Q2 2019 Earnings Call
Good day and welcome to the cousins properties second quarter conference call and webcast all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.
To withdraw your question. Please press Star then two please note. This event is being recorded.
And I would now like to turn the conference over to Pam Roper General.
Counsel. Please go ahead.
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, Our executive Vice President of operations, and Gregg Adzema, 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 Brinci requirement.
You did not receive a copy these documents are available through the quarterly disclosures and supplemental FCC information links 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. The company does not undertake any duty to update any forward looking statements whether as a result of new information future events or otherwise the full declaration regarding forward looking statements is available in the supplemental package posted yesterday and a detailed discussions of potential risks is contained in our filings with the FCC and now I'll turn the call over to Collin column.
Thank you Pam and good morning, everyone.
For the second quarter was transformational for cousins properties.
We successfully closed our merger with tier Reid.
Delivered strong operating results.
Advanced strategic property transactions and made great progress on the development pipeline.
Let me review the specifics.
First.
We remain extremely enthusiastic about the tier merger, which closed on June 14th.
We have enhanced the companys geographic diversification, including an expansion into Dallas strengthened our growth profile and maintaining a fortress balance sheet.
Our team has been hard at work and I am pleased to report that the integration has gone smoothly.
In addition.
The impact of the merger on 2019 FFO is inline with our original guidance and we are delivering on 18 and a half million of annual Gnh synergies, Greg will discuss in more detail.
Second.
Our trophy office portfolio continues to outperform.
We delivered an increase in cash same property NOI of 5.5% during the second quarter.
In addition, our team executed approximately 1.1 million square feet of leasing.
Including a 561000 square foot lease at Hearst tower in Charlotte.
For the proposed combined corporate headquarters of BMT and Suntrust.
The lease which highlights the robust demand for leading Sunbelt Urban office towers also includes a onetime purchase option at a price of 455.5 million.
Third we are under contract to purchase our partners, 50% interest in terminals here in Atlanta in a transaction that values the properties at 503 million or $410 per square foot.
Closing is scheduled for October .
While Midtown Atlanta has generated generated outsize demand and headlines during recent years Buckhead continues to perform well with limited new supply and solid demand from high growth companies like Salesforce Workday and Fleetcor technologies.
After adjusting for the CVR expiration at the end of June .
Terminix is approximately 79% occupied.
Providing a unique opportunity for the cousins platform to create value through the lease up of vacant space in a trophy property.
Given there are few competitive blocks of large contiguous space in buckhead.
We are thrilled to rebuy terminus, which is one of the most highly amenitized office properties in buckhead at an attractive attractive value add price.
Well below replacement costs.
Fourth.
Momentum remains strong in our development pipeline.
As you likely noticed in our financial supplement.
Pre leasing at 10000 Avalon in Atlanta increased to 52% at the end of the second quarter and we have a deep pool of additional prospects looking at the remaining space.
At domain 10 in Austin.
We are drafting a lease for 104000 square feet with a fortune 100 customer, which will increase pre leasing to 98%.
I look forward to sharing more details on this when we finalize the lease which would bring the office component of our $428 million development pipeline to 86% pre lease.
With domain 10 fully committed.
Our leasing team in Austin has shifted their focus to pre leasing efforts at domain nine and we are encouraged by the initial interest.
Looking to the future development opportunities, we are making great progress on our 100 mill project in Tempe.
Given the significant level of customer interest we are likely to break ground. This fall with meaningful pre leasing.
Like our Avalon project in Atlanta, We will develop this 288000 square foot Trophy office property.
With a total cost of approximately $150 million in a 90 10 joint venture with Hines.
Overall demand for office space in Tempe remains robust.
As technology companies seek growth opportunities outside of California.
The walkable urban environment, along with the engineering talent at Arizona State, our strong growth drivers for downtown Tempe.
Stepping back.
We have been exceptionally busy at cousins throughout 2019.
We have announced a series of exciting transactions, including the Norfolk Southern headquarters project.
The gold Air rights sale.
The tier merger.
The BMT lease in the terminals acquisition.
We appreciate appreciate that this creates complexity for our investors, especially considering significant onetime gains in 2019 from land sales and development fees.
