Q3 2024 Cousins Properties Inc Earnings Call
Okay.
[music].
Good morning, ladies and gentlemen, and welcome to the cousins properties third quarter conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you required and when you do this just starts please press star zero for the operator this call is being recorded.
Speaker Change: IDEXX over 'twenty 'twenty 'twenty four I would now like to turn the conference over to Pamela Roper General Counsel. Please go ahead.
Thank you good morning, and welcome to cousins properties third quarter earnings Conference call with me today, Colin Connolly, our President and Chief Executive Officer, Richard Hickson Executive Vice President of operations Kennedy Hicks, Our executive Vice President and Chief Investment Officer, and Greg Eczema, Our Chief Financial Officer, the press release and supplemental.
Speaker Change: Market 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 breakthrough requirements. If you did not receive a copy. These documents are available through the quarterly disclosures and supplemental SEC FCC information link on the.
The Investor Relations page of our website cousin Dot com.
Speaker Change: 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 atrophied filings. The company does not undertake any duty to update any forward looking statements.
Speaker Change: Whether as a result of new information future events or otherwise I suppose that the reason 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 with that I'll turn the call over to Colin Connolly.
Colin Connolly: Thank you Pam and good morning, everyone.
Colin Connolly: We had a strong third quarter at cousins.
Colin Connolly: On the earnings front the team delivered 67 cents a share in SSO.
Colin Connolly: And same property net operating income increased four 4% on a cash basis.
Colin Connolly: Leasing remained very strong.
Colin Connolly: We leased 763000 square feet during the quarter, the seven 2% cash rent roll up.
Colin Connolly: This was our highest quarterly leasing volume since 2019.
Colin Connolly: In addition, we executed compelling and accretive new investments and completed our inaugural unsecured bond issuance.
Colin Connolly: These achievements are fantastic and continue to highlight the strength and resiliency of our leading sunbelt lifestyle office portfolio and best in class balance sheet.
Colin Connolly: Before discussing the quarter in more detail I will start with a few observations on the market.
Colin Connolly: Fundamentals are improving.
The existing supply of office buildings is declining as older buildings are converted or torn down and new construction is almost nonexistent.
Colin Connolly: At the same time leasing demand is accelerating as more companies return to the office.
Colin Connolly: In a recent KPMG survey, 83% of Ceos. So they expect their companies will shift back to requiring five days of office attendance sometime in the next three years.
Colin Connolly: Amazon just made it by day of week announcement, we know the other fortune 500 companies considering similar measures.
Colin Connolly: Not surprisingly national leasing volume during the third quarter was the highest since pre pandemic.
Colin Connolly: We believe vacancy is reaching a peak in market tightening is not far off in the lifestyle office sector.
With these tailwind our team remain strategically focused on driving earnings growth, while maintaining our best in class balance sheet.
Colin Connolly: To do so we are prioritizing both internal and external growth opportunities.
Colin Connolly: Our portfolio was 88, 4% occupied at quarter end up from 87, 6% at the start of the year.
Colin Connolly: Given the quality of our real estate and the strength of our balance sheet, we intend to grow our leasing market share and drive occupancy back to more stabilized levels.
Colin Connolly: Bank of America's exploration in Charlotte next year is a speed bump and that process. However, with the pickup in leasing activity and otherwise modest expirations through 2026, we believe there is meaningful upside in the cash flow of our existing portfolio in the intermediate term.
Colin Connolly: Externally.
Colin Connolly: We are executing on compelling investment opportunities.
We closed on a joint venture acquisition of the Presidium building in Midtown Atlanta and.
Colin Connolly: And subsequent to quarter end, we purchased a whole loan collateralized by St. Anne Court in Uptown Dallas.
Colin Connolly: Those are high quality assets in terrific locations Kennedy will provide more specifics in a moment.
Colin Connolly: The transactions highlight that we are open to a wide variety of opportunities, including debt structure chance transactions joint ventures and property acquisitions at this point in the cycle.
Colin Connolly: However, our core strategy remains the same invest in properties that already are or can be positioned into lifestyle office and our targeted sunbelt markets near term accretion remains a priority.
Colin Connolly: While there are signs of Bali, the private capital markets remained challenging for office.
Colin Connolly: Asset level debt and equity is limited and expensive.
Colin Connolly: Many private equity investors have legacy issues and their portfolios and are on the sidelines.
Colin Connolly: Conversely, the public markets show meaningful signs of improvement.
Colin Connolly: Liquidity has grown in the unsecured debt market and spreads have tightened.
Colin Connolly: Office REIT share prices have begun to rebound disagree.
Colin Connolly: This creates a compelling investment environment for cousins as private and public market valuations finally converge.
Colin Connolly: In conclusion, the office market remains highly bifurcated.
There is little to no leasing demand or capital for commodity in older vintage properties values.
Colin Connolly: Values for these properties will reset so they can be re imagined or demolished.
Colin Connolly: At the same time, the lifestyle office market continues to improve.
Colin Connolly: New construction is at historic lows, while leasing demand is picking up.
Colin Connolly: The market is rebalancing and a shortage of premium space is not far off it is econ 101.
Colin Connolly: <unk> is uniquely positioned for this environment, we built the company to thrive during all economic cycles and today, we are at a highly advantageous position.
Colin Connolly: We are in growing and vibrant sunbelt markets.
Colin Connolly: Bank of America ranked our portfolio is the highest quality among all all office Reits.
Colin Connolly: Our leverages the lowest across the sector the pricing on our unsecured bonds trade at the tightest spreads to treasuries among all traditional office companies and.
