Q3 2022 Cousins Properties Inc Earnings Call
[music].
Good morning, and welcome to the cousins properties third quarter 2022 earnings conference call all participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Pam Roper General Counsel. Please go ahead.
Thank you good morning, and welcome to cousins properties third quarter earnings Conference call with me today is Colin Connolly, our President and Chief Executive Officer, Richard Hickson, Our executive Vice President of operations and I can see now our Chief Financial Officer. The press release and supplemental package were distributed yesterday afternoon, as well as furnished on form 8-K.
In the supplemental package. The company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with breaking 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.
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 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 statement whether.
Whether as a result of new information future events or otherwise the full declaration regarding forward looking statements is available in the supplemental package posted yesterday and a detailed discussion of some potential risks is contained in our filings with the SEC.
Now I'll turn the call over to Colin Connolly.
You Pam and good morning, everyone.
We had a very strong third quarter at cousins on the earnings front.
<unk> delivered 69 cents per share.
And same property net operating income increased one 5% on a catfish.
Importantly, we leased 431000 square feet during the quarter with a four 8% cash rent roll up and seven 3%, excluding our non core asset in Houston.
Additionally, we sold our 50% interest and Carolina square a mixed use property in Chapel Hill, North Carolina for $105 million, recognizing a gain of $56.3 million.
These are terrific results.
Before providing an update on our strategy of cousins I will share a few observations on the macro environment.
Debate, the current inflationary environment, the federal reserve and other central banks around the world.
Rapidly raised interest rates the slow economic growth.
Angel conditions have tightened layoffs or growing the probability of a recession has increase.
This unwinding process will likely take some time to play out.
What are the implications for real estate versus leasing demand is likely to soften indoor slow across all product types.
Second the availability of capital both debt and equity has decreased while also becoming more expensive.
As a result, the bid ask spread between buyers and sellers has widened in the investment sales market has dramatically slow.
Amidst this challenging market.
There are some real long term silver linings, taking shape for cousins.
First our customers are returning in greater force.
Within our portfolio, we have properties with a physical occupancy well above 70% effectively pre COVID-19 levels.
Remote work became widely accepted in an era pandemic lockdowns and massive government stimulus.
Understandably many workers do not want to lose the convenience of a dining room commute. However.
However, labor productivity has fallen to historic lows.
Attrition has increased mentorship, it's down.
And not surprising cultures or freight.
Financially prop.
Profits are declining in many stock prices are back to 2019 levels are lower.
Leaders are now more clearly recognizing the shortcomings of a remote workforce.
We anticipate more firm directives for teams to work physically together at least most of the time.
Second the flight to quality continues.
The onset of COVID-19 properties built since 2010.
We recorded 84 million square feet of positive net absorption nationally.
During the same period.
<unk> built in the 19 eighties recorded 89 million square feet negative net absorption.
This is a staggering bifurcation.
Effectively.
A growing percentage of leasing demand is now exclusively focused on trophy properties.
The outperformance of these premier workplaces, which represent the top of the market is becoming even more pronounced at.
At the same time, the obsolescence of commodity office is accelerating.
At cousins, we have a unique and compelling strategy.
Will the preeminent Sun belt we.
We have been executing on our plan for over 10 years.
Most recently, we completed a transformational merger with the purchase of tier REIT in 2019.
During 2020, and 2021, we accelerated our asset recycling.
We sold $1 2 billion of less relevant properties and reinvested the proceeds into the development and acquisition of the rail yard in Charlotte.
300, Colorado and domain nine and Austin <unk>.
New house of Nashville.
725 pumps in Atlanta, and high teen in Tampa.
These are all highly differentiated properties and vibrant neighborhoods.
Looking forward market and financial conditions will likely become more challenging.
However, we built cousins to thrive during all phases of economic cycle.
We are exceptionally well positioned today, let me highlight what.
First we own the leading sunbelt portfolio Premier workplaces in the best Submarkets in Atlanta, Austin Charlotte.
Phoenix, Dallas and Nashville.
With a third of our properties less than five years old or recently redeveloped.
We believe that we will get more than our fair share of leasing demand as we benefit from those sunbelt migration.
And the flight to quality trends.
Encouragingly, our existing customers are growing.
Looking at our 2022 renewals through the third quarter.
We've had more customers expand and contract.
Importantly, our lease expirations through 2024 totaled just 12% of our annual contractual rent among the lowest in the office sector and this positions us favorably to grow occupancy over time.
Next our $569 million development pipeline.
With the office component at approximately 70% pre leased is appropriately sized and positioned for the current climate.
We will benefit from incremental NOI during 2023 and 2024, while we have only modest speculative risk.
To date, we have approached 2022 with caution.
Importantly, we have wisely prioritize our best in class balance sheet over new investments thus far.
Our net debt to EBITDA at the end of the third quarter was $4 seven five times.
