Cousins Properties' (CUZ) CEO Larry Gellerstedt on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Cousins Properties (CUZ)

Cousins Properties Inc. (NYSE:CUZ)

Q2 2014 Earnings Conference Call

July 30, 2014 1:00 PM ET

Executives

Eddie Jones – Corporate Communications

Larry Gellerstedt – President and CEO

Colin Connolly – SVP and Chief Investment Officer

Gregg Adzema – EVP and CFO

Analysts

Jamie Feldman – Bank of America Merrill Lynch

Brendan Maiorana – Wells Fargo

Matt Spencer – Robert W. Baird

Jed Reagan – Green Street Advisors

John Guinee – Stifel Nicolaus

Operator

Good day, and welcome to the Cousins Properties’ Second Quarter 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 Mr. Eddie Jones of Corporate Communications. Please go ahead sir.

Eddie Jones

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 filed on July 29, 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 by 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 will now turn the call over to Larry Gellerstedt.

Larry Gellerstedt

Good afternoon, everyone, and thanks for joining us today. Joining me are Gregg Adzema, Chief Financial Officer; and Colin Connolly, Cousins’ Chief Investment Officer.

It’s been a great year. We continue to make significant progress with our long-term strategic plan. Second quarter in particular was highlighted by strong operational performance and prudent balance sheet management. Our markets continue to lead the nation in terms of job growth and net absorption and our urban submarkets generally lead in each of our cities.

Texas is further along in the cycle and is seeing some supply growth, but today the majority of this supply has been sub-urban and is not impacting our urban locations. In Atlanta and Charlotte, new supply is almost non-existent with the exception of a few built-to-suits and therefore the outlook for rental rates and customer demand remains strong for the next couple of years.

Our strong operational performance was driven by the performance of our team which leased or renewed 416,000 square feet of space during the quarter, with deal terms that continue to trend in our favor.

Same property net operating income was up 7.7% during the quarter driven by outstanding expense control and we made considerable progress on our properties with embedded NOI potential. As for prudent balance sheet management, we replaced our last remaining tranche of preferred equity with common equity and we recast our credit facility on significantly more favorable terms. We have an industry leading balance sheet which is well positioned for what lies ahead.

I am really proud of our team and what we’ve accomplished not only this past quarter, but over the last few years. What we’ve done is truly transformational. We didn’t just identified compelling strategy, we implemented it, both quickly and efficiently, but we’re not finished.

For evidence, look no further in our announcement yesterday to acquire Fifth Third Center, a class A office tower in Charlotte, North Carolina for $215 million. We are excited to add this trophy asset to our portfolio increasing our presence in uptown Charlotte, where we also co-own Gateway Village, a 1 million square foot office property.

Colin will provide additional details on Fifth Third Center with similar to 191 Peachtree, my company built in 1997 when I [indiscernible] construction.

Let me take a minute now to explain why we believe this acquisition is such a good fit for us. Fifth Third Center is an iconic office tower in the best submarket in Charlotte. It provides value-add potential through lease up of vacant space. And we purchased it at a discount to replacement cost.

Charlotte has emerged from the recession as the dynamic city with robust rapidly diversifying economy. Banking remains important, but other industries are recognizing the economic advantages of Charlotte as well.

For the banks, after giving back 1.2 million square feet of office space from 2009 to 2012 in an effort to become more efficient, they are now starting to actually add back some office space.

Much important, they aren’t absorbing as being taken by corporate relocations. A very recent example is Sealed Air Corporation announced last week that it plans to relocate its headquarters from New Jersey to Charlotte, bringing about 1,300 jobs. Employment in Charlotte has grown by 16% since 2010 with uptown employment jumping 23% during that period.

Over 2.3 million square feet of class A office spaces has been absorbed in Charlotte since 2012, bringing overall vacancy down to 10.8%. Stronger still, class A vacancy in uptown is now only 9.7%. 24 development projects are proposed or under construction in uptown Charlotte with only one slated as an office project.

What we like about those numbers is the developer projects are predominantly multifamily and hotel, which adds to the already dynamic amenity base in uptown. Limited office supply and the rebounding demand in uptown Charlotte, make uptown Charlotte a top submarket in the Sunbelt.