Colin Connolly: In short we have great access to capital and are excited about the future for cousins.
Colin Connolly: Before turning the call over to Richard I want to thank our talented cousins employees, who are the foundation of our success there dedicated hardworking and provide excellent service to our customers Richard.
Richard: Thanks, Colin good morning.
Richard: Our operations team continues to deliver outstanding results in 2024 in the third quarter. Our total office portfolio. In this period, we used in weighted average occupancy percentages or 91% and 88, 4% respectively.
Richard: Both metrics are essentially in line with last quarter.
Richard: Some comments on occupancy to start this quarter's occupancy reflects the full impact of Wee works give back space at 725 parts in Atlanta.
Richard: We also had two portfolio changes this quarter first and as I outlined last quarter domain for an Austin dropped out of our operating portfolio. Upon it through its original lease exploration in August.
Richard: Second our recent acquisition Presidium in Midtown Atlanta was added to the operating portfolio at our 20% share.
Richard: With these portfolio changes only one 8% of our total square footage expiring in 2024, and about 290000 square feet of signed new and expansion leases set to commence three years, and we expect occupancy to trend modestly higher in the fourth quarter.
Richard: Looking to 2025, the long anticipated move outs of one trusts and Atlanta Bank of America in Charlotte and a handful of other smaller ones should result in a downdraft in occupancy and temporary trough through the third quarter. However.
Richard: With otherwise low explorations and continued strong leasing demand we expect to begin to begin building back occupancy towards the end of 2025 and beyond.
Richard: This was an exceptional quarter for cousins from a leasing perspective during the third quarter. Our team completed 37 office leases totaling a very strong 763000 square feet with a weighted average term of seven seven years.
Richard: This quarter's activity represents our highest volume since the second quarter of 2019 and was also one of our highest quarterly totals relative to our portfolio size.
Richard: I also want to note that as of today, we have signed nearly the same volume of leasing year to date. In 2024, then we signed in all of 2023.
Richard: Also encouraging that 611000 square feet of our completed leases this quarter were new and expansion leases, representing 80% of our activity.
Richard: Included in this quarter's activity was our recently announced 320000 square foot full building lease with IBM at domain 12 in Austin.
Richard: IBM will officially assume Luis for meta platforms as of January one 2026, and the lease was also extended from 2031 through 2040 I.
Richard: I will speak to this lease more later.
Richard: Guarding lease economics second generation cash rents increased again in the third quarter by a solid seven 2%.
Richard: Like last quarter, the Atlanta portfolio was the largest contributor.
Richard: With Austin, and Tampa also seeing solid rent roll ups average.
Richard: Average net rent this quarter came in at a record breaking $45 in 'twenty one.
Richard: Eclipsing, our next highest quarter by over $6. This quarter average leasing concessions to sum of free rent and tenant improvements were $7 73.
Richard: A decrease relative to the last few quarters as a result, our average net effective rent. This quarter also broke a company record at $34 57.
Richard: At the market level, our new half development and National continues to show good momentum this quarter. The team completed a 22000 square foot office lease with Boston Consulting group, taking the commercial portion of the project to 44% leased we are also in lease negotiations with three more office users totaling another 20.
Richard: 5000 square feet and these would take the commercial portion of the project is 50% leased.
Richard: As a reminder, multifamily leasing that new half began in the second quarter I.
Richard: I am pleased to say that multifamily leasing has accelerated as we sit at 25% we used today compared to 25, 21% at quarter end.
Richard: This is impressive given we are in a seasonally slower time for apartment leasing.
Richard: And Atlanta high quality space continues to see the most demand reflected in positive absorption across class a assets this quarter.
Richard: It's a office vacancy also dropped this quarter for the first time since 2022 per J O L. <unk>.
Richard: Large transactions are also returning to the market with seven leases signed in Atlanta, This quarter of 75000 square feet or greater in.
Speaker Change: In our Atlanta portfolio, we signed 100 104000 square feet of leases and 68% were new and expansion leases.
Speaker Change: Austin is also seeing a return of large block leasing activity with two of the largest new leases of the year signed in the third quarter.
Speaker Change: <unk> also recently noted that quarterly leasing activity in the market has increased every quarter. This year with this quarter, surpassing one 5 million square feet for the first time since mid 2022.
Speaker Change: Our Austin team signed 399000 square feet of leases this quarter rolling up second generation cash rents by 8%.
Speaker Change: That includes our new lease with IBM that domain 12.
Speaker Change: We are incredibly excited about the IBM lease not just because of its size, but for several other important reasons as well.
Speaker Change: We view this week is a strong signal that the technology sector will continue to be highly invested in the Austin market and particularly the domain over the long term.
Speaker Change: As IBM takes occupancy we believe the energy in the core of the domain will be better than ever third the extended lease term that came with this transaction significantly derisk the exploration profile of our domain portfolio and last this week is a great example of the power of our platform and the types of <unk>.
Speaker Change: Creative solutions cousins can provide customers regardless of the market.
Speaker Change: In Charlotte our team remains focused on finalizing plans for the material redevelopment of fifth third center in Uptown, where as you know bank of America is set to move out of 317000 square feet at the end of July 2025.
Pleased to report that during the quarter, we extended an existing 49000 square foot sub lessee of bank of America on a short term direct basis, which incrementally ladders two full floors of that upcoming exploration.
Speaker Change: We view the <unk> decision to remain at the property for longer as a vote of confidence in the quality of the customer experience at the building.
Speaker Change: And Phoenix.
Speaker Change: CBRE noted the class a office posted 69000 square feet of positive net absorption in the quarter.