This compares to the Green Street sector average of seven nine times.
After quarter end, we closed a $400 million term loan and have locked rate on a $221 billion mortgage at our terminal property in Atlanta.
Upon closing of the turbine its mortgage we will have no significant loan maturities into 2024 and less than $100 million outstanding on our $1 billion revolving credit facility.
In closing, we are mindful of the potential impacts of higher interest rates and a slowing economy. Our short term results. However over the long term, we are optimistic that premier workplaces will separate into its own asset class with improved sentiment.
Cousins is uniquely strong position.
We are in the right cut adult markets.
We own a trophy portfolio.
We have a fortress balance sheet.
Importantly, we have significant liquidity and capacity to pursue new investments at a time when many of our competitors do not.
Our talented and created a creative team will be ready.
Before turning the call over to Richard I want to thank all of our employees at cousins, who provide excellent service to our customers as well as their skill and talent to their jobs every day.
Their dedication resilience and hard work will continue to propel US ahead. Thank you Richard.
Thanks, Colin and good morning, everyone.
Similar to last quarter, our operations team produced solid results in the face of increasingly challenging macroeconomic conditions.
Our team isn't simply focused during this complicated time and our portfolio continues to resonate with users of high quality office space.
For the third quarter, our total office portfolio end of period, the lease percentage and weighted average occupancy was 91% and 87, 3% respectively.
Our lease percentage was unchanged, while our weighted average occupancy was virtually unchanged down only 1%.
It is encouraging to see stability in these important metrics.
Leasing results this quarter once again impressive we executed 48 leases in the quarter totaling 431000 square feet.
Our transaction count was only four fewer than our record count last quarter and our square footage volume was largely in line with our quarterly run rate in the first half of the year.
Our third quarter activity also produced a weighted average lease term of eight three years clear evidence that companies continue to make long term commitments for office space.
New and expansion leases represented 49% of total leasing activity this quarter and activity was again balanced in terms of industry representation.
With customers and the legal financial services in General professional services sectors accounting for most of our volume.
Leasing concessions defined as the sum of free rent and tenant improvements came in at $7.66 per square foot compared to our previous four quarter average of $7 and 55 sets with.
With the benefit of stable concessions I'm pleased to note that net effective rents this quarter moved higher to $24.97.
Dollar and 47% increase relative to the first half of this year.
Net effective rents this quarter. We're also the second highest we have recorded since the beginning of 2021.
Second generation net rents increased four 8% on a cash basis in the third quarter, representing lower growth than in recent quarters, you will recall that in the past two quarters I mentioned, we might see increased activity in Houston, and if that completed it would likely not screen well relative to our stronger core markets that proved out.
This quarter when excluding a 25000 square foot renewal signed in Houston, Our second generation cash rent roll up this quarter was a stronger seven 3%.
Looking forward, we remain encouraged by healthy volume in our late stage pipeline as well as the level of inquiries and activity in our early stage pipeline.
I would note once again, however that our pipeline still includes sizable activity in Houston.
And that activity is likely to have a dampening effect on our reported leasing metrics when completed.
Despite our relative optimism about the leasing pipeline, we do continue to monitor the macroeconomic landscape and acknowledged that further weakening of the economy would likely have a negative impact on our leasing activity going forward.
Regardless, we continue to see the positive impact of the flight to quality trend across our sunbelt markets is office users gravitate toward amenity rich Submarkets and properties for instance in Atlanta, we are seeing a number of requirements focused on Midtown a dynamic submarket, where we have two fantastic existing.
Next with transformational redevelopments, either at or near completion.
One of the projects is promenade central.
Where visa will soon commence occupancy representing an important new to market absorption.
Our buckhead portfolio continues to perform nicely as well with 53% of our 144000 square feet of Atlanta leasing activity this quarter, taking place in this in town Submarket.
In Tampa direct vacancy is now just under 12% the lowest vacancy since pre COVID-19. According to J O. Our research we signed an impressive 98000 square feet of leases in our high quality Tampa portfolio, this quarter of which 55% were new and expansion leases Sim.
Similarly in Phoenix, many companies are choosing to move into higher quality monetize space in order to attract new talent and entice existing employees back to the office, we've seen a class a properties made up 67% of total leasing volume in Phoenix. This quarter also according to J O L. We signed <unk>.
<unk> thousand square feet of leases in this quarter in Phoenix with an average cash rent roll up of 19, 6%.
Now I want to briefly highlight the strength of our portfolio in Austin, where we signed 79000 square feet of leases this quarter, including two new leases for the last two floors of direct vacancy at our recently developed 300, Colorado building in the Central business District.
Our Austin portfolio produced 31, 7% of our total net operating income in the third quarter and it includes $4 6 million square feet in three distinct submarkets.
