.
Okay, great. Thank you.
Thanks, Jamie.
Our next question will come from Dave Rodgers with Baird. Please go ahead.
Yes, good morning, maybe Colin and Richard to both of you but.
You guys, usually build toward informed demand down in Austin, and so you're obviously, a little bit more cautious there, but you talked earlier about record number of leases good volume really encouraged by the leasing pipeline yet the tone does come across as much more cautious.
Obviously, there's a lot of uncertainty, but I guess the question directly is are you guys seeing stuff from your tenants that makes you that's much more cautious.
Tone coming across that I feel like as much more cautious view can you point to things that you're more worried about that youre seeing directly versus just maybe the macroeconomic view.
Yeah again, our caution around development has not informed by leasing or demand. It is it is informed by construction cost debt over really the last quarter or two from our perspective has had.
Materially escalated beyond.
We just thought a few quarters ago. So any cautiousness is really us being disciplined allocators of capital and looking at what those development yields have compressed to with higher cost.
And believing that there could be other opportunities, but as I mentioned those costs will moderate.
We believe over the second half of this year and into next year, and then perhaps those development yields become more attractive, but but the last thing we want to do is lock ourselves into a G. Max at a price.
That debt.
And of course that don't offer an attractive overall financial return, but that's going to change.
And we will be ready to go.
And then maybe just purely on the leasing side I don't know are there any details you can share.
That make you cautious there in terms of maybe length of time to close the deal tour activity anything along those lines that that makes you more cautious if we separate out the development component.
Yeah look at it is we're not seeing anything.
Certainly on the ground within our existing leasing pipeline.
At the moment or any feedback from any of our customers. It's obviously the summer.
Our activity typically slows a bit in the summer, but there we're seeing positive signs again from some broader parts of the economy that had perhaps been on hold over the last couple of years I would say our tone is should be interpreted as very constructive on the market today, but.
Also realistic.
As you read kind of headlines.
The GDP numbers that if the market were to change we want to make sure we positioned ourselves well.
As I always say at cousins.
We are we.
We are positioned to thrive during all phases of the economic cycle, but no I mean, nothing that has shown up today.
But we do read the same papers that you do every day and so we're watching that broader headline and macroeconomic data.
Great maybe last question, just maybe more specifically on the anthem and Peachtree tower.
Backlog of activity to kind of backfill that space the timing any any expectation on downtime before you're able to kind of finish up the leasing at those.
We've got activity on.
Those properties again both.
CIT effectively on top of Marta stations and their respective Submarkets, one right here in Buckhead and the other down in Midtown I think importantly, we are finishing up.
And to the renovation of the ground floor in outdoor and in many amenities space.
Both of those projects and they are just kind of taking shape.
And.
So we believe our.
Our lease ups should begin to accelerate now that we can bring customers into the project and making experience firsthand as opposed to can have renderings and drawings that we've been showing them during the first half of the year.
Alright, Thanks Colin.
Yes, Thank you <expletive>.
Our next question will come from Vikram Malhotra with Mizuho. Please go ahead.
Thanks for taking the question.
Maybe just first one you're talking about development deals and you're pausing and waiting to see where things shake out can you. Maybe also talk about just where values are.
Trade, you've seen and what that spread may look like between sort of the trophy asset that you've called out questions. The average product.
In your market.
Well again as it relates to development.
And again, we remain constructive on demand, but cautious on pricing and again waiting for those two hopefully quickly.
Our rebalance.
As it relates to pricing again, there has not been yet a lot of price discovery kind of on the other side.
A material change in the rate environment that really occurred.
Or I should say stay the debt capital markets for real estate of June .
So you haven't seen really any completed trade trades, yet I do think as it relates to the kind of discussion as some deals that are out there today.
We're seeing people talk about a 10% change.
Asset values and could be higher.
For more value add type product, but again the market is still finding its.
It's pricing level.
Okay.
And then just your.
Comments on just the tech slowdown and now.
Are you seeing an uptick or maybe more.
Words financials.
Professional services.
What does that mean for if you could maybe just some of your top markets what does that mean for.
Market rent growth and incentives and can you translate that into for cousins, specifically, how should we think about the mark to market NPI trajectory over the next 12 months.
This is Richard.
I think that.
From a mark to market and Ti perspective, and concessions perspective, I'm not sure I see.
That anything is really going to change with the rotation from technology to more traditional customers I think the demand levels again like we talked about earlier are still there.
That would be the primary driver of of general lease economics, So I'm not sure I see a real big sea change or a change in the and the economics that we're going to be able to accomplish in our markets.
Or just I meant like softening in demand how does that translate into both of those metrics at the market level versus.
It doesn't specifically.
Okay.
Well Vikram, it's Colin and I would just add again, we haven't really yet seen kind of that softening.
Again, if the broader economy over the latter half of the year and next year does.
Certainly that would have an impact I don't want to speculate today.
On.
What that would look like because we don't know the extent of the softening, but as Richard said the pipeline today looks pretty solid and we haven't seen it.
A material change in in rents or in concessions.
Okay. Thanks, and then just last question.
