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Cousins Properties Inc. (NYSE:CUZ)

Q1 2014 Earnings Conference Call

May 8, 2014 11:00 AM ET

Executives

Tripp Sullivan - Corporate Communications

Larry Gellerstedt - President and CEO

Colin Connolly - CIO

Gregg Adzema - EVP and CFO

Analysts

Jamie Feldman – Bank of America Merrill Lynch

Brendan Maiorana – Wells Fargo

Dave Rodgers - Baird

Jed Reagan - Green Street Advisors

Operator

Good day, and welcome to the Cousins Properties’ First Quarter 2014 Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Tripp Sullivan of Corporate Communications. Please go ahead.

Tripp Sullivan

Thank you. Certain matters the Company will be discussing today are forward-looking statements within the meaning of Federal Securities Laws. For example, the Company may provide estimates about expected operating income from properties, as well as certain categories of expenses along with the expectations regarding leasing activity, rental rates, leasing expenses, development, acquisition, financing and disposition opportunities and expectations regarding the demographic and economic trends in markets in which the Company is active. Such forward-looking statements are subject to uncertainties and risks and actual results may differ materially from these statements.

Please refer to the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2013 and its current report on Form 8-K for the quarter ending March 31, 2014 for additional information regarding certain risks and uncertainties. Also, certain items that Company may refer to today are considered non-GAAP financial measures within the meaning of Regulation G, as promulgated via the SEC. For these items, the comparable GAAP measures and related reconciliations may be found through the quarterly disclosures and supplemental SEC information link on the Investor Relations page of its website at www.cousinsproperties.com.

I’ll now turn the call over to Larry Gellerstedt.

Larry Gellerstedt

Good morning everyone and thanks for joining us today. With me this morning are Gregg Adzema, our Chief Financial Officer and Colin Connolly, our Chief Investment Officer. Strong market dynamics and robust real estate fundamentals continue to propel growth in the Sunbelt and Cousins is at the forefront of this growth with our portfolio of Class A office properties which combine prime urban locations with best in class amenities. We remain very confident in our long term strategy and our portfolio and balance sheet are well positioned to adapt and execute this strategy in all stages of this real estate cycle.

I would like to start the call this morning briefly touching on this long term strategy and how it layers into the current real estate cycle. Colin is then going to discuss overall performance in the first quarter as well as an update on investment activity. We’ll then finish up with Gregg who will provide more detail on our financial results for the quarter.

The Cousins team continues to move forward in 2014 with our long term strategic plan. We own, acquire and develop well placed trophy assets in the best urban submarkets and high gross Sunbelt cities. We began this strategy at the time when market and economic conditions provided a window of opportunity for compelling value add acquisitions. We focus on our Sunbelt cities where demographic and economic road projections were positive and then Tim [ph] pointed high barrier urban submarkets in those cities where companies and their employees wanted to work and live. This is where our creative deal making capabilities, our development skills, deep relationships and market knowledge provided a key competitive advantage.

We have assembled a portfolio of attractive office assets at values averaging 57% below replacement cost, well placed and walkable communities near public transportation, desirable housing and city parks. Our highly skilled develop teams have revitalized and upgraded these properties with best in class amenities and technology efficient creative work spaces. We are confident that these repositioned assets will continue to outperform over the cycle and will provide us with a stable platform for new development and investments when and where it makes sense.

Let me briefly expand on the strength of the markets we targeted to give you a deeper understanding of what will continue to drive our results. Job drop, job growth and demographic trends towards urban assets drive demand for our office product. According to PPR, job growth in our core markets of Atlanta, Austin, Houston, Dallas, Fort Worth and Charlotte is averaging 2.7% while that of the United States as a whole is only 0.8%

The Houston Metro added approximately 138,000 new residents in 2013, the largest population increase of any U.S. metro area. The Dallas Fort Worth Metro ranked third beat out only by New York which had the second largest increase. A particularly powerful point to note, our core markets which comprised only 7.7% of the U.S. labor force accounted for 41% of the total office net absorption in the United States during the first quarter.

In addition to appealing demand elements, our infield submarkets provide physical and economic barriers to entry, which constrain the potential for new supply. While new development is underway in some of our Texas markets, the specific submarkets we target have limited new supply and few competitive future sites in available and large part due to the multifamily sector development burn. It is these compelling supply demand characteristics along with our creative repositioning efforts on the asset level that provide our current portfolio with a catalyst for solid growth for the next few years.