The portfolio is very healthy at nearly 95% leased and enjoys an in place weighted average lease term of over six years remarkably the entirety of our $2 1 million square feet at the domain and domain point are currently 100% leased.
Similar to the Austin market as a whole we do have outsized exposure to the technology sector.
Really been an important driver of demand in Austin in the past.
Note that approximately 75% of our technology sector exposure in Austin is with high quality publicly traded large cap technology companies.
We are very pleased with the quality of our customer base in Boston technology or otherwise.
On top of all that only eight 9% of annual contractual rent in our Austin portfolio expires during 2023 and 2024.
In short our Austin portfolio sits in an enviable position of strength.
Looking ahead, many of the compelling dynamics within our Austin portfolio are also present in our entire operating portfolio.
Only 12, 1% of our annual contractual rent expires through the end of 2024.
We have only one customer greater than a 100000 square feet expiring during 2023.
At 135000 square feet and in the fourth quarter.
And we are very encouraged about the status of that renewal.
Further the average size of our expiring customers in 2023 is approximately 11000 square feet and the weighted average exploration date is in the third quarter.
We currently have 890000 square feet of new and expansion leases that are signed but not yet commenced these have a weighted average commencement in the second quarter of 2023.
We recognize the economic climate.
Main complex for the foreseeable future, yes, we continue to see firsthand. The companies are seeking high quality office space in our markets cousins is incredibly well positioned for any opportunities ahead with a stable high quality portfolio and the best Sunbelt markets.
Before handing it off to Greg I want to thank the entire cousins team their skill and hard work continued to drive our success correct.
Thanks Richard.
Good morning, everyone.
I'll begin my remarks by providing some detail on our same property performance in our parking revenues.
Then I'll move on to our transaction activity.
Capital markets activity and our development pipeline followed.
Followed by a quick discussion of our balance sheet before closing my remarks with updated information on our outlook for 2022.
Overall as Colin stated upfront third quarter numbers remain very solid despite the ongoing economic volatility and uncertainty.
Focusing on same property performance cash net operating income during the third quarter increased one 5% compared to last year.
This is an improvement from the first two quarters of the year, which were essentially flat.
With the increase largely driven by Amazon's lease commencement on July one.
For our entire domain two property in Austin.
For all of 2022, we are reaffirming our guidance the same property cash NOI will be positive compared to 2021.
As Colin mentioned earlier physical occupancy at our properties has continued to increase and our parking revenues have grown along with it.
For all of 2022, we anticipate parking revenues will be up a little under 9% compared to 2021.
Turning to transaction activity during the third quarter, we sold our 50% interest in Carolina square to our joint venture partner for $105 million generating a gain on sale of just over $56 million.
We sourced this development opportunity through our long standing relationship with the University of North Carolina.
And we brought our joint venture partner and help us execute it due to the heavy mixed use nature of the projects.
Office represents only 34% of the total square footage at Carolina Square.
There was a noncore asset from the start and.
And we believe that this was an opportune time to seller interest well.
Largely driven by our recent refinancing of the property with very attractive debt that was assumable at no cost by our partner.
Overall, it was a terrific outcome for our shareholders.
On the capital markets front, we were very busy and productive both during the third quarter and subsequent to quarter end.
We started by amending an outstanding $350 million term loan with the goal of changing the base interest rate from LIBOR to suffer.
This change allowed us to officially executed a floating to fixed interest rate swap.
Whereby we fixed the underlying separated for two 3% through maturity.
Next we closed on a new $400 million term loan with our existing bank syndicate that matures in March 2025, and includes $4 six month extensions.
Both the pricing and covenants are consistent with our outstanding credit facility and term loan.
We used a portion of these proceeds to.
It paid off our maturing prominent tower and legacy Union mortgages.
Finally, we initiated the process of extending the existing mortgages on our two determinants properties here in Atlanta with the current lender.
Maturities will be extended from January 23 to January 31.
Principal will increase to $221 million.
And the interest rate has been locked at 634%.
Rates have continued to move higher since we locked rate determinant, so while ago and today the rate under state and excuse me the rate on this debt would be in the upper 6%.
This extension is expected to close before the end of the year.
The goal of all this activity was threefold first to refinance the $331 million in mortgages that were maturing during the fourth quarter of this year and the first quarter of next year.
Second to return our floating rate exposure to its historical level.
Third to create additional liquidity.
The advantage of the potential investment opportunities created by the current dislocation in the commercial real estate debt markets.
Overall mission accomplished the mortgages were taken care of.
Floating rate debt is back to approximately 20% of total debt and.
And we have almost 1 billion in dry powder.
Focusing on floating rate debt for a moment, we believe floating rate debt around 20% of total debt provides.
<unk> provides us with valuable flexibility as we recycle properties, which we are aggressively done over the past few years.
Right now we only have three pieces of floating rate debt on our total capital stack our credit.