Speaker Change: Our portfolio Hayden ferry has experienced unprecedented tour activity with August seeing three times the monthly average.
We attribute this interest to the transformational redevelopment of this project, which is nearly complete.
Speaker Change: This quarter, our Phoenix team signed an impressive 171000 square feet of leases, including a new lease with a 53000 square foot customer that will occupy the first two floors of Hayden ferry one in the second half 2025.
Speaker Change: We also signed a 52000 square foot renewal and 23000 square foot expansion of a technology company at Hayden Ferry too.
Speaker Change: This transaction is particularly notable and that the need for this customer to expand was driven by an initiative to bring employees back to the office.
Speaker Change: According to J O L. The Tampa office market also remains strong and stable recording $2 3 million square feet of leasing activity year to date.
Speaker Change: Further sublease space decreased by nearly 600000 square feet in the quarter.
Speaker Change: This quarter, our Tampa portfolio occupancy increased to 92% and the team signed a total of six leases and rolled up second generation cash rents by two 6%.
Speaker Change: I'll wrap up by touching on our leasing pipeline recall that subsequent to quarter second quarter in our late stage leasing pipeline strengthen markedly one driver of that was our pending lease with IBM. However, even with that we now signed our late stage pipeline remains at a very healthy level.
Speaker Change: Our early stage pipeline is even more encouraging so recall it takes time for that to translate to signed activity in short we remain optimistic about what lies ahead.
Speaker Change: As always thank you to our hardworking and talented operations team for positioning positioning us so well I do want to extend a special thank you to our Tampa team they.
Speaker Change: They are doing an incredible job with the recent hurricanes not just during and after the storms, but as important leading up to them. They are proactive and professional approach to preparedness and support one another was second to none and a big reason our properties performed so well with only minor damage.
Speaker Change: <unk>.
Thanks, Richard Good morning, everyone.
Speaker Change: Salaries and our leasing activity is coinciding with an acceleration in investment activity I'm pleased to discuss key recently completed transactions transactions that align with our core strategy thoughtfully and accretively invest in sunbelt lifestyle office environment.
Speaker Change: Subsequent to quarter end, we acquired a mortgage loan secured by St. Enquired at 320000 square foot class a office asset built in 2009, and the dynamic Uptown Dallas Submarket.
Speaker Change: $138 million loan with acquired a part a basis of $431 per square foot.
Speaker Change: Now let me have an initial maturity of December seven 2024, and an interest rate at <unk>.
Speaker Change: Plus 366 basis points.
Speaker Change: At the time of the acquisition the asset with 98% leased.
Speaker Change: As you are aware, we also recently acquired two mezzanine loans as a way to allocate capital and earn attractive risk adjusted return during a time period in which the office sector has continued to reprice in a bid ask spread often remains between buyers and sellers. This is a continuation of that branch.
Speaker Change: In addition in August we.
Speaker Change: We acquired <unk> at 525000 square foot class a office building that is extremely well located at the intersection of Peachtree in 14th Street in the heart of Midtown Atlanta.
Speaker Change: We acquired the 2001 vintage building and an 80 20 joint venture with <unk> $83 million or $158 per square foot on an all cash basis.
Speaker Change: I think the sense, the 20% interest and will provide property management leasing and redevelopment services for the partnership.
Speaker Change: We're excited about this transaction for some regions.
Speaker Change: First the initial basis of $158 per square foot and opportunistic return profile is very compelling.
This is reflective of the re pricing that has occurred particularly for value add profile asset.
Building has historically averaged about 90% leased but with 74% leased at the time of acquisition.
Speaker Change: With some long known move outs I think the C is projected to drop to approximately 50% over the next few quarters.
Speaker Change: As part of our acquisition and we are planning significant capital upgrades to modernize and repositioned the building.
Speaker Change: These redevelopment efforts will begin in early 2025.
Speaker Change: This is a similar strategy that cousins has successfully executed at several other properties recently, including the neighboring Promenade campus and we're encouraged by early leasing interest in the building.
Speaker Change: All in we anticipate that our stabilized basis will be less than half of today's replacement cost a significant competitive advantage.
Speaker Change: Second we are excited to have executed this transaction with a fantastic partner in Count Lane.
Speaker Change: The joint venture allows us to participate in an attractive opportunistic investment in our backyard and leverage our strong development in Atlanta team.
Speaker Change: Given the lease that they re positioning effort needed it will take time for the investment to materialize into meaningful accretion.
Speaker Change: Therefore, partnering with <unk> on this transaction allows us to create long term value at the property level, while maintaining significant acquisition capacity for other transactions that offer more near term accretion.
Speaker Change: Finally, we remain optimistic that this is just the beginning of an interesting transaction cycle for guidance, one where we intend to press our competitive advantage as Colin mentioned asset level debt for office remains challenging to obtain in expenses in the case of <unk>, our ability to move quickly and close all cash with a highly regarded Jay.
<unk> partner gave us a significant advantage over other interested parties.
Speaker Change: We continue to evaluate a variety of acquisitions and structured investments across our sunbelt markets.
Speaker Change: Our guiding criteria its underlying asset that are or can be repositioned to be tricky lifestyle environments, we have ample capacity to acquire asset buyer.
Speaker Change: And we'll also evaluate investment opportunities with Likeminded joint venture partners, where it makes sense.
Speaker Change: I will turn the call over to Greg.
Thanks Kennedy.
I'll begin my remarks by providing a brief overview of our results.
Greg: Spending a few minutes on our same property performance.
Then moving on to our capital markets and development activity before discussing our balance sheet and closing my remarks with an update to our 24 earnings guidance overall as Colin stated upfront our third quarter results were outstanding.