Moving onto our Texas markets. The Houston economy remains high. The office market continues to see record absorption over 4.7 million square feet already this year, and job growth ranks second fastest among the country’s 20 largest metro areas rising 3.3% over the past 12 months.

Not surprisingly, the number one large market in the country for job growth is also in Texas. Dallas unemployment has grown 3.9% over the past 12 months, driven by diverse economic state and corporate relocations, most recently Toyota and ACTIVE Network out of California. Office demand also remains strong in Dallas with over 2.5 million square feet absorbed this year alone.

Our third market in Texas is Austin, which although much smaller than Houston or Dallas is widely known for its impressive pro-business environment, young talent, low taxes and consistently strong economic statistics. Job growth in Austin over the last 12 months has been 3.6% and the office of that market is healthy, particularly the CBD where class A vacancy has fallen to 3.9% as demand for space is increasingly coming from companies outside of Austin. I must say, it’s a great time to own office assets in Texas.

Now a few thoughts on Atlanta. Atlanta was hard hit in the last real estate cycle and it’s been slower to recover than our Texas market. However office fundamentals have turned the corner. Year-to-date Atlanta has absorbed about 1.5 million square feet of office space and job growth has been 2.5% over the past 12 months. The city’s low business cost, high quality of life and young educated talent pool as well as a strong transportation network anchored by the world’s largest airport in attracting companies who are relocating their headquarters continue to relocate their headquarters to Atlanta.

There are more than 700 tech startups in Atlanta with over $300 million a year of venture capital flowing into town. This is driven by the metro areas 270,000 college students anchored by Georgia Tech’s 20,000 students and 11 engineering programs, all of which are ranked in the top 10 in their field.

As we move through the second half of 2014, we will continue to monitor our markets, keeping an eye out for compelling investment opportunities. As a reminder, since the fourth quarter of 2011, we’ve successfully acquired over 9 million square feet of trophy urban office towers across our targeted markets at an average purchase price of less than $200 a square foot, which is about 60% less than we estimate replacement cost.

Each of these has significantly strengthened our position in each of our markets. Although we are quickly moving away from the part of the real estate cycle where acquisitions make sense for us and torn part of the cycle where developments are more likely. We are confident additional compelling [ph] investments will emerge on both fronts in the coming months, as I said that we are not finished with our strategy.

Before I turn it over to Colin, let me be the first to welcome the investment community to Atlanta for REIT World in November. In addition to holding the traditional property tour of our Atlanta assets, we’d like to roll out the red carpet and welcome everyone to our great city with a cocktail reception at the new Center for Civil and Human Rights in downtown Atlanta. Cousins with the fee developer for this recently open museum which houses many of the personal papers and items of Dr. Martin Luther King in addition to other powerful exhibits.

I guarantee this is an event you will not want to miss. More information will be provided on the cocktail party as well as the tour of our Atlanta portfolio in the coming weeks.

With that, I’ll turn it over to Colin.

Colin Connolly

Thanks, Larry, and good afternoon everyone. This was a strong quarter for Cousins. We are in attractive point in the cycle to be an owner of trophy office towers located in the best urban submarkets across the Sunbelt. And our fantastic property management and leasing team continue to outperform and drive great results within the portfolio.

I will start by highlighting some of our key operational and leasing metrics, then provide some color on activity within the existing portfolio and wrap up with updates on our development and investment activity including our pending acquisition of Fifth Third Center in Charlotte.

As Larry mentioned, our team leased approximately 416,000 square feet during the quarter. While the volume was generally consistent with past quarters, the underlying lease economics were terrific. Our weighted average net effective rent per square foot was over $2 a square foot higher than results from the previous two quarters.

And our second generation cash releasing spread was up over 33%. As I mentioned last quarter, these metrics can and will be volatile based on the geographic mix of leasing in any given quarter, but directionally we believe that these metrics will continue to trend in a positive direction.