<unk>, our new term loan and our new home construction.
This is consistent with our debt composition over the past decade.
Looking forward, we only have about 1% of total debt maturing in 2023, specifically, we have a mortgage tied to a medical office building adjacent to a hospital that is essentially 100% leased.
We own 50% of this Midtown Atlanta property through a joint venture with Emory.
Feel very confident in the SaaS it can be successfully refinanced even in the most difficult times.
Turning to our development efforts, we have three projects in the pipeline 100 mill in Phoenix.
On may nine in Austin, and our new <unk> joint venture in Nashville.
Funding commitment for this pipeline is just under $200 million.
Which is more than covered by construction financing liquidity I, just referenced and future retained earnings.
Looking at our balance sheet, we continue to reduce leverage during the third quarter as Colin stated earlier net debt to EBITDA is now just 475 times.
Our financial position is rock solid as we navigate these challenging economic times.
I'll close by updating our 2022 guidance. We currently anticipate full year 2022 episodes between $2 69, a share and $2 73, a share with a midpoint of $2 71 per share. This is up a penny.
This increase was driven by stronger than anticipated property NOI.
We offset by continued increases in interest rates in the property side the increase against our prior NOI assumptions is spread among many properties and categories. No single item is particularly noteworthy.
Focusing on interest rates as we've discussed on previous earnings calls, we use the forward LIBOR and sherpa curves to forecast short term rates and the forward 10 year Treasury curve plus current credit spreads to forecast long term rates.
Based on these curves rates have continued to move up.
Looking forward our debt schedule is very simple and clean and we would encourage you to look at the forward curves and credit spreads as you update your 2023 earnings model for us with that I'll turn the call back over to the operator for your questions.
We will now begin the question and answer session.
To ask a question you May press Star then on excuse me on your telephone keypad.
If you were 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 is from Blaine Heck with Wells Fargo. Please go ahead.
Great. Thanks, Good morning, Colin your comments suggest that you guys had been deleveraging and building up dry powder for investment opportunities that you expect her to emerge.
Can you just provide some more color on what you guys are looking for kind of how you think the current stress on the market is going to play out and maybe where the best opportunities are likely to emerge.
Yes, good morning, Blaine end to end and you're right.
I mentioned earlier, we have prioritized the balance sheet over new investments year to date in anticipation.
More attractive opportunities and.
And better pricing.
As we do look forward, we do think that there.
There will be some opportunities as we move into 2023 and for US those opportunities and our approach are always going to be singularly focused on.
High quality product.
Premier workplaces that we think are going to continue to.
Extract the best and brightest and growing companies in terms of how that plays out.
The current liquidity environment and higher rates continue I think that's going to continue to apply pressure to.
Some folks that have.
More leveraged than perhaps they should.
And I think we will likely focus on.
Again high quality trophy product that perhaps has broken capital structures. I think you can see that play out in some of the existing <unk>.
Instructions and new development, that's underway and.
And so I think like in cycles past.
We'll look at this environment, our low leverage and our liquidity and tried to take advantage of opportunities that could range anything from asset level opportunities to corporate opportunities like we've done with Barclays here.
Okay, Great that's helpful.
Second question.
Obviously, the headlines would suggest that tech tenants are at best is kind of stepping back from the leasing market and at worst.
Giving back a lot of space, whether that be through sub leases their termination.
Can you guys just talk about your exposure to attack and whether you have any concerns around space get back in your portfolio.
Blaine it's call it in and Youre right. The technology customers have stepped back in and I think if you look back over the last couple of years. Many of those companies I think staffed up and lease space in anticipation.
In some ways of.
World Forever, and obviously, we're now starting to see things normalize and I think that's having an impact on demand for <unk>.
Product in the tech space and at the same time the change in the interest rate environment and the lack of capital to continue to fund this business youre seeing some of them to step back.
Really just driven by the capital markets and so as we look forward. We are seeing now and is that.
The banking and finance and legal and other sectors kind of fill that void left by the tech customers, who will ultimately right sized their businesses and.
And be back as it relates to us in terms of exposure.
As Richard laid out in his remarks, the over 75% of our technology exposure is with large well capitalized.
Publicly traded companies and ultimately with pretty good lease.
And so if they were to get back space.
We look at that as an opportunity sublease space, that's an opportunity for us to multi tenant some of those buildings effectively covered or covered lease up as we did at 300, Colorado with the partially sublease, but at the moment, there's nothing significant that we're aware of within our portfolio.
Okay. That's helpful last one for me Collyn last quarter, you talked about potential share repurchases, given where your share price was I Didnt hear you mentioned that this quarter. So I'm wondering where that option ranks at this point in your preference for capital deployment and whether your thoughts have changed since last quarter.
Absolutely Blayne, we always evaluate our share price and repurchases and talk with our board about that.
Early.