Moving on to how our strategy fits into the current real estate cycle. As yields have compressed in high barrier coastal markets, we have seen the reemergence of significant inflows of both equity and debt capital for commercial real estate investment in our markets over the last 12 months.

With this influx of capital in the system, a strong recovery in pricing has significantly reduced the opportunity for bargain buys we have executed in the last 24 months. It is at this point in the cycle however where our new development acumen comes into play and we are focused on a good pipeline of opportunities which we look forward to discussing during the balance of the year.

As we have demonstrated this quarter in Austin, this development acumen, combined with our financial strength allows us to create significant value for our shareholders. Our new office building, Colorado Tower will be the first high rise office building developed in Austin, a city that is seeing historic office absorption since Cousins built Frost Bank Tower in 2003.

After a significant push in leasing during the first quarter of 2014 Colorado Tower has reached 51% leased, up from 22% at the end of 2013. We signed over an 110,000 square feet of new leases in the first quarter with companies and prospects remain very strong. Approximately 500,000 square feet of companies are currently evaluating relocation to the Austin City. With a little more than a 181,000 square feet available -- remaining available in Colorado Tower, we have positioned our asset as the best choice for companies that desire a prime location, innovative design, best in class amenities and state of the art technology efficiencies.

We are looking for other similar office opportunities, as well as executing our current opportunistic pipeline at Emory Phase 2, UNC, and downtown Decatur. These latter developments, which our relationships and expertise allowed us to access without competition remain very important sources of value creation.

In addition to development we remain focused on a select acquisition opportunities to upgrade our portfolio and to increase our market concentration. However in light of current pricing, we will remain very disciplined. On a similar note with these pricing levels, we will continue to evaluate additional non-core dispositions to support our investment efforts.

In closing it’s a great time to be at Cousins. Our strong performance and positive prospects are a testimony to the strength of our assets, our brand and our people. With that I’ll turn it over to Colin.

Colin Connolly

Thanks Larry and good morning everyone. 2014 is off to a great start at Cousins, as Larry mentioned we are in an attractive point in the market cycle to be an owner, operator of trophy office assets located in the best urban submarkets across the SunBelt as these favorable market conditions in conjunction with our best in class leasing and property management team continue to drive positive results within the portfolio.

The highlight, same store NOI growth on a cash basis was up 10.2% in the first quarter of 2014, compared to the first quarter of 2013. The burn off of free rent associated with prior leasing activity in the Atlanta portfolio accounted for the bulk of this increase. Same store percent leased ended the quarter at 90.7%, up 20 basis points from the end of the fourth quarter of 2013.

At the heart of this strong operational performance is continued leasing momentum. As Larry touched on earlier, our team executed approximately 454,000 square feet of leases during the quarter with good activity across all of our markets. Second generation releasing spreads were up by approximately 13% on a GAAP basis, although effectively flat on a cash basis. While on the surface these metrics might appear to signal some softening within the portfolio, the reality is quite the opposite.

Our releasing spreads are heavily influenced by the market mix in any given quarter. And in this particular quarter, approximately 50% of our leasing activity was in Atlanta with only 15% in Houston and Austin. As a comparison, approximately 51% of our leasing activity during the fourth quarter was in Houston and Austin with Atlanta’s share totaling 35%.

I mentioned last quarter that we believe that in place rents within our Texas portfolio, range between 10 to 20% below market. We still believe this to be the case and are therefore optimistic that we will continue to see positive cash re-leasing spreads over the long term but with some volatility quarter-to-quarter based on geographic mix.

Let me take a moment to highlight some of the key leasing activities within the portfolio. In Austin, as Larry mentioned our team leased approximately a 110,000 square feet at Colorado Tower, which brings the project to 51% leased. We were thrilled that Colorado Tower continues to be so well received in the marketplace and are very encouraged by the positive macro trends that play in Austin. Of the 110,000 square feet leased, approximately 90% is associated with new customers to the Austin market. This in migration of high quality jobs and positive net absorption bodes well for both Colorado Tower and the overall Austin market.