However, I want to reiterate the following three messages.
First each of these transactions is uniquely positive on a standalone basis.
Second.
The underlying performance of our existing portfolio remains strong.
Third.
We intend to maintain our leverage profile within our target range of four to four and a half times net debt to EBITDA.
At cousins, we strive to be the preeminent Sunbelt office REIT.
While this goal might sound simple.
We believe it is compelling and puts us at the intersection of two powerful long term trends.
Ongoing migration to the sunbelt and urbanization and our targeted submarkets.
With these supporting Tailwinds the company is exceptionally positioned for the future.
Our markets are healthy.
The balance sheet is strong.
The portfolio is best in class and importantly, we have an excellent growth profile with both increasing same property NOI.
And a well leased development pipeline.
Before turning the call over to Richard I want to express my thanks, and aberration to the cousins team.
Your tireless work and passion for the company is recognized and appreciated Richard.
Thanks Collyn.
I'm pleased to report that our strong first quarter operational performance continued in the second quarter. As a reminder, given we closed our merger with to read in mid June many of the operating metrics that I will cover include the effect of the tier operating portfolio.
As Colin referenced at the portfolio level, we completed nearly 1.1 million square feet of leasing this quarter.
Our quarterly leasing volume was our highest since 2015 and I would note that only about 8% of our total we've seen this quarter came from the tier portfolio.
Rick growth was also strong with second generation net rents, increasing 21.5% on a GAAP basis, and 4.9% on a cash basis. However, when excluding the sizable and unique BBSI lease which represented a modest increase in net rent second generation net rents increased 26% on a GAAP basis, and 11.9% on a cash basis.
With a solid leasing activity and including the addition of tiers operating properties. Our total portfolio weighted average occupancy for the quarter was 91.1% and we ended the quarter at 93.7% leased.
Our same property portfolio was slightly higher than our total portfolio with weighted average occupancy of 91.8% and ending the quarter at 93.9% leased.
Before moving to some market specifics I want to briefly highlight the favorable rankings of our core sunbelt markets and CBR Reis recently published 2019 Tech talent Scorecard. This is an annual survey that ranks major us and Canadian markets based on their ability to attract and grow tech talent.
All six of our core market screamed, well with both Austin and Atlanta, and the top 10.
CVR. He also cited that Atlanta is the fourth fastest growing market for technology jobs, adding over 32000 jobs in the past five years.
Given how critical demand from the technology sector has become the survey results are very encouraging for the continued strength of our core markets and the Sun belt overall.
I'll now turn to some details about our two largest markets in terms of in Hawaii, Atlanta and Austin.
First in Atlanta.
The overall market continues to be healthy and active in all respects. According to JLL Atlanta class, a asking rental rates continued their growth in the second quarter, increasing 5.2% year over year.
Costar recently noted that rent growth in Buckhead and Midtown in particular, we're about 75% of our portfolio is located has materially outpaced other Atlanta sub markets.
Citing the rents in these two prominent submarkets on a combined basis are now 50% above where they were in 2010.
The trend of solid absorption has continued as well with JLL, noting that year to date net absorption in the class a office segment stood at over 1 million square feet.
Of which about 60% has been in Midtown.
In terms of supply Atlanta construction activity remains manageable as a percent of inventory. So there is a concentration of new construction in Midtown.
Despite this dynamic we view the supply demand balance is healthy with active projects in the quarter of Midtown sitting at over 70% pre leased.
This quarter, our Atlanta team executed 251000 square feet of leases the solid level of activity spanned across all our submarkets and included a 15000 square foot expansion and 85000 square foot extension of one trust at Northpark in the central perimeter.
Our over 7 million square foot Atlanta portfolio continues to be well positioned at 93% leased as of quarter end.
Moving on to Austin, According to JLL overall, asking rental rates once again grew meaningfully increasing 23% over the second quarter of 2018.
Costar puts overall market class a vacancy at 6.4%.
With a north domain submarket running at a remarkable 1.8% vacancy level.
The CBD continues to run at under 6% vacancy.
Market wide construction activity in Austin is tracking at robust levels with JLL pegging at 5.2 million square feet and approximately 56% pre leased.