Certainly at current prices.
<unk> four for us too.
Absolutely consider.
At the moment, we've continued to prioritize liquidity low leverage and the Optionality that we have until we've got greater clarity on what the other potential investment opportunities might be but we certainly repurchase shares in the past and will always be open to it as we evaluate all the opportunities.
<unk> two to invest capital.
Alright, Thanks Colin.
Certainly.
The next question is from Dave Rodgers with Baird. Please go ahead.
Hi, Yes. Good morning, maybe first question for Richard I wanted to try to bridge that some of the gap between calling you a little more negative Richard kind of maybe not as much in terms of what youre seeing currently.
Maybe can you talk Richard about tours, the negotiations you're having the leaf pipeline today I guess are you and I get calling your kind of thing that macro view, but Richard are you actually seeing the activity kind of shrinking in the pipeline itself that will start to see that in the next quarter or two or are those tours negotiation lease dialogue still at a consistent level.
Yes, that's a great question I'd say that from our late stage pipeline perspective.
It's more of the same.
We haven't seen significant changes if anything on the early stage activity on tours.
And just trading early stage proposals, there is probably a little bit of incremental.
Softness there so.
We're seeing some impact but again, it's still at healthy levels I wouldn't I wouldn't call. It a large drop off at this point.
Okay. That's helpful.
Colin going back to your question and I don't know if this will dovetail into Greg as well.
You guys have built a great balance sheet and I think part of getting credit for that is using it and so can you talk again about maybe I know where the opportunities will end up being for you, but how you are willing to kind of use the balance sheet to take advantage of those perhaps that levering up perhaps I don't know if that buying debt, but kind of talk about maybe where you're comfortable.
Using your own asset as a balance sheet to go out and take advantage.
Certainly, David and I think you'd characterize that.
<unk>, our balance sheet is a tremendous asset, but only if we use it and if you look at our history certainly over the last 10 years, we have maintained a fortress balance sheet.
Effectively in the good times by not pursuing investments when a lot of our competitors have capital, but being patient and really deploying a lot of capital.
And using additional leverage in periods of time, when others don't have a lot of capital and we believer.
Embarking on one of those periods of time and again, if we're able to identify attractive opportunities to create value for shareholders to add high quality prime.
Premier properties to the portfolio, we're ready willing and able to seize on those opportunities.
As in the past if the opportunities there, we would perhaps take our leverage up a bit.
Demonstrated our ability to do that in the past and then they brought.
Leverage back down and I think we could be.
I have one of those periods of time in front of us.
As we look at some of your high quality peers, pushing 678 times debt to EBITDA do you have a comfort zone in the near term, but it sounds like you want to kind of get back to maybe a mid four sub five number but I mean in the near term do you have a stress level you are willing to push.
But I'd say as we look forward over the next year, if the investment opportunity.
Plays out like we think it might I think the probability of our leverage going up is higher than our leverage going down and that would be for us to take advantage of a good investment opportunities use the capital use the balance sheet that we have.
But that'll be determined by the quality.
The opportunity I wouldn't say that we've got a specific hard line in the sand as to how far we would take leverage I think that that will be driven by the quality of the opportunity in front of us.
Thanks, Colin last one Greg for you just in this up I think it was determined at <unk> was up I think 20% sequentially 500 basis point occupancy decline just curious if there was the move in there or something unusual in those numbers.
Yeah.
Good morning.
So we had some ti completions that were.
I'm, sorry, <unk> and completed during the quarter and we recognize revenue once it's completed and so it was just a timing issue on sky completions.
Alright, thanks, everyone.
The next question is from Brian <unk> with Evercore ISI. Please go ahead.
Alright, Thank you are going to be on the call.
I guess just building on some of your comments already calling on.
External growth and potential.
Distressed opportunities can you just talk about how youre thinking about underwriting today, how you're adjusting your return thresholds as you search for these new deals and maybe just how you're evaluating development versus acquisitions do you think you'd favor acquisitions today just to the extent you can find some dislocated chances.
Hey, good morning.
Clearly with the rise in interest rates I think clearly that drive the bar higher.
Waits to our hurdle rates for new investments, whether that be an acquisition or a development.
I think perhaps there will be some investment opportunities of high quality assets that perhaps have compromised capital structures in this environment and we will certainly be.
On the lookout.
And searching for those opportunities and I think just the current realities of the environment with higher construction costs higher.
Higher yields.
And potentially higher cap rates I think that makes the bar for new development is higher but as I said on the last quarter call I think youre going to see.
Some of that normalize.
The coming year and I do believe development.
The not too distant future, we will again be a very viable opportunity that's going to be driven by high quality customers that wont exceptional space and workplaces for their employees and have demonstrated a willingness to pay for exactly what they want and I think that's going to create really interesting opportunities for some of our fantastic.