Staying in Austin, 816 Congress is currently 84% leased, which is up from 78% at the time of acquisition about 12 months ago. I think it’s important to note that we leased 24,000 square feet during the quarter to Atlasian on a short term basis through year end at which time they will relocate to Colorado Tower on a long term basis. This creative deal structure highlights the power of our market concentration which allowed us to provide a unique, multi billing solution to address both the short term and long term needs of this important customer. Post quarter end, we renewed the US Attorney on 32,000 square feet. This along with the 35,000 square feet Texas teacher renewal that we announced last quarter addresses the material near term lease exploration at 816 Congress. With recently upgraded amenities including a new fitness facility and conference center, we are now firmly focused on offence in converting our robust pipeline of leading prospects.

Moving over to Houston, we had a relatively quiet quarter on the leasing front. This is really a function of our lack of vacant space to lease at our 5.6 million square feet at Greenway Plaza and Post Oak Central, which together are approximately 95% leased. That being said, we’re continuing to see demand remain very healthy and the team is focused on some larger renewals of existing customers. As we have mentioned in the past, Exxon does have two 6 months extensions on their 215,000 square feet lease at 3 Greenway Plaza which expires in February 2015.

We now believe that it’s most likely that Exxon will not trigger those extensions as they go ahead with their relocation of the Woodlands on schedule. We generally view this is a positive for Greenway Plaza. The clarity on timing now allows our team to move ahead with the marketing in this space and we’ve already received some preliminary interest from several existing customers looking for potential expansion space.

Moving over to Atlanta, we have seen a noticeable pickup in activity in most of our properties. Leasing has strengthened at Terminus in Buckhead as well as North Point in Alpharetta and we now believe the market is poised for some meaningful rent growth as there is no specula of new supply under construction. At Promenade, we have now completed our capital enhancement program that included a new fitness center, cafe, coffee bar and other lobby upgrades. These improvements have been very well received in the market as we are now 92% leased up from 58% when we purchased the building in November 2011.

Downtown Atlanta continues to remain soft on a relative basis, compared with other major submarkets in town. Nonetheless we did make progress during the quarter at both 191 Peachtree and ACSC, where we increased the percentage leased by 60 basis points and 150 basis points respectively. We are encouraged that near term completions of major downtown developments like the College Football Hall of Fame, National Center for Civil and Human Rights, the Atlanta Streetcar and major expansions at neighboring Georgia State University are beginning to create buzz in the city and will hopefully help us draw attention to the opportunity now available downtown.

Moving onto Dallas, Fort Worth, the story playing at 2100 Ross is very similar to Promenade in Atlanta. The property is now 82% leased, which is up from 67% at the time of acquisition in August 2012. In aggregate, we have leased over 316,000 square feet into our purchase making 2100 Ross one of the most active buildings in all of Dallas. This success has given us confidence as we near completion of a very significant capital enhancement program to upgrade the building lobby, fitness center, conference facility and other common areas and amenities.

Much like our experience at Promenade, we are optimistic these improvements will be well received and provide a springboard to push rental rates and complete the lease up of this exciting repositioning project in the heart of the Arts District in Dallas.

In Fort Worth, new leasing activity at 777 Main is slower than we’d like. That being said, we knew going into the project that this would be a longer term lease up than some of our other recent value-add acquisitions. This is the first time since 2004 that the Class A comstat in downtown Fort Worth has been below 89% leased. So this relatively small market without 6 million square feet is sometimes overlooked because there was an assumption that no big blocks of spaces are available.

We are working hard to re-educate the marketplace and led both the local and national customers and brokers know that Fort Worth once again has attractive space available in its urban and walkable CBD. Switching gears to our transaction activity, we closed on the sale of 600 University Park during the first quarter. The sale price was $19.7 million, which equates to approximately $161 a square foot. We do own one additional office property in Birmingham, Lakeshore Plaza which totaled 197,000 square feet and is currently 99% leased. We do not view Lakeshore as a long-term strategic. So we will evaluate our options to exit at the right time to maximize value.