Our portfolio, which through the tier merger now consists of over 4 million square feet located across the CBD domain and southwest sub markets ended the quarter at 95.8% waste across the market our team signed leases totaling 116000 square feet during the quarter, including a 47000 square foot expansion of an energy services company at 111 Congress and a 35000 square foot renewal of stitch fix at 816 Congress.
Like last quarter, our existing pipeline of leasing activity continues to be strong in Austin.
Our remaining core markets of Charlotte Tampa, Phoenix, and Dallas are also tracking nicely with all four are characterized by positive year to date net absorption steady vacancy and rental rate growth and manageable supply.
Our teams in these four markets executed 647000 square feet of leasing this quarter, including the 561000 square foot BB in two weeks.
Note that via the tier merger, we added the 891000 square foot Bank of American Plaza to our Uptown Charlotte portfolio.
As you will recall from our prior discussions around tier. This property is currently 89.7% leased and bank of America will vacate approximately 295000 square feet at the end of 2020.
We are aware of this known move out prior to announcing the tier merger underwrote the investment with that in mind and view it as a fantastic value add opportunity at a main and main location.
Our primarily Uptown Charlotte portfolio is 95% leased overall with otherwise very few lease expirations over the next couple of years.
The tier merger also provided us an opportunity to establish a larger position in Dallas.
Adding 516000 square feet in two properties located in the Preston Center and legacy North Dallas Submarkets.
59, 50, Sherry Lane and legacy Union are high quality assets that are currently 97.2% leased we are thrilled to have a team on the ground and this foothold to build upon in a market that has posted some of the most impressive job growth in the country. Since 2010 at just over 900000 jobs.
With that I'll hand, it off to Greg.
Thanks, Richard and good morning, everyone.
I'll begin my remarks by providing an overview of our financial results, including same property performance.
Then I'll move on to our capital markets activity.
Followed by a discussion of our balance sheet before closing my remarks, with an update of our 2019 guidance.
Before I begin just a quick reminder, that we closed the tier transaction on June 14th.
As a result, our second quarter numbers, including our weighted average share in unit count only includes 17 days of tier data.
Coincident with the tier closing, we also completed a one for four reverse stock split.
In all second quarter per share numbers reflect this reverse split.
I know that's a lot of moving parts. So just to be clear, we had 114.7 million weighted average shares and units outstanding during the second quarter.
And 148.5 million shares and units outstanding at the end of the second quarter.
As you can tell from Cowen and Richard's comments it was a solid quarter on many fronts and 71 to 71 cents per share excluding tier transaction costs and FFO was up 18% over last year.
And the important operating metrics that both you and we focus on were very strong.
Leasing velocity was outstanding.
Second generation leasing spreads were positive and same property year over year cash NOI increased for the Thirtyth.
Consecutive quarter.
Within our same property portfolio year over year cash NOI was up a very strong 5.5% during the second quarter driven by 5.2% revenue growth.
And 4.6% expense growth.
This marks the second quarter in a row that annualized growth has exceeded our expectations and as a result, we are raising the midpoint of our full year 2019 cents same property cash NOI projection yet again this time by 25 basis points.
Combined with our 100 basis point increase last quarter. We've now raised the midpoint of our same property cash NOI growth to 120 by 125 basis points since the beginning of the year I'll provide specifics on this later.
Soon after the tier closing, we issued $650 million in unsecured debt through a private placement.
The issuance was comprised of three maturity Traunches eight nine and 10 years priced at par with the weighted average coupon of 3.8%.
Proceeds from this issuance were used to pay off all tiers outstanding $575 million in term loans as well as their outstanding credit facility balance.
We also assumed one nonrecourse mortgage from tier associated with the legacy Union office asset in Dallas.
This is a $66 million note.
With a 4.24% coupon debt matures in January 2023.
Turning to the balance sheet.
Our reported second quarter net debt to EBITDA ratio in the financial supplement is 5.2 times.
However, this doesn't reflect the full story as I mentioned earlier, we closed the tier transaction in the middle of June and there are only 17 days of tier EBITDA and our second quarter numbers. In contrast, there is 100% of the associated tier debt as of June Thirtyth. This timing mismatch temporarily skews this ratio.