Stick development sites in the south end of Charlotte or Midtown Atlanta or out in the domain in Austin, but we're going to be patient, we're going to be diligent and thoughtful about how we allocate capital in the development relative to acquisitions and perhaps their own stock and so we'll look at all the opportunities.
And we will deploy it when we think it's the right risk adjusted return for shareholders.
Okay, and Greg I realize you're not providing guidance for next year, but just given where the implied fourth quarter run rate is and you.
The interest expense headwinds for next year could you just talk about some of the bigger moving pieces as we model in and Youre thinking about earnings growth for next year.
Yes, sure so I think.
What you're alluding to is if you take the midpoint of our full year 'twenty two guidance and you subtract. The first nine months of actual performance salts for a number <unk> number in the fourth quarter. That's below what we just reported in the third quarter.
And thats accurate and.
Two.
Items that are really moving back.
First we recognize the last of our 50 plus million dollars.
Fees from Norfolk, Southern here and I'll ask that during the third quarter, we recognized about $1 million in fees during the third quarter recognized about $3 million $3 $5 million piece for all of 2002 and the first nine months, that's done that so theres no fees for Norfolk, Southern in the fourth quarter and beyond and the second piece of that would be.
The interest rates, which you've heard on pretty much every call Im sure.
<unk> been participating in.
No.
As one example, I mean, the average so for rate during the third quarter of this year was just over 2%.
Using the current forward curve the average super rate during the fourth quarter. This year will be just over 4% that.
That's a dramatic difference.
As we push that through our P&L just like a lot of our peers that has a negative impact on fourth quarter interest expense versus third quarter, and then obviously beyond into 'twenty three.
You take a look at kind of in the fourth quarter would you say was that a good run rate going forward into 'twenty three now little.
Little premature on guidance from US, we typically provided like most of our peers.
On the next earnings call.
That being said fourth quarter will be a much better indicator of kind of future run rate in the third quarter was for the two items that I just described.
Okay. That's it for me thank you.
Yeah.
The next question is from Camille bottle with Bank of America. Please go ahead.
Okay.
Hi.
Going up on your prepared remarks can you speak to what you're seeing for customer expansion in your portfolio by industry and size that they're taking.
Yes.
I think this is Richard.
The industry like we've talked about already.
The mix has definitely shifted away from technology I think we're seeing plenty of expansion as Colin has mentioned in our portfolio when we have customer.
Customers that have renewed in the recent past and Thats fairly diversified I wouldn't say, there's any one industry, that's driving that more than another but collectively it's.
Like we said legal financial services and professional services, they're very much.
Backfill in the outsized demand that we saw from the technology sector before.
Okay, and nice job on selling Carolina square in third quarter can you just give us an update on your latest thoughts on the disposition pipeline.
Camille it's Colin and.
Good afternoon, the as I mentioned in my prepared remarks, the investment sales market has let's say dramatically slowed as a widening.
Why the gap in the bid ask spread between buyers and sellers as I think everyone looks forward visibility.
On the terminal rate.
With with interest rates and the fed.
And so at the moment I'd say, it's relatively.
That market is relatively slow I would anticipate as we move into next year and there's there's more clarity that will likely accelerate I think fortunately for cousins as we've laid out we have an exceptionally strong balance sheet.
And with the sale of Carolina Square, we really have no need at the moment to pursue additional dispositions until we feel like there's.
Appropriate pricing.
So we'll continue to evaluate it I think more in the sense of.
You know us as a buyer versus a seller.
And finally for me on North Park, It looks like 107000 square feet with given back this quarter.
Given the elevated available rates and the central perimeter of Atlanta, and these assets being not too far away from where home depot has suddenly think 600000 square feet can you just update us on how the lease up is going on the remaining bankruptcy.
Yeah.
It is.
We did have a large move out at North Park.
It is a more suburban asset and the overwhelming majority of our portfolio and I think that likely will take us a little bit more time to backfill and released that than perhaps some of our availabilities down in Midtown Atlanta as an example.
But it's a it's a terrific property with BARDA on site and it has been a really attractive.
The nation for large Fortune 500 companies you mentioned home depot, which is now really in the northwest Submarket Little further away from the North Park project, but I'd just highlight.
<unk>.
Are you kind of a recent I think good example of perhaps a normalization taking place in the market. There was a large fortune 500 company in Atlanta that put a significant amount of space on the sublease market.
Just this past summer and interestingly announced last week that space was quietly pulled back off the market is that customer kind of reevaluate their view and approach to work and work in a in a physical sense and so we will be interesting to watch those trends.
See if other companies make similar decisions as the as the world continues to normalize.
Okay.
Very interesting. Thank you for taking my question.
The next question is from Vikram Malhotra with Mizuho. Please go ahead.
Thanks for taking the question so just on your comments around.
The interest rate to four what goes.
You know what.