On the developmental front, we are very pleased with the progress made on our current active projects. As we’ve mentioned earlier, Colorado Tower is now 51% leased and on time and on budget for delivery at year-end. Emory Point also continues to perform very well. The apartments in Phase 1 are now 99% leased and the retail is 90% leased, which is a very strong indicator for customer demand in our $73 million Phase 2 which is projected to deliver in the spring of 2015. 121 West Franklin, our mixed use development project in Downtown Chapel Hill is still on schedule to break ground during the quarter of 2015. The total project cost is just over $100 million. Given the significant residential component in the project, I would anticipate us pursuing a strategy similar to Emory Point where we partnered with a best in class multifamily developer with deep local experience.

With that, I will turn the call over to Gregg.

Gregg Adzema

Thank you, Colin. Good morning everyone. Overall we had a very solid first quarter. EBITDA was $0.19 per share. This compares to $0.11 per share for the first quarter of 2013 for a year-over-year gain of 70%. The positive momentum in earnings we’ve enjoyed over the last several quarters persists. It was also a very clean quarter. There were no special or unusual items pushing FFO either up or down. As I said in our last conference call in February we entered a new constructive for earning here at Cousins. The quality of our earnings has significantly increased. 92% of our FFO is now coming from property of level NOI, rather than fee income land profits and the like, up from 62% four years ago and 95% of this NOI is coming from a single property type office.

In addition, the ownership structuring in our portfolio is much improved. 87% of our NOI is now generated by assets in which own 100%. This change is the result of the strategic plan that Larry had laid out earlier in the call. The benefit to shareholders is an earnings stream it is more focused, easier to understand, easier to forecast and easier to value.

We also continue to take our already strong balance sheet and make it even stronger. Our debt total market cap is now 25.6%. Fixed charge coverage is 3.6 times and debt to EBITDA is 4.3 times. These are strong balance sheet metrics from any perspective and compare very favorably to not our office peers but the entire REIT industry.

Digging a little deeper into our debt profile, the strong story remains the same. 91% of our debt is fixed rate and this fixed rate debt has an average maturity of 6.2 years. And we have no maturities of any significance until 2017. For all of our debt the weighted average interest rate is below 4.5%. These metric place us in an excellent position to execute the strategic plan.

We recognized termination fees during the first quarter of approximately $1.8 million. Although termination fees can be a bit lumpy this amount is not highly unusual. We’ve averaged $3.3 million in annual termination fees over the past couple of years with a quarterly range of between $19,000 and $3.2 million.

In addition, we’re now twice as big. So termination fees should in general be larger going forward. The most significant capital markets transaction during the first quarter was our issuance at 8.7 million shares of common equity at a net price of $11.365, which represented 1.94% discount to the closing price on the day we announce the issuance.

This transaction generated $98.6 million in proceeds which we use to redeem all of our Series B cumulative preferred shares. This is a terrific trade for our shareholders. But please do note that there will be a $3.5 million non-cash charge related to this redemption in our second quarter earnings.

We also increased our annual dividend rate during the first quarter from $0.18 per share to $0.30 per share, which is a 67% increase. We’re excited to be in a position to return capital to our shareholders through an increased dividend. Before moving onto guidance I wanted to provide an update on our portfolio of properties that had in place embedded NOI growth potential.

As a quick remainder in the summer of 2012 we identified three of our large assets in our portfolio that had significant NOI upside potential due to existing vacancy, 191 Peachtree, Promenade and the American Cancer Society Center. Upon the purchase of 2100 Ross during the third quarter of 2012, we expanded this list to four assets.

When we purchased 816 Congress during the second quarter of 2013, we moved the number up to five and we added a sixth, 777 Maine, a trophy office tower in Fort Worth that was part of the Crescent acquisition in the fourth quarter of 2013.

We estimate that moving the occupancy on these six assets, was the time added them to this list until they reached 90% occupancy will generate approximately $18.5 million in embedded NOI. As of March 31st we had signed a net new leases representing about $11.7 million of this total, up from 10 million last quarter.

The amount of annualized revenue we are realizing on these leases was about $3.5 million during the first quarter. We will continue to keep you apprised of our progress with these properties. Normally I’d wrap up my portion of the conference call with an update to our 2014 guidance. As a quick remainder we typically provide guidance for specific assets where historical performance may not exist or may not be good guide post for future performance. We also provide guidance on fee income as well as G&A expenses.\

I’m happy to say that no update is necessary. We currently anticipating hitting all the numbers I provided in our last call. Our properties are performing, our fees are on track and our expenses are under control. To wrap up we believe we have created a unique and compelling investment opportunity here at Cousins. We have irreplaceable portfolio properties in the rapidly improving Sunbelt markets. We have proven development expertise at the right point in the cycle and we have the balance sheet to support our strategy.