Greg: Second generation cash leasing spreads were positive for the 40 <unk>.
Greg: Straight quarter.
Greg: Leasing velocity was excellent and <unk>.
Greg: Same property year over year cash NOI increased.
It was also a very clean quarter, there were no significant unusual or nonrecurring items of note.
Greg: Focusing on same property performance for a moment GAAP NOI grew four 2% and cash NOI grew four 4% during the third quarter compared to last year.
Greg: This continues a string of positive same property numbers that began in early 2022 with the most recent quarterly cash increases.
Greg: Largely driven by occupancy gains at our sand Your center building in Austin as.
Greg: As well as our 100 mill in Tempe Gateway buildings in Phoenix.
I also wanted to take a moment to point out the lumpiness that can sometimes run through our quarterly same property expense numbers oftentimes driven by property taxes.
Greg: Property tax true ups as we receive actual assessments from the taxing authorities can pushed the quarterly numbers around quite a bit.
Greg: So it's always best to use longer term time frames when looking at expense numbers.
Greg: Moving on to our capital markets activity.
Greg: After receiving our investment grade credit ratings from Moody's and S&P in the second quarter, we completed our inaugural unsecured bond issuance in the third quarter.
Greg: In mid August we issued $500 million of five and 708 notes due 2034.
Greg: Investor demand was strong and it was widespread with over 100 investors submitting orders for $3 billion.
Greg: Subsequent to closing the offering pricing on our bonds in the secondary markets have improved significantly and as Colin said earlier, our bonds now trade at the tightest spread to treasuries among all traditional office Reits, providing us with the critical cost of capital advantage.
Greg: Turning to our development efforts to current pipeline is comprised of a 50% interest in new often Nashville, and 100% of Dot net domain nine and Austin.
Greg: Our share of the remaining estimated development cost is approximately $50 million, which will be funded by a combination of our new house construction loan and our operating cash flow.
Greg: We've revised the estimated stabilization of the commercial space, a new half from the fourth quarter of 2025 for the second quarter of 2026.
Greg: Construction is on schedule and leasing remains generally in line with our original underwriting however customer move in dates are a bit later than we originally forecasted.
Greg: Looking at our balance sheet net debt to EBITDA is an industry, leading five one times and our liquidity position is excellent. We ended the quarter with nothing outstanding on our $1 billion credit facility and over $76 million in cash and cash equivalents, we have ample balance sheet capacity.
Greg: As we explore the attractive transaction market talent and Kennedy discussed earlier.
Greg: I'll close by updating our 2000 <unk> earnings guidance. We currently anticipate full year 2024, <unk> between $2 66.
Greg: And $2 70 per share with a midpoint of $2 68.
Greg: This is up two pennies from the prior guidance, we provided in July and up six pennies from our original guidance. The most recent increase was driven by lower short term interest rates.
Greg: Lower real estate taxes, as we realized favorable assessment outcomes and new investment activity.
Greg: Our earnings guidance remains clean there no speculative property acquisitions property dispositions development starts or capital markets transactions. If any of these do take place we will update our earnings guidance Accordingly.
Greg: Our guidance assumes the mezzanine loan on the radius property in Nashville that we acquired during the second quarter is paid off at par prior to year end.
The loan has a maturity date of June 2025, however, the borrower's currently pursuing an early refinancing and we assume they will be successful.
Greg: Floating rate loan and open to prepayment with no penalty or diseases.
Greg: Our guidance also assumes the whole loan we just acquired in the St and court property in Dallas was paid off at par on the maturity date of December seven.
Bottom line, our third quarter results, our excellence and we are increasing earnings guidance for the third straight quarter.
Greg: I believe we are one of the few office Reits to forecast positive <unk> growth in 2024.
Greg: Our best in class leverage and liquidity position remains intact.
Greg: Office fundamentals continue to improve with accelerating leasing activity and declining new supply and we continued to deploy capital and it's compelling and accretive investment opportunities.
Greg: We are in the early innings of what is often a very productive part of the cycle for office owners and we enter it with a significant cost of capital advantage.
Greg: We look forward to reporting our progress in the coming quarters with that I'll turn the call back over to the operator.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone, you'll hear a prompt that you had.
Your hand has been rate should you wish to decline from the polling process. Please press star followed by the <unk>.
Speaker Change: If you are using a speaker phone please lift the handset before pressing any Keith one moment. Please for your first question.
Speaker Change: Your first question comes from Jeff Spector with Bank of America. Your line is now open.
Great Good morning, and congratulations on the quarter.
Jeff Spector: First question, if we could focus on your comments around optimism around the transaction cycle are you planning to continue to leverage.
Jeff Spector: Your current footprint and teams.
Jeff Spector: Do you see your self looking into other sunbelt markets. If you could talk about that a little bit more.
Speaker Change: Great Good morning, Jeff.
Speaker Change: I would say that we.
Speaker Change: Are very constructive on the investment environment today for lifestyle office, and we do remain very focused on the sunbelt.
Speaker Change: Footprint that we operate in today, we're always evaluating new markets within the sunbelt.
Speaker Change: No I've mentioned, Raleigh, Durham Metro and South, Florida markets that we continue to evaluate but I really wouldn't characterize them as new markets. We've been invested in both of those in the past.
Speaker Change: And so we will continue to look at those I would say there's nothing imminent in those markets is today, we really don't feel opportunity constrained in the markets that we've got a presence in today.
Speaker Change: In boots on the ground.
Speaker Change: Thank you and then my second question I know you've talked you've compared a couple of times to 2019, which I assume is.