It's where fundamentals are shaking out I was just trying to quickly run through some of those higher assumptions on rates et cetera through the model.
And.
I know youre going to give guidance next quarter, but.
Is it safe to say like the interest expense.
Okay. Good good sort of on a run rate basis, almost wipe out any gains or just limit the gains from the core portfolio and occupancy or rent spreads such that.
You, probably see a flattish trajectory on a on a fiscal 'twenty three.
Okay.
Well again, I don't want to I don't want to provide any guidance early here. The time will come for us to do that as we have in <unk>.
This past quarter.
Interest rates remain a headwind for not just us but for all office owners in for all real estate owners and so as we enter 'twenty three.
It's going to be something that everybody is dealing with and it will certainly reduce.
Pretty much everybody's.
Earnings growth, even if they don't have any floating rate debt, if they've got any fixed rate debt. That's maturing that when you've got rolled over in fixed rate debt has gone up as well so.
It's going to prove to be a headwind for everybody in the industry, including us.
Yeah, No I think whats the I guess, what's the price people and a few other peers that that have pointed to 'twenty three guidance or at least alluded to it you know like.
New development opportunities being financed with floating rate debt or other debt.
All adds to the occupancy remaining flattish.
I'll add to it and I think yeah. That's that's what I quickly ran through the curve and the higher expenses it seemed that way, but yeah, we will wait for you.
Those numbers I guess, just you know.
It would be helpful. If you can guide us to or.
We even got you put some guardrails around the trajectory of rent spreads given what we've seen the last say five quarters, where rent spreads have gone in the lease rate has gone.
Is it fair to bake in a lower renewal rates and just you know sort of move outs. So that's got there is pressure on lease rates in mark to market near term from Iran.
Vikram, it's Colin and.
You know again I think.
Within our markets and within truly.
The buildings that represent premier workplaces, we continue to see demand.
And so thus far we've seen rents kind of continue to hold and as we look forward to coming quarters. We're hopeful that we will continue to drive.
Positive cash rent roll ups I'd add the only caveat to that is as Richard mentioned, we are seeing increased activity from energy companies in Houston and.
The market dynamics in Houston are much different than all of our other markets and that could certainly way.
Way on those statistics that being said large leases in Houston within our portfolio. That's a terrific outcome and we're going to pursue this pursue those opportunities, but with specific to our core markets.
Even as the market kind of re check retrenching and Theres. Some recessionary forces I do think it's important to remind everyone that some of the silver linings within the office space and as the technology companies perhaps.
Less active we are seeing these other segments in the economy.
<unk> financial services law firms et cetera.
Continuing to pursue more space in those organizations that continued to grow throughout the last couple of years until it and really did not lease a lot of space and so we do think there is some pent up demand that can perhaps provide a buffer.
To some of the overall macro headwinds that you had.
But the entire.
Sector is going to face.
Okay, No that's fair yes.
Provide guidance it would be helpful. Just to provide more guardrails around the leads great occupancy same store NOI that just given all this uncertainty in the rate environment.
It would be helpful. If you can consider providing some of that.
Last question I guess, you you referenced the balance sheet a lot.
I think that that's off.
The communities may arise, but I'm wondering ultimately like at the bottom of the cycle the basis is going to be really important.
In terms of where you invest on a per foot basis.
So can you maybe just give us.
Your thoughts like what are you hearing or seeing today.
Ebitdas for assets, whereas where cap rates are where the basis, where do you anticipate the basis trending to for you to then get aggressive.
Yes.
No I think it's going to be.
For us specifically, it's going to be when we start to see higher quality properties become available and I think there's typically come a little bit later, the lowest quality are typically the first two rollover, we are starting to see and hear a pressure.
On some of those types of assets.
But I think we're going to continue to be patient and thoughtful and.
And wait for high quality opportunities. However, we get there again, whether thats an asset level transaction at corporate level transaction.
We'll be patient, we'll be thoughtful about deploying capital.
And I think as you start to see some trades, perhaps into lower quality space.
We will start to create a market again and.
Create a level of which other high quality assets can trade off.
And then.
When that exactly happened.
It is anybody's best guess, but I do think some of the looming.
Loan explorations.
Are coming and it's going to force some transactions and I think you'll start to see any market resume sometime next year.
Got it thank you.
The next question is from Anthony Powell with Barclays. Please go ahead.
Hi, Good morning question on acquisitions and joint ventures. Some of your other peers are basically doing exclusive joint ventures, when they're doing our acquisitions are doing more asset management is that something that you would consider or could you actually do some deal better.
On a consolidated give me your balance sheet strength.
Yes, great question Anthony.
We would certainly consider joint ventures.
There was some strategic merit.
Doing that venture, perhaps an entre into a specific asset.
And so there could be some opportunities to come into existing.
Joint ventures, if the size of the transaction were too large.