Same store NOI on a cash basis was up 15% and our same store percentage lease ended the quarter at 91%, up 30 basis points from the last quarter. The increase in NOI was primarily driven by the burn off of free rent and operating expense saving.

I do think it’s important to note that our same store pool only accounts for 31% of our total portfolio and does not include any of our Texas acquisitions, which account for a significant percentage of the embedded growth and below market rents within Cousins overall portfolio.

Moving onto some specific portfolio updates. As we discussed last quarter, Exxon will be vacating its 215,000 square feet of space in 3 Greenway Plaza in February of next year. We have started to pre-market the space and plan to begin construction on a full lobby renovation later this year.

Greenway is an exceptionally tight market today. Our other properties within the complex had a weighted average occupancy of 96.6%. So while there is nothing imminent to announce, we are confident that there will be demand for this block of nine contiguous floors. It is a very unique opportunity in an infill submarket of Houston today.

Staying at Greenway, our team executed an early renewal at attractive economics with Gulf South Pipeline for approximately 99,000 square feet at 9 Greenway. Gulf South has been a customer in the project since 2007, so we are thrilled that they have chosen to reaffirm their long-term commitment and keep their headquarters at Greenway into 2024.

It’s sticky, loyal customer base is one of the hallmarks of Greenway Plaza and this is just a latest example. We had a strong quarter at 816 Congress in Austin. We leased approximately 47,000 square feet and the property is now over 90% leased, up from 78% when we purchased the building in April of last year.

Included in this leasing was a long-term extension with the U.S. attorney’s office, who is our third largest customer. This, along with last quarter’s extension with Texas Teacher significantly mitigates our near-term rollover exposure and allows us to focus on our remaining vacant space. I do want to remind you that Atlassian will be vacating the 18th floor in early 2015 when they move into Colorado Tower on a long-term basis. And as expected when we purchased the building, IBC Bank will be vacating its 16,000 square feet at the year end.

Overall though, customer interest in the building is very good and we remain ahead of our initial lease-up schedule. This has been great execution by the team in a very short period of time. Here in Atlanta, I think it’s worth noting that our Terminus project is now 95% leased with is an all-time high. Of note during the quarter, we signed an 8,000 square foot lease with Fidelity and a 14,000 square foot expansion with North Highland.

This is not only a great validation of Terminus by both new and existing customers, it highlights that companies are growing in Atlanta again, which is very positive signal for the improving health of the market.

Outside of the office towers, we recently relocated and expanded the fitness center, opened a new restaurant that has been very well received and Crescent Communities has opened the first phase of their 355 unit apartment project.

We are thrilled to see our original vision of creating need leading mixed use urban development in Buckhead coming to fruition.

Switching gears to the development pipeline. Colorado Tower remains 51% pre-leased at quarter end, but I would characterize the activity on the remaining space is very robust. As we have discussed in the past, our original underwriting assume as the project would deliver December of this year at 50% pre-lease. Given the pipeline in front of us, we believe that we have a great opportunity to significantly outperform this internal projection.

We identified a compelling market opportunity, selected a highly desirable location, designed a cutting-edge product and now the market is rewarding our efforts. We are pleased with the progress at Emory Point, which is our mixed use development project across from Emory University and the CDC here in Atlanta.

We plan to deliver the first units of Phase 2 which consists of an additional 307 apartment units and 45,000 square feet of retail during the first quarter of 2015. The retail component is now 62% pre-leased with Earth Fare, which is a leading organic and natural foods grocer anchoring the project. Earth Fare has a great following. So this was a big win for Emory Point.

Now only where a grocer service is a great amenity for our apartment residents, Earth Fare will be a significant draw from the surrounding neighborhoods providing a great boost for the retail as a whole. We believe that the additional apartments will be very well received as there is no other multifamily construction in this immediate submarket and rents in Phase 1 have now eclipsed the $2 square foot mark, which is well ahead of pro forma.

In Chapel Hill, home to the University of North Carolina, 123 West Franklin is on track to begin construction during the first quarter of 2015. This mixed use development is currently slated to include 150,000 square feet of office, over 40,000 square feet of retail and 265 apartment units.