This will resolve itself in the third quarter, when we will have a full quarter of tier data in our numbers.
I'll wrap up my comments today by updating our 2019 AFFO guidance. Please note this guidance excludes the costs associated with closing the transaction.
We currently anticipate 2019 FFO in the range of $2.81 to $2.93 per share.
All of the assumptions behind this guidance are unchanged from the guidance. We provided on April 24th except for the following first.
We anticipate year over year same property NOI growth of 3.25% to 5.25% on a cash basis.
This is up from our previous guidance of 3% to 5%.
Moving on we anticipated gain on land sale at 14, and a half million dollars.
Up from $13.1 million due to a gain recognized on the sale of land in Tempe to the city to widen roads for New Street card line.
Next we anticipate fee and other income of 32 to 34 million.
Up from the previous range of 20 830 million.
Due to an increase in termination fees at Hearst tower in connection with the new BBSI lease.
We anticipate general and administrative expenses of between 34 and $36 million net of capitalized salaries. This is up a half a million dollars from our previous guidance of 33, and a half to 35 and a half.
We anticipate interest and other expenses net of capitalized interest.
Of $66 million to $68 million.
Up from the previous range of 50, and a half 52 and a half million dollars.
We anticipate GAAP straight line rental revenue of 28, and a half to $30.5 million up from the previous range of 22, and a half to $24.5 million.
We anticipate above and below market rental revenue of between $10 million to $12 million.
Up from the previous range of five and a half to $7.5 million.
All of these changes are driven by the closing of the tier transaction in mid June .
Finally.
Alan discussed a couple of new property transactions during the second half of 2019 that you should incorporate into your projections first on the investment front weve entered into a contract to acquire our partners 50% interest in terminals.
This transaction values, both at the terminal assets.
At $503 million.
As part of this transaction, we will assume our partners interest in the terminals mortgage debt, which currently has a total outstanding balance of approximately $196 million. Our purchase represents approximately 50% both of these numbers.
We anticipate closing this transaction early in the fourth quarter, but please note. This transaction will trigger the consolidation of these two properties at fair value.
And resulted in us recognizing a gain on the stepped up basis in calendar year 2019.
But this game will have no impact on FFO.
On the disposition front weve commenced the process of selling our wood crest asset in New Jersey and have classified as held for sale and our second quarter financial statements.
We aren't selling this asset to de lever and we don't need the proceeds to achieve our targeted leverage levels quite simply this is a noncore legacy tier asset in a noncore market.
We anticipate closing this disposition late in the fourth quarter.
Some of the assumption changes I just walked you through were driven by the tier transaction.
And some of them or not.
Specifically outside of tier our same property growth continues to exceed expectations.
And we've announced several positive leasing and investment transactions. However, now that we have closed here.
We think it's important to isolate its earnings impact.
And compare our current expectations to our original expectations back in March when we announced the deal.
In March we projected the tier transaction would reduce 2019 FFO by a penny or two a share.
Which equates to between four and eight cents per share after adjusting for the reverse stock split.
We currently project the reader reduction will be approximately six cents per share.
After adjusting for the reverse split right in the middle of our range.
Said differently.
On an apples to apples basis, we are squarely in the middle of the Penny or two original range that we announced in March and overall the financial implications of the tier transaction are inline with our expectations with that let me turn the call back over to the operator.
We will now begin the question and I'll listen to ask a question you May Press Star then one on your time fine how are you seeing speakerphone. Please pick up your handset before pressing the keys.
If any time your question has been addressed and you would like to withdraw your question. Please press Star then.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from the line of Jamie Feldman with Bank of America. Please go ahead.
Great. Thank you and good morning.
Greg I guess going back to your you are in line with the six cents that you originally expected from the tier merger I know you guys have said over time that starts to burn off based on signed leases that have yet to commence.
Can you just talk through how we should think about that ramp.
To get to a point, where it's actually kind of neutral to earnings or even accretive and the timing.
Sure Jamie good morning.
Yes, so as we talked about back in March when we announced a tiered transactions it will be dilutive to 19 and generally the 20-F AFFO, but beginning in 21 and 22 as you alluded to the development pipeline starts to produce results from the tier side and the dilution.