Speaker Change: Purposeful so.
Speaker Change: In terms of occupancy levels can you provide any more color there I know you.
Talked about how 25 may play out, but I guess big picture.
Speaker Change: Where do you have compared again this quarter to 2019 2019 was a very strong year.
Speaker Change: Can you talk a little bit more about that and maybe even tie in.
Speaker Change: Thoughts around concessions and free rent. Thank you.
Speaker Change: Sure Jeff.
Speaker Change: It's call it again I think we.
Speaker Change: To refer to 2019.
Speaker Change: They are in that.
Speaker Change: And our performance today, if you were to strip out of the.
Speaker Change: The year 2024, and compare our results to pre pandemic of 2019 as it relates to leasing volumes net effective rents et cetera, it's kind of at or better.
Speaker Change: And so at cousins, we are spending less time talking about return to office and more time about returning to normal.
And our customers are back more in force the leasing demand is running parallel with that and so we believe that our occupancy today that was really less COVID-19 related in some specific discrete move outs that we've dealt with over the last couple of years and one next year.
Speaker Change: But we believe we can return this portfolio to normalized levels of occupancy and Thats, certainly north of 90% that might take us a year or two to to reach those goals and but the quality.
Speaker Change: Of the portfolio that we own today the lifestyle portfolio that bank of America. We appreciate ranking number one across all REIT is certainly has the capacity to do that and I think broadly speaking the office market as a whole is going to stabilize youre going to see lower quality properties.
Speaker Change: Candidly disappear.
Speaker Change: And repurposed, while the highest quality buildings fill back up and that process is certainly underway today and so that gives us a lot of optimism and again I think the performance of the company in 2024.
Speaker Change: Largely mirrors or exceeds what we were where we were in 2019.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Blaine Heck with Wells Fargo. Your line is now open.
Blaine Heck: Great. Thanks. Good morning can you talk a little bit more about the St in court and mortgage acquisition. Its got a maturity date that is right around the corner I know what Greg just said in.
Blaine Heck: In guidance, but can you run us through any of the potential alternative scenarios and whether you think there's much probability that something other than being paid back at maturity happens.
Yes.
Blaine Heck: Blaine.
Blaine Heck: Let me just again step back again and strategically kind of highlight how we're looking at the market today, which again I've mentioned, how constructive we are on lifestyle office.
Blaine Heck: <unk> for the obvious supply and demand reasons.
Blaine Heck: Since we have while we certainly have an equity bias, we have a list of target buildings in our markets.
Blaine Heck: That we think are consistent with our lifestyle office.
Blaine Heck: Yeah.
Blaine Heck: Criteria.
Blaine Heck: And as we evaluate those buildings in this environment, we are willing to look across the capital structure. So that we invest at the appropriate basis and with compelling risk adjusted returns since over the course of 2024, we've we've acquired two mezzanine loans now one whole loan we've done a joint venture acquisition and we will continue to look at.
A wide spectrum of opportunities you noted in a particular scene in court loan that that does mature in December of this year I'd say, it's still way too early to speculate.
Blaine Heck: On that but but on the mezz and whole loans.
Blaine Heck: Our expectation is that will ultimately be paid off at maturity. However, those outcomes are still uncertain.
Blaine Heck: And I think ultimately if the borrower does not pay us off we will certainly assess our rights and remedies and be prepared to take appropriate action.
Blaine Heck: We're highly comfortable and the quality of the collateral and our loan basis, but I think it's just too early to speculate and I can't comment on any specific conversations beyond that today.
Okay. That's really helpful color and maybe just sticking with with you here.
Speaker Change: Its kind of first made that decision coming out of the pandemic to really gather up dry powder for investment and commented on your intention to find ways to invest in the dislocated market. It seemed as though you know kind of everything was on the table, including large portfolio or even entity level transactions, which.
Speaker Change: <unk> has done in the past.
Speaker Change: Is that still the case could we see anything any any kind of large transactions portfolio transactions entity level transactions or do you think in this environment, it's probably more likely to be one off smaller deals.
Yes.
Speaker Change: We're again, we're going to continue to be creative.
Speaker Change: Cousins in terms of.
Speaker Change: How we access.
Speaker Change: And complete transactions again focused on.
Speaker Change: The appropriate basis in compelling risk adjusted and accretive.
Speaker Change: Turns and we're going to be flexible.
Speaker Change: And how we invest and I think certainly in the early part of the cycle is Kennedy mentioned with bid ask spreads you have got to be a bit more creative I do think that.
Speaker Change: We are starting to see.
Speaker Change: Market values and public market values converge and so we do think that's going to open up.
Speaker Change: An opportunity to consolidate assets.
Speaker Change: The more traditional property acquisitions.
Speaker Change: That's certainly an opportunity to take a bespoke approach and really curate and select the right assets.
Speaker Change: <unk> to add to the portfolio, where again, we'll always evaluate any and all opportunities.
Speaker Change: But I do think the.
Speaker Change: The probably the near term opportunity that's going to open up for US is in the property acquisition Arena.
Speaker Change: Okay, great. Thanks, Scott.
Blaine Heck: Thanks Blaine.
Speaker Change: Your next question comes from Anthony <unk> with Jpmorgan. Your line is now open.
Speaker Change: Yes. Thanks.
First just with the discussion about the desirability of just the best assets in and Youre, having a decent amount of activity. There is there any prospect of build to suits are activating any of the <unk>.
Speaker Change: Development land in the near term.
Speaker Change: Sure Tony we are starting to see.
Speaker Change: More.