We’ve planted the seeds for the success over the last three years and now is the time to begin harvesting them for our shareholders. We look forward to reporting our progress as we move through 2014. With that let me turn the call over the operator for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead, sir.

Jamie Feldman – Bank of America Merrill Lynch

Can you guys talk a little about what kind of rent growths you’re seeing across your markets, in terms of market asking rents?

Colin Connolly

Hey Jamie, it’s Colin. It really varies market by market, and certainly in Houston over the last two-three-four years we’ve seen very significant rent growth totaling upwards of 30% over that time frame. We’re started to see, as the markets in Dallas and Atlanta and Charlotte have begun to stabilize, we believe that we’re at a, an inflexion point where over the last 12 months the tightening was really in the form of concessions, TIs and free rent starting to come down. We’re now at inflexion point where we’re really starting to see as you said kind of face rents start to move. So we would anticipate in those markets Dallas, Atlanta, Charlotte to really start to see that movement over the course of the next 12 months.

Jamie Feldman – Bank of America Merrill Lynch

So I guess, even in terms of net effective rents, where would you say they are year over year?

Colin Connolly

I think in Atlanta for example, when we look at net effective rents including concessions, we’ve seen changes of call it 10% or so within our particular portfolio.

Jamie Feldman – Bank of America Merrill Lynch

Okay, and then I know there’s talk of potentially new supply in Buckhead and maybe Central Perimeter. Can you guys talk about the supply side across your markets and which ones. I know it takes a while to build an office building but where are you more concerned or less concerned or maybe you’re not concerned at all at this point.

Larry Gellerstedt

I’ll take a first stab at that Jamie, and then I’ll let Colin jump in if he wants to add some color. If we just sort of start through our markets, in Atlanta there’s talk about Tishman maybe starting a building in Buckhead. I don’t really have an insight on that. I don’t know of any leasing they’ve done but they have said they’re going to start this year for a half million feet. That’s the only new supply that we’re aware of that might come on this year and the market other than some selective build-to-suit. A lot of folks including us want to make sure we got attractive sites in other areas. We announced one this past quarter in the Central Perimeter that we ventured with a developer here where we’ve got a site tied up and are looking for a build to suit type of opportunity but the rents are still significantly below replacement cost rents in really all the submarkets in Atlanta. So we don’t anticipate any significant new supply for at least the next year to year being announced or coming out of the ground.

We are seeing fair amount of new supply in Houston. There’s about 14 million feet of new supply. About 70% of that is pre-leased and then you’re continuing to hear starts of new development. So we’re keeping our eye on Houston pretty closely in terms of new supply. But there’s no new supply that is either in place or under construction that we see as a level of concern, yet, but we certainly are keeping our eye on Houston.

Austin, we feel great about. We were the first strike in downtown and that will go -- obviously is going very well. We’ve heard rumors of some more new supply, possibly getting started in the CBD of Austin but I couldn’t really comment on how valid that is. Nothing has started rather than the one other building that started the same time that we’d started Colorado Tower.

And then Dallas around the uptown market where we have 2100 Ross, you have one new building that has started. It’s doing very well in terms of the preleasing and there’re a couple of others there are making noise like they’ll start here in the next six to 12 months. But if you look at under the context it’s still very manageable new supply and not anything at this point that we’re concerned about although Houston would be the one we’re watching most closely.

Operator

Thank you, our next question comes from Brendan Maiorana of Wells Fargo, please go ahead, sir.

Brendan Maiorana – Wells Fargo

And this may be for Colin. You guys did a great job in repositioning Promenade and got that asset leased up and as you know sort of in a stabilized form now. It seems like and maybe you’re in a comparable position at 2100 Ross, and 816 Congress now, given the improvements in each of those buildings. So just wondering if you could kind of talk about maybe the time period that we could expect those assets to get leased up to stabilization in that sort of 90% plus range.