Like Emory Point, we plan to bring in a joint venture partner with deep multifamily experience in this market and hope to have something to share in the near future.

Lastly, I’d like to give you a brief overview of our Fifth Third acquisition, which we plan to close no later than August 8. This 698,000 square foot trophy office tower is well located in the heart of uptown Charlotte and checked all the boxes from the leasing standpoint. Beautiful lobby, excellent ingress/egress, above market parking ratio and a strong retail and dining amenities, including the Capital Grill.

We believe that this is truly a top fired asset in Charlotte. The property is currently 82% lease with two very attractive blocks of contiguous space in the upper part of the building. This gives us an opportunity to execute on one of the things we do best in Cousins Properties, lease space.

In-place rent roll is comprised of a blue-chip roster of companies with excellent credit in almost nine years of term. As Larry mentioned earlier, Cousins’ has a deep and long relationship with the building and a vast majority of this rent roll, which gives us a unique perspective into the building.

Bank of America is obviously a customer and joint venture partner at Gateway Village in Charlotte. McGuireWoods, the second largest customer occupies meaningful space at the Promenade here in Atlanta and 816 Congress in Austin.

And lastly, Winstead is a customer at 777 Main, who was an anchor in our Frost Bank Tower project in Austin many years back. From a financial perspective, we are paying $215 million, which translates into $308 per square foot. The going in cap rate is approximately 6% on a cash basis and 7.2% on a GAAP basis. We think now is an attractive time to invest in Charlotte as we see many similarities, including both the state of the property fundamentals and the capital markets between Charlotte of today and our Texas markets several years ago.

Job growth has returned, occupancy levels have stabilized, and with little new supply in the horizon, the best assets in the best submarkets of Charlotte are poised to drive both, occupancy and rental rate.

With that, I’ll turn it over to Gregg.

Gregg Adzema

Thanks Colin. Good afternoon everyone. Overall we had a solid and productive second quarter. FFO was $0.18 per share. That’s up 50% from the $0.12 per share we reported in the second quarter last year. Excluding a non-cash charge associated with the early redemption of our 7.5% Series B cumulative senior preferred stock this April, which we discussed on last quarter’s conference call, FFO this quarter was $0.20 per share.

We’ve paid for this preferred redemption with proceeds from the issuance to the 8.7 million shares of common stock this past March. With this redemption, we have now eliminated preferred equity from our capital stack.

We also re-cashed our unsecured credit facility during the second quarter. It was a very successful transaction. We obtained a clear five-year commitment extending the maturity from 2016 to 2019. We increased the size of the facility from $350 million to $500 million, and we improved pricing across the board.

At our current leverage level, we improved our all-in pricing on the facility by 45 basis points. Putting this important financing to bed on these favorable terms is a terrific win for our shareholders.

Finally, we announced the launch of an 18 million share common equity offering last night. The proceeds from this issuance will be used to pay for 100% of the Fifth Third Center acquisition Larry and Colin discussed earlier.

Combined, these three transactions lock in the simplicity and the strength of our balance sheet. And by simple I mean a balance sheet with a clean capital stack comprised of only common equity, mortgage and construction debt in an unsecured credit facility. I mean the balance sheet were 87% of our NOIs generated by assets in which we own 100% interest, and a balance sheet where NOI from a single asset class office comprises 95% of all NOI.

And our balance sheet is strong. As of June 30, the debt to total market capitalization was only 26.5%. Debt to EBITDA was 4.48x. Fixed charge coverage was 4x. Our weighted average interest rate was only 4.19% and we have no debt maturities of any consequence until 2017.

This approach to balance sheet management is particularly important in light of our investment philosophy. We are not passive owners of stabilized assets. We actively manage our portfolio and have a deep history with value-add acquisitions in new development. These investments offer potentially greater returns, but they also come with greater risks. We offset these risks with a very conservative balance sheet. We believe it is a unique and winning combination.

Before moving on to guidance, I wanted to provide an update on our portfolio of properties that have in-place embedded NOI growth potential. As a quick reminder, in the summer of 2012, we identified three large assets in our portfolio that had significant NOI upside potential due to existing vacancy; 191 Peachtree here in Atlanta, 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 Main in the fourth quarter of 2013.