Speaker Change: Or having more discussions with customers about their future real estate needs that could include build.
Speaker Change: Build to suits.
Speaker Change: <unk>.
Speaker Change: Other types of development and I think.
Speaker Change: I think in today's current.
Speaker Change: Capital markets.
Speaker Change: The challenge is.
Speaker Change: With construction costs and the cost of capital.
Speaker Change: Being able to find a balance in the appropriate return.
Speaker Change: And rent that works for existing customers I do think youre going to see.
Speaker Change: Similar to the situation with IBM, where existing buildings are going to fill up first but I don't think development is that far behind and I do think it's again very encouraging some of the conversations that we're having with customers who are thinking longer term very specific about their space needs and.
Speaker Change: And I think Youll see development in very select Submarkets like the domain as an example.
Speaker Change: <unk> be really not that far off.
Okay.
Speaker Change: Thanks, and then just second one as you think about 2025.
Speaker Change: Can you maybe talk about.
Speaker Change: What the mark to market looks like right now on the leases coming due and just how you think.
Speaker Change: That might look.
Speaker Change: Sure Tony.
Speaker Change: Yes, I can't comment specifically on 2025 that will ultimately be dictated by which specific deals are completed.
Speaker Change: What renewals, we do what early renewals that we do.
But again I think we remain confident that we have an opportunity to consistently roll up rents and again to what degree will vary quarter to quarter, but I think this marked our 14th straight quarter of.
Speaker Change: The roll ups and we're optimistic that we can continue that into 2025.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from John Kim with BMO capital markets. Your line is now open.
John Kim: Good morning, there was commentary I think Richard made on the Austin market and two large leases signed in the third quarter. We all know about the IBM lease, but I was wondering what that second lease was with and if you could just discuss the.
John Kim: The health of Tech leasing in the market.
Maybe it's looking for space I'm wondering if there's other large tech leases out there.
John Kim: Currently in the market.
Speaker Change: Sure So the second.
Is paypal.
Speaker Change: <unk> signed a significant expansion.
Speaker Change: And tower too, which is on the friends just outside of the core of the domains. So.
Speaker Change: It kind of dovetails with the second part of your question regarding tech sector activity, Yes, I think thats.
Speaker Change: Again, an example of a technology company and you're making a long term decision.
Speaker Change: To increase their presence.
Speaker Change: And we know of a number of other technology companies that we already do business with and some others that we don't currently do business with it are searching.
Speaker Change: The Austin market, specifically, so we feel good about about the amount of activity, that's starting to come to fruition.
Speaker Change: Okay and then following up on the same home core mortgage debt.
Speaker Change: Have you been in contact with the owner of hardwood and.
Speaker Change: Can you discuss.
Speaker Change: What do you think they are added.
Speaker Change: Opening up a relationship with you.
Colin Connolly: Sure John as I mentioned earlier.
Speaker Change: We need to maintain confidentiality relative to any discussions we have with our borrowers across any of the loans.
Speaker Change: That we own and the other thing is just too early to.
Speaker Change: To speculate.
Speaker Change: And certainly we will continue to keep you up to date.
Speaker Change: As these evolve.
But I certainly need to maintain confidentiality relative to.
Speaker Change: Any discussions we may or may not have.
Speaker Change: I know Greg mentioned.
Youre, assuming that mortgage debt gets paid off but I imagine youre not making this investment just for five or six weeks of accretion. So I'm just wondering.
Speaker Change: That commentary was for.
For guidance purposes or is that what do you think will actually happen.
Speaker Change: Well again our.
Speaker Change: We certainly need to make some assumptions as it relates to our guidance and again our expectation.
Speaker Change: Any and all.
Loan investments that we make.
We are going to.
Within our guidance make it our expectation that we were paid off at maturity again theres outcomes are uncertain, but we felt like that was the appropriate assumption to make and ultimately if the borrower does not pay us off as I mentioned earlier, we'll assess our rights and remedies and.
Speaker Change: Go from there.
Speaker Change: Okay, great. Thank you.
Your next question comes from Nick Tillman with Baird. Your line is now open.
Hey, good morning first wanted to.
Speaker Change: Touch on the leasing pipeline the kind of late stage pipeline that break out between new and renewal leasing.
Richard if you had that.
Speaker Change: Yes, so the mix is.
Speaker Change: Still waiting and our pipeline toward new and expansion leasing.
On average over a long arc of time, it's more like a 50 50 mix, but but we are still leaning towards new and expansion a lot of that.
Speaker Change: I would note is driven by the fact that that we still remain at a very good position from an exploration profile perspective, so we're going to naturally because of that.
Speaker Change: Have more new and expansion activity.
That's helpful and then Greg I wanted to touch a little bit on some of the two large pending vacancies within the portfolio what youre assuming for redevelopment costs for maybe fifth third and if there is any additional spend needed at North Park with one truck leaving.
Speaker Change: Sure. So we've talked about this several times on previous calls we are.
Speaker Change: We're still finalizing our plans and the fifth third Redevelopments in Charlotte I think we'll have really specific or more specific answers for you in our February call, but as we sit here today.
Speaker Change: Very likely to look like in cost like previous Redevelopments that we've done for example, promenade in Atlanta would be a good example.
Speaker Change: And but we'll have more details for you on that development in the February call.
Speaker Change: On North Park, I'm Gonna, let Richard talk about North Park about that sure.
Speaker Change: Okay.
Speaker Change: Stepping back we are constantly evaluating.
Every property in our portfolio.
Speaker Change: Whether we need to be making improvements proactively to help drive leasing helped maintain quality at the level that we think our customers deserve and demand and so.