Larry Gellerstedt

Hey Brendan, this is Larry. Once again I’ll sort of give a high level and let Colin jump in with anything that I might have missed. The 2100 Ross is really a great story because that starting lease level that we had, we’ve also had 50,000 square foot termination that we took on that building and. So we have had tremendous success leasing that up and have been able to push rate form the initial lease. We did a good deal. So we aren’t really worried about the leasing up 2100. We’re just trying to make sure that we lease it out at the most favorable rate and the amenities that just have opened in the past 30 days are just remarkable. When you go and see them and the customers feedback, both from existing customers and new prospects, we feel pretty bullish between now and the end of this year, you’ll continue see some meaningful leases that will push that number up towards the higher 80s or 90s.

816 Congress is very similar. We have just opened this past month the new amenities and once again we’re just getting unsolicited comments from existing customers and prospects about the difference that those have made. There’s a lit bit more vacancy in Downtown Austin sort of at the Class A level that 816 is competing against but just given that demand, particularly the thing I’ve been so encouraged about in Austin in the last six months is the out of market demand in the overall Austin marketplace. It’s just palpable in terms of the companies looking to relocate there and so although I wouldn’t want to put a timeframe on leasing up 816, you right, in terms of just how positive we feel about the prospects for continuing to move that lease percentage up.

Brendan Maiorana - Wells Fargo

And then again I get -- oh, sorry go ahead Colin.

Colin Connolly

I was just going to say in terms of the assets, I think they are in a very good comparisons. We bought Promenade in November 2011. So we’ve stabilized that asset little under 2.5 years and really as bought that, the playbook was to establish some early momentum, really begin at that point to implement some enhancements to the project that -- we really listen to the customer to provide to provide that direction and what they wanted. And again as I’ve mentioned in my prepared remarks that really provided catalyst to us to really complete the stabilization of that project. As we look at 2100 Ross and 816, I think we were in a very much looking in a similar playbook, had underwritten in a similar manner, and we feel very good about kind of where we are relative to the original underwriting and acquisitions and where we are in the execution.

Brendan Maiorana - Wells Fargo

Okay that’s helpful and I guess if we think about 191, you guys have done a nice job over the past several years, kind of moving that up. So you’re pretty close to stabilization there. ACSC, it looks it moved up a little bit in the quarter and just wondering if there is maybe some more activity and if you’re little more optimistic about being able to drive occupancy higher in that asset now than maybe over the past six months or so?

Larry Gellerstedt

We have as I’ve said earlier overall downtown relative to kind of robust activity in some of other markets has lagged a little. That being said, over the last – I’d say over the last quarter or so we’ve begun to see that start to filter into downtown and we have seen some increased activity that’s showing up in this quarter’s results. And it’s been active both on renewal side as well as some new customers looking at the project.

Brendan Maiorana - Wells Fargo

Okay that’s helpful. And then last couple of ones for Gregg. Any color that you can provide or guidance on what the straight line rent impact may migrate to during this year? I know it picked up. It seems like that was probably largely from all the good leasing activity you’ve done and probably for rent periods that are there now but I would imagine that that number migrates downward during the year, but if you could provide some color, that’d helpful?

Gregg Adzema

Generally you’ve got direction correct, Brendan. But we provide asset by asset GAAP NOI guidance and I’m just going to kind of stick to that.

Brendan Maiorana - Wells Fargo

Okay and then just finally that Exxon lease, is the mark-to-market on that, if you really had that space comparable to kind of those overall terms of Houston that you’ve provided previously?

Gregg Adzema

It is, Brendan.

Operator

Thank you. Our next question comes from Dave Rodgers of Baird. Please go ahead, sir.

Dave Rodgers - Baird

Just wanted to follow up little bit more on Exxon. Now that you have I guess a specific time and you’re able to have discussions. What do you think downtime is on that space and kind of given the quality and the tenants that you might either be having discussions with or that would fit in that space? Can you put a band not only around the time but maybe the capital needed to get that space up and running?

Larry Gellerstedt

Sure, I think as we look at 3 Greenway Plaza now with Exxon most likely leaving in early February, it can be a very similar playbook to what we’ve done at Promenade, 2100 Ross and 816. There is a great releasing opportunity for us there. As just mentioned those rents are below market today. So we are going to aggressively look at some upgrades to that building from a capital perspective, lobby upgrades et cetera. And we’d anticipate -- I don’t want to put specific timeframe, Dave, in terms of the lease up but as I said in my prepared remarks, we have begun to see some activity as that space -- it’s gotten out in the market that it’s going to become available. We have some incoming from existing customers who are looking for expansion. So we’re certainly pleased by that activity and optimistic with what we can do there.