You mentioned look at the look at the forward curve.
In terms of thinking about interest rate impacts to 2023.
Would it be fair to say the magnitude you've adjusted the Guy just from.
From the rate impact eight cents I think you mentioned, if we were to annualize that would that be a reasonable way to think about how much 23 numbers to come down by just isolating for in prior calls that class.
Vikram, it's Greg.
Terrific question. So the eight penny adjustment, we made for 'twenty two was clearly not a full year annualized number.
If you were looking at 'twenty three you would use a full year annualized number however.
Current forward LIBOR curve is assuming that short term rates peak kind of in the first second quarter of 'twenty three and then come downward. So the increase over the last three months to short term rates in 22 of the 200 basis points. I mentioned earlier is much lower in 'twenty, three it's probably closer to 100 basis points.
It's a smaller adjustment upward from what we previously had in but applied to.
Longer time period.
Got it that's helpful. Thanks, so much.
Yes.
Our next question will come from Daniel Ismail with Green Street. Please go ahead.
Great. Thank you.
And then maybe digging into the construction of your comment a bit more the land.
You guys sold in Dallas, what that pretty healthy pricing.
Are you seeing any softening on the land side it will be.
Equation when it comes to development.
I wouldn't say, we have not seen.
A change yet in land pricing it tends to sometimes be a little bit sticky.
I would say we have seen over the last quarter more land become available.
So we are starting to look at some of those opportunities, but that we have not seen a change in that pricing I would expect.
Likely there to be some change in the price but.
But I would say, we've seen more of it but not yet at different prices.
Got it and then you mentioned the ability to be opportunistic, giving given a potential backup in pricing in your balance sheet.
Curious on the <unk>.
Central opportunity.
All are evaluating are those mostly coming up as a function of higher rates or.
Is there any okay got it.
It could be kind of issues.
Potential acquisition opportunities you guys are evaluating.
I wouldn't say that any of Ben.
Tenant driven.
<unk> seen some instances where.
For whatever reason.
Different funds.
Perhaps have queues and are trying to find liquidity and with less debt available.
There are smaller buyer pools, and so I think that could create some interesting opportunities for us given we could be a cash buyer and I think we will.
We will continue to focus our efforts on opportunities that.
Trophy quality Premier office that we think over the long term will generate outsized demand and so I think that will be our focus on that quality and properties.
And I do think there'll be some opportunities and then hopefully at some point down the road the development market will rebalance and we will pivot to development opportunities like we have in the past and so we continue to be kind of agnostic.
Agnostic.
Allocators of capital and willing to pivot between acquisitions and development and again focus on whichever provides the most compelling return.
And then just last one for me I have Dr. Weinstein from the last call, but now there is.
Confirmation that the largest life science owner in the country is developing in Austin.
Our updated thoughts on potential expansion in that sub markets or excuse me sub sector.
And any potential.
Acquisition opportunities within the lifestyle.
On the horizon for cousins.
Yes, again, we're obviously, taking note and seeing that life science activity in Austin, We're actually also seeing an uptick in that activity.
In Atlanta.
But again, we're open to a mix of use.
And as I mentioned.
Have have been active in the residential sector and I think it will be active in the residential sector going forward in the context of an urban mixed use projects, we'll evaluate and.
And understand the life science market I think today we.
We likely I think we lack the expertise.
But it's something that we'll get smart on over time, and perhaps there could be opportunities to partner with groups and we can offer some local market experience.
But given our lack of experience and history in life Science, I think it's a lower priority for us.
Okay.
Yeah. Thank you Danny.
Our next question is a follow up from Blaine Heck with Wells Fargo. Please go ahead.
Great. Thanks, Colin you've mentioned repurchases a few times as a potential investment given where your implied cap rate is can you just remind us if you have a repurchase program in place and if so what's your capacity for buybacks at this point and I guess, where does that option rank at this point and your preference for capital deployment.
Brian It's Greg I'll start with the first part of the question I'll, Let Tom answer the second part we do not have a share repurchase program in place, but as you know.
It's a very simple program put in place board approval and a few days of setup and within a week you could have it in place. So it's not complicated it's not time consuming and so when we identify a potential source of capital and share.
Share repurchase emerges as the most compelling use of that capital we can put in place very quickly.
Yes Blayne.
I don't have a lot to add to greg's comments again as we.
If we're able to generate sources of capital.
Along with our board sit down and look at the strategic and financial merits of acquisitions development and <unk> share.
Share repurchases and we have done that in the past we have executed on all three.
And again, I think today, where our share prices that certainly going to be part of the conversation and it will be dependent upon again the source of capital at the time and what those uses are.
In front of us and we'll try to be dispassionate agnostic investors and focus on the rate right opportunities to drive value for shareholders.
Alright, that's helpful. Thanks, guys.
Alright, Thank you Blake.
This concludes our question and answer session.
I'd like to turn the conference back over to Colin Connolly for any closing remarks.
Thank you all for joining us today and your continued interest in cousins properties. Please feel free to reach out to myself, Greg eczema Iranian though if you have any further or follow up questions. Thank you all very much have a great weekend.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.