We estimate that moving the occupancy on these six assets and whilst the time we added them until they reach 90% occupancy will generate approximately $18.5 million in embedded NOI. As of June 30, we had signed net new leases representing about $12.6 million of this total. That’s up from $11.7 million last quarter.

The amount of annualized revenues we are realizing on these leases was about $6.5 million the second quarter. We’ll add Fifth Third Center to this list next quarter and keep you apprised of our progress.

Normally I’d wrap up my portion of the conference call with an update to our 2014 guidance. As a quick reminder, we typically provide guidance for specific assets where historical performance may not exist or may not be a good guide post for future performance. We also provide guidance on fee income as well as G&A expenses.

I am happy to say that for the second quarter in a row, no update is necessary. Our properties are performing, our fees are on track and our expenses are under control.

Before closing, I want to take a minute to point out some increased disclosure in our earnings supplement this quarter. We’ve added a cash basis revenue and expense data to our same property NOI table, which is on Page 15 of the supplement. I hope this is helpful. Please keep suggestions coming. Our goal is to provide you with the data that you need in the format that you want.

Finally as I mentioned earlier in the call, we launched common stock offering late yesterday. As I’m sure you understand, we cannot provide any more information during the Q&A portion of this call other than the information that’s already included in the perspective supplement and the associated news releases, but as always we’re happy to address any other questions that you might have.

With that, I’ll turn it over to the operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Jamie Feldman of Bank of America Merrill Lynch. Please proceed with your question.

Jamie Feldman – Bank of America Merrill Lynch

Great. Thank you and good afternoon. So I guess just starting with Fifth Third Center. Can you talk about where you think rents are in the building today versus the market?

Colin Connolly

Hi Jamie, it’s Colin. We’re not going today to comment specifically on where our in-place rents are versus market, I guess I could characterize in general where market rents are in uptown Charlotte for the best class A assets if you were to go to CoStar for example, you’ve seen those range from the high 20 on a gross basis, upwards of in the low $30 per square foot as well.

Jamie Feldman – Bank of America Merrill Lynch

Okay. And then what did you is the – or did you say what the actual expirations, like when are the biggest leases coming due?

Colin Connolly

Sure Jamie. Again the top three customers in the building are Bank of America being the largest, McGuireWoods being the second largest customer and then Fifth Third, those three customers comprise 74% of the total square footage, but across the entire building there is roughly nine years of weighted average lease term remaining.

Jamie Feldman – Bank of America Merrill Lynch

And are there any in the near-term?

Colin Connolly

Excuse me?

Jamie Feldman – Bank of America Merrill Lynch

Are there any leases expiring in the near-term?

Colin Connolly

There is no material near-term lease expiration.

Jamie Feldman – Bank of America Merrill Lynch

Okay. And then in terms of Charlotte as a market, how do you plan to manage that part of your business? I don’t think you have a big concentration there right now. So who is going to run it, and do you expect to add more people? And then how do you think longer term about expanding into Charlotte specifically?

Larry Gellerstedt

Well, we really don’t consider as expansion into Charlotte. We’ve been in Charlotte for a decade and we developed with our partner, Bank of America, the 1 million square foot Gateway Village and have co-owned that and done all the management of that asset since it was developed. So we have a significant team in Charlotte, the Gateway Village. For people that aren’t familiar with it, it’s a mixed use facility with a million square feet of office, but it’s also got retail and multifamily. It’s a very dynamic project.

And so we’ve got a great backbone of people up there, and this will absorb well into the talent base we have, as well as some of the talent that’s been with this property. And we’ll move forward to that.

We have said for the last three or four years is with this strategy, the North Carolina and Charlotte specific is very much a focus for us. And so this was really something that we had been tracking this potential asset opportunity for a year. And when it came available with our history of the building, our knowledge of Charlotte, it was a great fit. We’re very excited about it and look forward to growing further in Charlotte as we move forward.