Dave Rodgers - Baird

Okay maybe for Gregg. I think both 2100 Ross and Promenade had fairly large lease versus occupied spreads still embedded there. Can you talk about when those larger leases do begin to affect the economics both on a GAAP and a cash basis?

Gregg Adzema

Yes, so we’ll just talk on a GAAP basis. At 2100 Ross, we’ve got three big leases that are signed and represent approximately -- I’m doing the math in my head -- about 100,000 square feet and all those tenants will move in before the end of ’14. So you will see that leased occupancy number compressed by the end of this year. At Promenade the delta is even wider. As you know the total number is probably closer to 115 and look I’m trying to again add in my head, 115,000ish. That will take a little bit longer because the largest chunk of that 115,000 is a lease that we signed with Frazier & Deeter that has kind of two-step move in. Two thirds of it they move in at end of the ’14, the other third they move in at end of ’16. So you’ll get about and I’m rounding here, Brendan -- you’ll get about 80% of the existing leases at Prom moving in by the end of ’14 with the balance moving in in ’16.

Dave Rodgers - Baird

And then I guess, maybe just going back to directionality of the straight line rents without giving the guidance, the move-ins by the end of ’14 shouldn’t offset the improvements that you’re seeing from the beginning of year?

Gregg Adzema

To be candid, Brendan, I don’t have that math in front of me. So I don’t, I mean I’m sorry, Dave, I’m sorry, I don’t want to guess because I just don’t have that math in front of me.

Dave Rodgers - Baird

Okay no problem thank you. And maybe for Larry, talk a little bit about more on the development side. I think previously it seems like maybe Galleria, Houston, CBD, Austin Suburban seemed to be kind of areas where you felt there were good economic returns in development. I guess one maybe talk about kind of what’s happening in development returns, are they getting tighter? And two, are there other areas that you’re focused as well or should we kind of continue to focus around your core portfolio today?

Larry Gellerstedt

Well, I think development spread, we remain disciplined in our development spreads where we look for 150 basis points to 200 basis points spread over what we think are conservative exit caps. Those spreads will vary a little bit depending on how big the project is and how much preleasing there is or isn’t in it. But in terms of the specific opportunities that we’re looking at, we continue to see opportunities in our core markets and so we haven’t been pursuing anything outside of those core markets.

We think that although the central parameter in Atlanta is ways off from new development, it has gotten tight and it continues to be an area that big corporations like their headquarters and so we think we’ve got a fantastic site there. We are actively marketing it. We’ve got a couple of sites up in North Point that would be nice smaller buildings and that market has also gotten tight so we’re marketing those.

And we’re active looking at opportunities in the Buckhead market Atlanta. In Houston we’re really watching that new supply coming in and I would tell you we’re being very conservative just in terms of our underwriting of the new development opportunities we see, not that we aren’t looking at them but we’re just trying to watch the new supply pretty closely. We’re looking some things in Dallas once again in the core area that we like and then we’ve got some good opportunities in Austin. I think we’ve given color that we have another site out in the Northwest market at Research Park that we’re feeling positive about and we’ve also got some land that we’re working to see if we can get entitled in the Southwest, some market which is tightened a great deal. So the good news is we see plenty of opportunities in the places that we have assets and have great people on the ground, and that’s where we’re staying.

Operator

Thank you. (Operator Instructions) Our next question comes from Jed Reagan of Green Street Advisors. Please go ahead, sir.

Jed Reagan - Green Street Advisors

Just curious if you’re seeing any changes in cap rates and values in your core market so far this year and maybe there’s any specific recent comps that you could point to that might demonstrate value in your portfolio?

Colin Connolly

Jed, its Colin. We’ve certainly seen I’d say as we’ve rolled into 2014 a compression of cap rates. I’d say it’s been more pronounced in some of the value-add type acquisitions that we’ve seen worth net or more heavily reliant upon what’s become more abundant and attractively priced leverage, but we’re certainly seeing it in the core assets as well. I think to kind of speculate on a specific cap rate change, from a range standpoint I’d say it’s been anywhere 25 to 50 bips in some cases in terms of what that compression looks like probably year-over-year.