Flips and turns into accretion moving out in kind of the second half of 21 and into 22 and beyond.
In terms of 20 dilution it should be similar on a percentage basis to what we thought 19 would be so we only have about a half year results here six pennies. So we're not going to provide you with 2020 guidance yet but in terms of the impact the earnings impact of the tier transaction in 2020 numbers. It should be similar to 19 on an annualized basis.
You are saying 12, youre, saying 12 cents and 20 or six cents and 20.
Closer to 12.
Closer to 12, okay.
I thought you guys had said it starts the kind of burn off throughout the year.
It starts to burn off I mean, these the domain properties. As you know is begin to deliver in 2000 people start to move in and 20, but it takes time.
So I'd say the impact on 20 is the back half of 2000 and its muted.
The positive impact really starts to kick in at 21, and then firmly in 22 and beyond.
Okay.
And then thinking about Buckhead.
Can you guys just talk about some of the lease expirations in that sub market overall.
And then your prospects to fill up terminal I mean, my understanding is there is a decent amount of sizeable expirations coming I'm just curious what your outlook is.
Jamie and good morning, its kolon and.
We're very excited about about the transaction at terminus and as I noted in my prepared remarks, we've got a we've got a terrific terrific value add acquisition.
Opportunity to put the cousins platform at work and as I said, we've got about 20% of the project.
Is currently vacant and as we look forward, there's there's roughly a million or so square feet. According to JLL ahead of demand in the market and I think importantly for us at terminus outside of our vacancy we've got about 6.3.
Years of weighted average term. So we don't have a lot of near term expirations, but as you look at the market as a whole between now and 2000 and in 22. There is theres just over 4 million square feet of space expiring. So as we think about leasing up the balance of terminals that will certainly be the list that our team will be focused on.
Hi, there I mean can you quantify any large chunky expirations that are coming in that market that might be competitive.
We certainly can and we do have a list, but I think for competitive reasons, we'd rather not share that on on on this call, but rest assure our team has knows exactly where those expirations are and.
And we'll we'll have those conversations.
And as we try to go lease up the balance of that space. We're excited about the opportunity.
Okay and then finally from me just you mentioned the New Jersey asset for sale can you talk about your thoughts on some of the other.
The weather kind of new markets, you may not want to stay in or just other assets from tier that you might or even from cousins that you might be thinking about selling.
Yes, Jamie and I'm glad you asked that question and.
I think is we look at the portfolio. We're we're clearly doing.
In a an analysis of the portfolio.
Going forward and evaluating what's core and noncore, but but I want to make sure I reinforce the point is we.
If we do evaluate and decide that there is some additional noncore sales.
As I said in my prepared remarks, we're we're committed to keeping the leverage.
Levels within our target of four to four and a half times. So so we identify additional noncore sales in the future we're optimistic in the team's ability to.
To to source and identify new investment opportunities, whether they be an acquisition like terminus or potentially new development start like the 100 mill. So I think the the net net of that through some capital recycling, we do intend to keep keep that leverage between four to four and a half times I know there has been some discussion in the investment community will we look to do a big strategic disposition like the Orlando portfolio in post the Parkway transaction that took us down to mid threes, and we don't see such a strategic.
Move coming I think you could see some additional.
Sales and noncore markets like the Fort worth potentially a Houston again, those are markets, where we don't have platforms, but we think we can balances with with some some additional new investment opportunities.
And how do you think about managing the dilution.
Again, I think the earnings impact.
Yes.
What I was trying to hit that Jamie as we as we look at some additional future noncore sales, there's there's opportunities for us to reinvest some of that capital in whether it be an acquisition opportunity or a development opportunity, which might have some timing to it if we sell on the front end.
But again I think we're we're we're confident we can keep that leverage level in between those.
Long term stated goals of Florida, Florida have tons and.
And recycle capital.
As needed potentially use some of those noncore sales to fund new opportunities.
Okay all right. Thank you.
Next question comes from the line of Blaine Heck with Wells Fargo. Please go ahead.
Hi, Thanks, Good morning, Colin maybe follow up on the question on Buckhead move outs can you also give some color on some of the major.
Upcoming expirations you guys listed associated with peer in the supplement.