Jamie Feldman – Bank of America Merrill Lynch

Okay, thank you. And then looking at some of the big success, it looks like you had small but still occupancy or leasing percentage declines at 2100 Ross, 191 Peachtree and Promenade. Can you guys just give an update of what’s going on at those buildings and what your leasing prospects are?

Colin Connolly

Sure. Jamie, you’re referring to 2100 Ross, Promenade and the 191 Peachtree? Again, the activity in 2100 Ross continues to be very strong, the Arts District in the uptown market of Dallas. There is quite a bit of activity. Job growth is strong. And so we have a healthy pipeline, and I think very much remain on schedule. We do have a very attractive contiguous two floor, potentially three floor contiguous block of space there. So activity is good.

Here in Atlanta at 191 Peachtree, we talked about in our opening remarks, at Atlanta certainly had trailed Texas in terms of the recovery, but we’re really starting to see great signs of job growth here. As I mentioned, we’re starting to see some of the customers within our existing portfolio expand. And with little new constructions slated to deliver over the next couple of things, I think we think now is an interesting time and a great time to be an owner in Atlanta to continue to drive the occupancy.

Larry Gellerstedt

Yes, Jamie. I’ll just add on what Colin had just said. The demand side really on Promenade and 2100 Ross, it remains very strong and we remain confident that we’ll show good progress during the balance of this year on both of the assets. 191 Peachtree, as we’ve said before downtown is the slower of the submarkets that we’re in, but we’re continuing to see activity at 191 Peachtree and I am optimistic we’ll also have some positive results to show here about the next year.

Jamie Feldman – Bank of America Merrill Lynch

Okay, great. Thank you very much.

Larry Gellerstedt

Thanks Jamie.

Operator

Our next question comes from Brendan Maiorana of Wells Fargo. Please proceed with your question?

Brendan Maiorana – Wells Fargo

Thanks. Good afternoon. Colin, I know you guys are kind of limited in terms of what you can say about Fifth Third. Just had one question or a clarification. So the spread between the cash cap rate and the GAAP cap rate. Is that primarily driven by adjustment for mark-to-market of rents, or is there a component or large component that’s kind of free rent or annual bumps that’s driving the spread between that 60 and the 72?

Colin Connolly

Yes, Brendan obviously there is kind of two components there. A little bit limited in terms of what I can say. I think one thing, I would point you towards is as I said there is approximately 9 years of weighted average lease term in the building. I think that hopefully can…

Brendan Maiorana – Wells Fargo

Okay, that helps. And then Colin, just how do you think about the – I think you mentioned that the acquisition environment is, it’s still pretty challenging out there, but you feel like there are still things that you guys can get done. How do you think about deploying capital in acquisitions today? Is there more stuff that you guys can pick off or at another call earlier today it was suggested that even in the past 90 to 120 days in your kind of Sunbelt markets, there is even been a sort of reacceleration of asset pricing. So is it pretty challenging or do you think you can get some more stuff done?

Larry Gellerstedt

Hi Brendan let me take a swing at that first, and Colin can fill in. We’re extraordinarily diligent with a very much of a sharp shooter approach. So we haven’t acquired anything as a company in a year since we did the Crescent transaction. We really haven’t – in the Texas markets on the acquisition standpoint, we really haven’t looked at anything since that period of time just because of the aggressive nature of pricing.

The south east being Georgia and North Carolina have obviously trailed for reasons we stated in the call, just the impact of the recession has caused these markets to come back slower, and the spread has been a little bit wider in terms of capital coming back into these markets, although that has changed in the last 12 months. And so it has become more aggressive, but we still think that there is a spread where we can see specific assets were not just the price we pay but the operating platform that we bring in terms of leasing relationships, client relationships and capital deployment to reposition them. We think they are going to be a few select, but we think we’re very much in the end of that cycle. We’re just a couple of targets that our potentials will have to look at.

We much more are looking in our markets the development opportunities. And I am optimistic between now and the end of the year, we’ll have some more development opportunities to talk about as well.