Speaker Change: Specifically to North Park. We are we are actively looking at some improvements that we can make primarily around amenities.
Speaker Change: In light of the one trust exploration in the first quarter next year, but we have a handful of other properties, where we're proactively making.
Speaker Change: We're reinvesting if you will.
Speaker Change: Across multiple markets.
Colin Connolly: This is Colin I'll, just add kind of.
Colin Connolly: Some additional color.
Colin Connolly: That I think kind of highlights the portfolio today as you'll recall, we sold over $1 billion.
Colin Connolly: I'd say, our lowest quality office from 2020 to 2022 and those were the assets probably that needed.
Colin Connolly: The highest amount of capital.
Colin Connolly: Then over the last several years, we have substantially reinvested in buildings like promenade built.
Buildings like.
Colin Connolly: At Hayden ferry $33, 50, Peachtree et cetera, so while we continue to evaluate some renovations and upgrades to properties like fifth third.
Colin Connolly: In North Park.
Colin Connolly: The portfolio overall is in terrific shape, and and high quality really from top to bottom and so we think.
Colin Connolly: Our portfolio in the amount of capital needed relative to some others. It's just been a really good place.
Colin Connolly: That's it for me thank you.
Speaker Change: Your next question comes from Paul <unk> with Keybanc. Your line is now open.
Speaker Change: Alright, thank you.
Speaker Change: Colin you talked about reaching 90% occupancy at some point in the future given you talked about some downward downdraft in occupancy through <unk> next year.
Feel like Youre still on track reached 90% occupancy and maybe even possibly 2026.
Speaker Change: But we're not going to set specific.
Speaker Change: Specific dates, but I do think once we.
Speaker Change: I think the bank of America exploration again, which has been long known.
Speaker Change: As we kind of hit that I think that will certainly be a trough in occupancy and the pipeline of leasing in front of us than what we've already done our hope is to recover that in <unk>.
Short order and.
Speaker Change: And I did mentioned in 2026, we do have I'd say fairly modest expirations through 2026, and so I think that's going to allow us to really move occupancy late in the second half of 'twenty five and then certainly into 2026.
Speaker Change: But I'm just not prepared to put a specific date on it yet, but I do think certainly 90% is absolutely a goal of the company I do think it is very achievable and ultimately our goal is to drive occupancy.
Speaker Change: Occupancy beyond 90%.
Speaker Change: Two as I said more stabilized levels.
Speaker Change: Okay got it that was helpful and then.
Speaker Change: Just quickly on the IBM lease I was wondering if you can give us some color on how that took place in.
Speaker Change: <unk> met as planned and the rest of the Austin market going forward.
Speaker Change: So again the IBM lease.
Speaker Change: Highlights the still the current challenges in the private capital markets and some of you might recall that IBM actually had a signed lease to anchor a new development just adjacent to the domain that also had some speculative.
Speaker Change: Space and ultimately were unable to obtain the necessary financing to move that project forward. So our team.
Speaker Change: Came up with a very creative solution too.
Speaker Change: To utilize some kind of.
Underutilized space by meta and ultimately find a really a <unk>.
Win win win for cousins, IBM and meta and I think it's terrific transaction I think again.
Speaker Change: Highlights my earlier comments that that I think we're going to see customers.
Speaker Change: From a from a cost effectiveness find ways to utilize high quality space that is currently available and that will ultimately tightened the market and then lead to new development.
Speaker Change: But a terrific transaction for the company and I think I think all are.
Speaker Change: Excited about the outcome.
Speaker Change: Your next question comes from Peter <unk> with Jefferies. Your line is now open.
Peter <unk>: Thank you very much one of your peers. This quarter mentioned, an uptick in interest for build to suits and a lot of the sunbelt markets.
Speaker Change: Just curious if those conversations are picking up for you as well or if that's kind of part of the opportunity set you are considering.
Peter <unk>: With the capital that you've raised.
Speaker Change: It is I still believe that near term kind of acquisitions and investments are the most likely path for new investment for us, but those conversations regarding new development and build to suits are happening.
Speaker Change: And again, those conversations and discussions regarding a project like that usually start one to two years out before ultimately commencing.
Speaker Change: So.
Speaker Change: As I said those conversations are starting if I had to.
Speaker Change: Speculate on how our investment activity with sequence I think we'll see a period of time, where investments are very attractive, but im excited our team is are having those conversations so that in a year or two down the road, perhaps since the acquisition.
Speaker Change: Market becomes less compelling we're ready to go with the highly attractive and hopefully pre leased development opportunities to continue at really attractive long term growth profile.
Speaker Change: Okay. Thanks, and then just to go back to your comments around.
Speaker Change: The dislocation between the public and the private market I guess, maybe a philosophical question. If you kind of step back and look at the environment your cost of capital in the public market is pretty favorable.
Speaker Change: And like you said things are pretty challenging in the private market.
Speaker Change: I guess do you see anything that could sort of change that dynamic, particularly on the private market side and cost things to converge or is there anything out there that maybe you think about sort of change that dynamic over the next year or so.
Speaker Change: Well I mean ultimately.
Speaker Change: Markets.
Speaker Change: Converge and.
12 months ago, you would you would probably say the private side still had a more advantageous cost of capital than the public I think that's probably reversed itself today, but longer term they will likely converge.
Speaker Change: But I think that will take some time and part of that dislocation on the private side has so many private players.
Speaker Change: Debt and equity.
Speaker Change: And at their own share of legacy issues and on the private side those take longer to resolve than that in the public mark where market, where there can be kind of instant liquidity and so I do think that that is kind of the governor at the moment on private capital is is trying to work through and clear.