Bank of America, 300000 square feet next year in Charlotte, obviously being the largest one.
Conduit I guess should be sold by then and then time Warner Hundred 12000 square feet next year in Austin.
Yes, it blayne happy to answer that and good morning the.
Bank of America expiration that you referenced approximately 300000 feet in December of next year and Richard touched on that in his prepared remarks that is a known move out we knew that going into the tier transaction and in price that accordingly.
In into the the overall merger so we feel like Thats, a fabulous value add acquisition opportunity for similar to what we're doing at terminus we've got a terrific team in Charlotte they've just demonstrated their ability to backfill is significant.
It's a block of space also vacated by bank by Bank of America. So were we look forward to that that opportunity and I am confident in time as we get the space back we'll do we'll do quite well the the rents are a fair bit below market at the bank of America space. So we feel like that again gives us a great opportunity now looking towards the other two you touched on the conduit is.
Our goal is to have that project sold and by August of 2020 over in Austin with time Warner cable just over 100000 feet and domain point.
I'd say, it's a bit premature.
We have no reason at this point too.
I think that thats, not an opportunity to to renew but it's still very early in the process.
Okay. That's fair and then on the Bank of America stands what type of tenant profile will again be be targeting.
For backfill.
Well look I think the some recent announcements in Charlotte give us quite a bit of confidence and encouragement that theres going to be a pretty diverse set of customers, who who will look at that space. Obviously in a Charlotte is geared towards financial services companies and large banks and we've seen them be quite active.
But at the same time, we've seen some really terrific.
Announcements new move ins to Uptown Charlotte from more diversified companies. One Honeywell is just announced they're going to move their corporate headquarters from New Jersey to Uptown lows, which has historically been a suburban Charlotte.
The company has elected to take a quite a bit of space.
In Uptown Charlotte, So again as we look at the pool of potential customers. We're optimistic that it will be a diverse set across a wide ranging wide ranging industries.
Okay, Great and then lastly, it looks like Capex per square foot and concessions in general were higher this quarter.
You just talk about whether that was a mix issue with the BNP lease this quarter and more generally what you're seeing with respect to T.I.s and free rent in your markets.
Yes, the you hit it.
Yes, Blayne in terms of the tick up there that was at say directly associated with with the BB and T. lease, which was which is a 15 year.
Lease with.
A I'd say a typical amount of capital.
In the T.I.s associated with that in addition to that we did have some.
Buyouts that we that we had to do.
That we have discussed previously to to put together that 500000 square foot block of space that you see some of those costs aggregated and.
And capitalized into that number so I think that skewed it.
Upwards of where it's typically be Ben I think as we look across our markets as a whole and think about concessions both T size and free rent.
I've said on previous calls construction costs continue to inch up and so we've seen HTI five inch up accordingly.
12 months ago, 18 months ago, they were $5 per square foot per year today, maybe they have inched up to five and a half.
Dollars per square foot per year, but at the same time, we've seen.
Net rents face rents continue to inch up and we've actually seen free rent.
Moderate in some markets actually decline so overall net effective rents in our in our markets continue to continue to move up.
Thanks Collyn.
Thank you Blake.
Next question comes from the line of John Guinee with Stifel. Please go ahead.
Great you guys have been busy this is more of a two curiosity questions. The first one is.
Hearst tower and 966000.
Square feet, 97% occupied per year, our sop.
How on Earth. This one generate.
561 that 561000 square feet of available space instantaneously.
Where they where the tenants just not occupying the space and just.
Ready to leave.
John the all the various customers.
We're we're occupying the vast majority of their space and say it took a lot of ingenuity and hard work and relationships amongst the team.
I think the biggest block of that space.
Roughly 300000 square feet was bank of America, and as Weve discussed on previous calls we're moving to.
Two two a newbuilding, where they were consolidating several several different locations into into into one space. So that was the vast majority of it and it certainly help give us a leg up that there was a path. There and then we had we had to really work it with a few other a few other customers and.
As I mentioned there were some.
The termination fees that we paid as a part of that to help help make that possible and.
As we said those are capitalized into the overall deals and I think explains why our costs inched up slightly this quarter.
Great. Okay, and then the second.