In terms of assets that are out in the market, I think we’re going see some big sales over the next quarter or so. There are some assets out there 3630, here in Atlanta and the Buckhead submarket. Our sense is that will be a fairly big number, still remains, still not done. But we think that you’ll continue to see large trades in all of these CBDs. Heritage Plaza in Downtown Houston sold for north of $400 feet just recently, a pretty significant stake in it. So there’s healthy demand in the capital markets for high quality well located assets. And we don’t really see that changing over the next 12 months.

Jed Reagan – Greenstreet Advisors

Okay. Are you seeing any of the cap rate compression spreading out to some other more kind of secondary and tertiary locations in the Sun Belt, maybe kind of looking at your Birmingham sales as an example?

Larry Gellerstedt

Yes. I think the -- we are seeing compression across all markets I think the search for yield continues and it certainly started in high barrier markets and we found that now certainly in major Sunbelt markets like Atlanta and Texas it -- I think it will continue into -- and filter down to those markets as well. I’d say we continue to see more pronounced in major markets like Atlanta, like Texas versus as you get in the some of the tertiary market, but I think it’s only time.

Jed Reagan – Greenstreet Advisors

And just a couple on Austin. It sounds like you guys had underwritten Colorado Tower to be 50% leased by year end and you've obviously hit that target already. So just wondering how much higher you think you could get over the balance of the year and then maybe just how confident are you feeling about today's pipeline. That’s it.

Larry Gellerstedt

The pipeline is fantastic our confidence is high. We’re in a position with just the quality of the building. The building isn’t even topped out yet. The scan is just going on it. A lot of customers really, once you can take them up and they can visualize the views and just where it sits in Austin is a very powerful tool to have. And so we really are focused on making sure we get the right customers with the right economics on the balance for the space and not as focused on velocity, but the pipeline is very, very positive and we remain very, very bullish on Colorado tower.

Jed Reagan – Greenstreet Advisors

Okay. Great. On 816 Congress, am I correct in thinking that the leasing gains you had there were basically due to that short-term lease? And then, just kind of more broadly, if you could talk about sort of the types of tenants that are looking at that building and how the pipeline's looking and then maybe how you're coming in so far relative to underwriting?

Gregg Adzema

Sure. Jed yes, you are correct in terms of the move in the first quarter. The short term lease that we did with Atlasian doesn’t count for a big chunk of that. Again we think that that was a great transaction for us and as I mentioned, really allowed us to provide a flexible solution that our competitors couldn’t. That being said as we look forward to future quarters in terms of the pipeline and not only backfilling that Atlasian space, but continuing to drive occupancy up from where it is today. The pipelines are robust. We think that there are several leases that are very much actionable this quarter and so we’re hopefully open and optimistic that you’ll see continued progress in that asset next quarter.

Larry Gellerstedt

It’s very positive to have not only the two buildings in Austin but the two price points of the two buildings. And they are very different assets but as Colin noted in this speech on the Atlasian deal, it’s not as though -- that the space that we -- that Atlasian is using on a one year basis, that we were having trouble finding prospects for. It’s just it was very compelling to be able to put it in there for a year, in order to get them in Colorado tower. Without that interim bridge strategy they probably would have to locate in an existing building but they really wanted to be in Colorado tower and we’re optimistic that they will grow in Colorado Tower over time.

Jed Reagan – Greenstreet Advisors

Okay. And is it a pretty different type of tenant that’s looking at those two asset announcement?

Larry Gellerstedt

I’ll say they’re pretty much reflect, the market in Austin. We’ve got some technology and then a lot of legal and those types of folks in both. It’s really – they are just two very different assets, two very different price points, both fabulous assets and that’s what you love to have in a market.

Operator

Thank you gentlemen. There are no further questions at this time. I’ll turn the call back over to you, Mr. Gellerstedt for any closing remarks.

Larry Gellerstedt

We appreciate everybody joining us today. And we look forward to talking to you all soon and appreciate your interest in Cousins. Thanks.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.

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Source: Cousins Properties' (CUZ) CEO Larry Gellerstedt on Q1 2014 Results - Earnings Call Transcript
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