Speaker Change: Or are there existing portfolio.
Speaker Change: Though challenges before they're in a position to allocate new capital.
Into the office sector.
Speaker Change: Alright, Thats helpful. Thats all from me thanks.
Speaker Change: Your next question comes from Dillon Brzezinski with Green Street. Your line is now open.
Speaker Change: Hi, guys. Thanks for taking the question here.
Beat a dead horse on <unk>, but just sort of curious you talked about.
Speaker Change: Likely being paid off at maturity or that's been what's implied by guidance or possibly assessing horizon remedies. If you don't get paid off but just sort of trying to get a sense for your appetite to extend this loan possibly at maturity.
But we're going to go.
Speaker Change: Again, it kind of any any discussions and possible paths.
Speaker Change: Until those ultimately play out we're going to continue to the main confidentiality.
Speaker Change: Certainly those are just conversations that have to happen in between.
Speaker Change: Borrower and.
Speaker Change: And lender.
Speaker Change: But again I think I go back to this.
We're highly comfortable in the quality of the collateral and the loan basis and there is a wide variety.
Outcomes. One is we mentioned that we're assuming in our guidance is that it has paid off and we'll continue to use that as is our assumption and expectation.
Speaker Change: We will continue to reevaluate.
Speaker Change: As the process plays out and it can be fluid.
Speaker Change: And I guess as you guys are evaluating other investment opportunities are there certain markets, where youre seeing just a higher investable universe today, given where.
Speaker Change: He he there were just more appetite in terms of sellers wanting to have any bid that's there whether its on the debt or equity side.
Speaker Change: No I'd say across our footprint.
Speaker Change: We think that that they are.
Speaker Change: There'll be.
Speaker Change: There'll be opportunity.
Speaker Change: And I think for US it's important to note that.
Speaker Change: While over the long term, we do want to continue to enhance our geographic diversification and grow our market share in places like Charlotte and Nashville and Dallas.
Speaker Change: We have a lot of conviction across all of our markets, including Atlanta, and Austin and so in this kind of unique peer.
Speaker Change: Period of time, we're going to invest opportunistically in any of our markets when we think.
Speaker Change: Really attractive situations come up where we can invest in high quality lifestyle office at attractive attractive basis with compelling risk adjusted returns and we and we hope some kind of near to medium term accretion.
Great I appreciate those details Colin thank you.
Thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from Brendan Lynch with Barclays. Your line is now open.
Great. Thank you for taking my question.
Speaker Change: Who's great outcome between men and IBM and it sounds like tech demand in Austin is pretty strong, but do you anticipate any other tech tenants will scale back square.
Square footage within your portfolio.
Speaker Change: This is Richard no no we don't anticipate any other significant.
Speaker Change: Scaling back.
Speaker Change: Okay, great. Thanks, one quick one on scene in court.
Speaker Change: The initial maturity date is in December but is there anything embedded extension option that you could discuss.
Speaker Change: There are certain extension options embedded in that that debt.
Speaker Change: Required certain thresholds that will be met and unfortunately, we just can't provide any any more specifics beyond that.
Understood.
Speaker Change: And maybe one other quick one it sounded like.
Taxes were a consideration in the.
Speaker Change: Cash same property NOI coming down a little bit relative to the first half just wondering if theres anything else specific that you could call out that might be behind that decline.
Speaker Change: Okay.
Speaker Change: Greg now that that was the largest.
Speaker Change: Component by far.
Speaker Change: Okay very good thank you.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question. Please press star one.
Speaker Change: Next question comes from John Kim with BMO capital markets. Your line is now open.
Speaker Change: Thanks.
John Kim: I wanted to comment.
John Kim: Follow up on your commentary on the Bofa lease in Charlotte you mentioned.
John Kim: So short term direct leasing you've done with the sublet fee.
John Kim: I'm wondering if you could provide any color as far as how long that term was if theres any mark to market.
John Kim: Sure.
John Kim: Mark to market.
John Kim: As more of like a customary.
John Kim: Escalator kind of in line, so that really didnt move the needle at all but.
The it's a two phased extension if you will so so one of the floors will be expiring at the end of 'twenty Fives and then the balance will expire at the end of 2006.
Speaker Change: Are there any other opportunities to go direct with their sublease tenant.
Speaker Change: No no that really is the only one as far as going direct with <unk>.
Speaker Change: A fairly unique situation, but I would say that we have very encouraging tour activity already even though bofa has yet to vacate the space.
Speaker Change: In Charlotte.
Speaker Change: Is pretty compelling from an early stage leasing pipeline perspective.
Speaker Change: Okay and then.
Speaker Change: Notice that the $9 6 million.
Speaker Change: Bankruptcy claims SVP is no longer mentioned in your supplement I realize it wasn't part of your guidance to begin with but I was wondering what the status of Atlas.
Greg: It's Greg.
Greg: The continued the bankruptcy process continues along slowly as they always are.
Greg: But we still have that unsecured claim out there for $9 $6 million. The bonds are still trading in the secondary market between kind of 55% to 60 cents on the dollar so thats still out there. It's just not in any of our guidance.
Greg: Okay.
Speaker Change: Thank you.
Speaker Change: There are no further questions at this time I will now turn the call over to Colin for closing remarks.
Colin Connolly: Thank you all for joining us this morning, and your interest in cousins properties. Please feel free to reach out to gray Andrew of Ronnie with any questions or follow up and we hope to see many of you out in Las Vegas at the NAREIT Conference in November have a great day.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.