Looks like you are going to buy your way into terminals set about for 10, a square foot and likely sell.
First at 471 a foot.
What do you think it cost to build new product in both of those markets right now.
John in kind of the urban areas to build build large towers that say, it's plus or minus $500 a square foot and.
You can depend based on land in T.I.s or particular customer, but I'd say, that's a that's a pretty that's a pretty down the middle.
Estimate.
Great. Thank you very much.
Thank you John .
As a reminder.
A question. Please press star followed by one.
The next question comes from the line of Dave Rodgers with Baird. Please go ahead.
Yes, good morning.
Colin you talked a little bit earlier about domain point, and obviously to your had some aggressive development redevelopment plans for the entire domain.
But as you looked at it I think you mentioned potential renewal with time Warner So I guess, maybe give us a little more thought on what your thoughts are on domain and kind of how you might view the pace of development or redevelopment there versus maybe what had been communicated with tier previously.
Yes, Dave It I'd say the plans that that tier had.
For the long term redevelopment of the project, we share those plans and as we continue to look at the opportunity.
I think our enthusiasm about the domain as a whole continues to rise as we get under the get under the Hood and I referenced the lease that were in process of doing that domain tend the demand.
For for space in that in the domain is strong I would say that if we move forward with a renewal.
Of of time Warner domain point, it doesnt necessarily preclude the redevelopment.
The site Theres some theres some adjacent land there are some things you can do with the parking garage is so so by signing that renewal doesn't necessarily preclude.
Some redevelopment on a portion of that site.
And then maybe just sticking with Austin I mean, now with the domain with the CBD assets that you previously owned.
And then some of the assets that they had owned in the southwest Submarket in the suburbs.
How do you view Austin and is that all kind of a core holding for you now can you rank those in terms of how you think and feel about often in various submarkets.
Yes, Austin as a whole is is a market that cousins has been in for 2020 plus years and in a market that we continue to see a fantastic growth profile I think again, if you if you backup prior to that the tier merger is our management team and board put together our strategic plan for the company, we had absolutely identified to southwest and domain as Submarket stat that we wanted to be invested enacted in and I think the.
The tier transaction presented us an opportunity to advance that strategic plan and we feel like we now have a fortress asset with the terraces in southwest in and couldn't be more excited about the buildings that we have at the domain and the potential to add to that over time as the demand continues to grow.
And then maybe for for Greg Colin talked about the potential development, starting the second half of the year and.
Continued activity in discussions I mean, do you kind of view asset sales is the primary source of funding for the development spending as you go forward and how aggressive do you feel like you'd need to be to sell assets to fund the growth.
Well every time, we've got a use of proceeds day, we look the most cost efficient source of capital.
So you know right now the most cost efficient source of capital for us would be asset sales and then you layer on top of that the strategic.
Reasons behind that he we've acquired some assets through the two transactions that are non core markets for us and and it makes asset sales by far the most likely source of capital for any incremental investments in the second half of 19.
Remind me of your second part of your question.
I think you had I think you addressed it I get part of it is you'll you'll use some of the proceeds from her first it sounds like assuming that happens to fund and rivers terminal. So I guess, maybe the second part would be how how how much do you feel like you'd need to sell starting new development or do you feel pretty well positioned at least for the near term.
Okay.
Yes, Dave I think the way to think about that it's a great question. The way to think about that is from a leverage perspective, certainly the way we think about it I mean, we said it several times in this call and we mean it I mean, our targeted leverage level is between four to four and a half times net debt to EBITDA, we've essentially been running the company in that range. Since 2014, so chroma six straight years. So we're not just saying it we're actually doing it.
And so we'll adjust our asset sales.
Accordingly to make sure that we stay within that range.
Okay, great. Thank you.
Next question comes from the line of Dan is now with Green Street Advisors. Please go ahead.
Great. Thanks, guys good morning.
Can you maybe describe the decision to consolidate terminal was if the JV partner looking to exits or did you approach them and maybe the appetite to consolidate other JV interest in the portfolio.
Morning, Danny it.
At terminus again, I think we've we've always.
As we look at it bucket felt like there's there's a terrific opportunity in say in conversations with our with our partner.
Which is a multi billion dollar fund.