We would absolutely consider a joint venture, but unlike some of our peers with our leverage at 475 times, we do have very significant capacity for willing again for the right opportunity to incrementally move leverage higher and for the right the right opportunity and the right asset will be willing to do that.
Alright, Thanks, and maybe just refresh us on where you think of the South Florida market honestly.
There's a bit of a gap here when you look at the map of your supplement its a big market and it seems like Theres more.
More financial firms and firms moving to the market. So when you're talking about markets broadly is that a market that you would show interest in overtime on the accident side.
Yes, absolutely we we.
<unk> monitor or South, Florida, like we do a handful of other markets that we think could be interesting and have positive dynamics I think certainly the last couple of years.
As you alluded to Youre seeing more interest from financial services and asset management firms.
I look to south, Florida, as they like a lot of other industries, including technology more broadly distribute their workforces across the country and so as that dynamic continues to play out in that market matures and.
And you start to see kind of a larger average customer in south, Florida, that's certainly a market that.
Again, we will continue to evaluate but I would just note.
We don't feel capacity constrained or opportunity constrained in any of our existing markets and so I think it's a it's a it's a <unk>.
Likely probability that we deploy capital within our existing markets versus pursue expansions in the current environment, but that over time.
We will continue to look at markets like that and others and perhaps we will expand.
In the future.
Great maybe one more quick one in terms of Houston, the planner to lease it up and sell it and maybe call. It noncore just curious what the timeline is for maybe looking at it.
Sally asset.
Yes.
But by definition I think noncore for us means.
To sell at the at the appropriate time.
Capital markets from our perspective.
Just have not been.
Pricing that to do a price that we may have thought have made sense in the past and we do think there is some incremental leasing opportunities in the meantime that we can do that perhaps will drive value.
And.
And in the future I think is Houston again, normalizes as an economy and I think youre starting to see the energy companies with the oil price where it is starting to grow again, and I think that could change investor perceptions around Houston, and creating better exit point in the future we.
Don't have any specified timeline.
When we would sell that asset it would be a point in time, where we feel like it's a fair price.
Again.
Selling into a positive investment or investment climate.
Alright, thank you.
Right.
Again, if you have a question. Please press Star then one.
The next question is from Daniel Ismail with Green Street. Please go ahead.
Okay.
Great. Thank you, maybe just going back to the Carolina square.
Is that a negotiated price or was that done at market. It sounded like the latter but just wanted to confirm.
Danny.
It was a combination of both it was it was a asset that we had on in the market with with he's still that gave us good visibility into a market price and ultimately for the reasons that Greg alluded to around the debt we elected to sell to our.
I would venture partner.
Got it and then.
Maybe.
Richard you touched on this a bit throughout the call, but maybe leaving Houston aside.
Can you describe where you're seeing the best prospects for net effective rental rate gains across your markets.
Any specific submarkets.
That seem to be outpacing youre seeing higher demand than other than others.
Sure I think the ones that come to mind, where we've seen an ability to push rents consistently not just this quarter, but over the last few quarters or a year plus.
I alluded to Phoenix, we've seen on.
This COVID-19, 6% roll up on on the leasing activity that we did there, but but we've been very successful in pushing rents in Tempe.
Tampa is really another standout in my mind.
All of our assets.
Where most of our assets are in the west shore Submarket, but we also have heightened union close to the CBD.
Hi, Julian we acquired essentially fully leased but we've been we've been again successful in pushing rents more than I would've thought and Tampa and then.
Continue to see good rent growth in the properties, where we've reinvested like Buckhead Plaza here in Atlanta, but also in Midtown so.
And then of course, they have to mentioned.
Really where we've had just <unk>.
<unk> success over many years is Austin.
It's just been a wonderful market in terms of rent growth for a long time, so it's a.
A little bit of everywhere, it's certainly sub market specific but we felt really good about our ability to push rents.
The board.
Okay, and then just last one I.
I know Houston is a small portion of the overall portfolio, but I'm just curious I know you mentioned, it's the connection between oil prices and potentially better office demand there I'm curious if that's true.
Net absorption or is it just musical chairs happening in that market I'm. Just curious if you can maybe unpack that a bit more.
That's a great question I think I think it's probably a combination of both.
One thing I would mention is that there are the same dynamics in Houston that we're talking about across the country about the need for.
Creating an exciting workplaces for that motivate employees to want to come back to work that have a good commute time.
And so I think if there is kind of a musical chair dynamic happening in Houston, that's driving a lot of it and that's what we're seeing right now.
Relative to our activity.
Great. Thanks, everyone.
This concludes our question and answer session I would like to turn the conference back over to Colin Connolly for any closing remarks.
Thank you for your time today and your continued interest in cousins properties, we'll look forward to seeing many of you at NAREIT in San Francisco in just a few weeks I hope everybody has a great weekend.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
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