They were making some of their own fund level decisions and we saw an opportunity.
To to put together the transaction and move forward with again, what we think is going to be a terrific in a value add opportunity, but I think there were certain fund level decisions that they were making and again created to.
If a good opportunity and I think more broadly speaking as we look at other.
Joint venture interests were we've got some and are fortunate to have some terrific partners that.
That weve worked very well with and created value with and I think at times, where it makes sense for for those parties to exit.
And we think it's a good investment opportunity going forward.
We're always interested in pursuing those but as we sit here today.
Again, I think we've got.
We've got some great partners that we're working very very well.
Together.
On future dispositions or potential dispositions any potential tax consequences from a sale of Hearst tower or anything.
The legacy to your assets.
Dan its Greg good morning.
We will we have a clear line of sight to be able to sell the assets that we've talked about and then some without the requirement of special distribution or a 10 31.
Okay, and just last one from me it looks like there was some modest cost savings and the domain developments.
Any of those relating to just accounting differences or anything we should be aware of in terms of synergies.
Relating to the tier transaction.
Yes, Dan add there's room or accounting adjustments as you brought it over from from tier two cousins.
Okay, great. Thanks, guys.
Next question comes from the line of Anthony Paolone with JP Morgan. Please go ahead.
Hi, Thank you good morning.
I'm just looking at the development pipeline in the supplemental and now that you've got this year.
Projects rolled and can you give us an update on where the pipelines expected yield.
It is and how that might compare to where you see the private market.
Sure Tony the.
I think as we've rolled tier into.
Into cousins and their development pipeline I think it looks very similar to to the projects that we have which in total look at the shadow pipeline could support.
Over 3.5 million square feet, and we've consistently been able to deliver GAAP yields in a north of an 8% yield and.
And I think that that remains unchanged with the.
The tier projects now with within cousins and so I think if you look at the private market for New Trophy quality properties, we're seeing cap rates.
Certainly in the fives and I would I would tell you in terms of some recent trades, it's been in the very low fives for stabilized properties and Austin and then as you look at it the other markets within our within our portfolio. They.
Tended to range in that five and a half to five and three quarter range theres quite a bit of spread quite a bit of margin and quite a bit of customer interest and demand and thats why we remain so so encouraged about the opportunities in front of us.
Okay and just maybe this is a great question just to understand as we.
As we think about just talking about development yields going forward, if I look at that tier assets that were added.
I think the basis you show it was actually a little bit less than where tier used to show them and.
It seemed like you paid a premium to their basis for the entity. So I didn't know if this was an allocation thing or how we should think about.
That.
Okay.
Tony you are dead on we hire a third party as do all companies when they do a transaction like that your transaction.
To provide.
Independent third party evaluation of what's called a few PA purchase price allocation.
And.
And the numbers that you see in our in our documents right now our preliminary they will actually get finalized in the third quarter, but we used Duff and Phelps by Duff and Phelps, you'll see promise you spiked weak would you have the numbers that we put the tier assets on our financial statements at are the results of the purchase price allocation.
The macro the total price that we paid for Terry.
Okay, and so but it sounds like between that and cones comment swim quick when tier used to talk about 9% kind of development yields.
Your yields given what you think you paid for these assets will be comparable.
You Didnt allocate more money to those and so you're taking an eight or something like that.
Jenny it ultimately.
Yes, again, regardless of where.
Where it gets allocated whether it's specifically into the land or or elsewhere.
On to the balance sheet, we ultimately paid the.
The premium that that we paid.
But I, but I would just kind of point you to my earlier comments that that the we look at our development pipeline and and remain confident that we can continue to deliver north of those 8% yields.
Across the entirety of our portfolio I think Austin Austin included.
And.
We're excited about that what's in front of us there.
Okay, great. Thank you.
This concludes our question not to session I would like to turn the conference back over to Colin Connolly for any closing remarks.
We appreciate you spending the time with US. This morning as you can tell we're excited about having the tier merger behind us and we're excited about the opportunity in front of us for cousins properties. We appreciate your interest and we look forward to talking to you again next quarter.
Ladies and gentlemen, the conference has now concluded. Thank you could tending today's presentation you may now disconnect.