Brendan Maiorana – Wells Fargo

Okay, great. So last one is for Gregg, in terms of the balance sheet, just with the raise that was done last night or this morning. If we assume that the shoes gets extra size, you sort of overcapitalized this transaction. And then with additional asset sales that are smaller but I think are expected for the back half of the year, how should we think about deployment of that capital which really on a pro forma basis brings your leverage down to a pretty low level after this deal?

Gregg Adzema

Good afternoon Brendan. First off, there is no green shoe, there is no overlap for this equity ratio. It’s a clean 18 million shares. So really when you look at the proceeds from that 18 million share offering, it match funds the Fifth Third acquisition pretty close to 100%. So it’s the first question. Second question is I think kind of a balance sheet management question, and are we lowering our leverage strategically in the balance sheet and the answer would be no.

We’ve been running the balance sheet kind of between 25% to 30% leverage for the last few quarters. This takes us down to the bottom of that range which is still generally within the range where we’ve been running the balance sheet. The idea with the equity raise was to fund 100% of Fifth Third, that’s all.

Brendan Maiorana – Wells Fargo

Okay, great. Thanks.

Larry Gellerstedt

Thanks Brendan.

Operator

Our next question comes from Dave Rodgers of Robert W. Baird. Please proceed with your question.

Matt Spencer – Robert W. Baird

Hi, Good afternoon. It’s Matt here with Dave. Can you maybe talk about the leases that were signed at 777 Main in the quarter and the activity that you’re seeing there? I think on the last call, activity there was a little bit full. If you could just provide a little bit more color, that would be great.

Colin Connolly

The activity in Fort Worth is a bit slow. We expected it to be slow as we’ve said before, that market in the last decade has been over 90% leased and we bought 777 Main, we knew we were buying vacancy due to corporate M&A transaction that created the vacancy. And so we’ve been – we anticipated as slow lease up. It’s been slow, although new customers tend to come and take blocks in Fort Worth and it remains – it’s the best building in the market. Fort Worth is extraordinarily vibrant city that’s growing and adds amenities.

We did do a couple of small deals this quarter. And I would tell you in doing the small deals, that’s the 0.5% of the deals done in the market. So we’re pleased with the progress, but we do anticipate 777 will continue to be a slow and choppy [indiscernible].

Matt Spencer – Robert W. Baird

Okay. And then maybe just regarding the $12.6 million that is signed leases and then what the $6.5 million that was actually realized in the second quarter? Could you provide any color regarding maybe when we’ll start to see that revenues start to show up in earnings? Is it in the back half 2014, 2015 or maybe even beyond?

Gregg Adzema

Hi, it’s Gregg. As we’ve said in previous quarterly conference calls, most of those leases were run through the income statement by the end of this year. Not all, we’ve got a two or three leases signed that kind of trickled into ‘15 and ‘16 but the vast majority of that number will run through the income statement by the end of this year. And that’s consistent with what we said previously.

Matt Spencer – Robert W. Baird

Okay, thanks guys.

Operator

Our next question comes from the line of Jed Reagan of Green Street Advisors. Please proceed with your question.

Jed Reagan – Green Street Advisors

Good afternoon guys. You talked about the 6% initial yield of Fifth Third. Just wondering if you have a stabilized yield expectation for that building? And then also if you anticipate having to put any – have additional capital into that asset?

Larry Gellerstedt

As we said earlier, the building was phenomenally well built when it was build, but we really don’t see a lot of capital being required. And Jed, as you know, given the equity offering yesterday, there is just not a lot more we can say about anticipation of where the project maybe after next week, we’ll be able to give a lot more color.

Jed Reagan – Green Street Advisors

Okay, fair enough. And it sounds like it was a fully marketed deal. I am guessing competition for the asset was pretty brisk. I am just curious what made you guys comfortable? Is that kind of heavier price per pound that gather as a higher watermark in that CBD market and maybe how you thought about that use of capital versus perhaps pursuing higher risk adjusted return and development planning kind of proceeds elsewhere?

Larry Gellerstedt

Well, I think if you look at the price in Charlotte there, a lot of the trophy buildings in Charlotte over the years because they were bank account have not traded and this isn’t that far above some assets that traded a year and half ago if you just look at the movement in the overall capital markets have made. We are very disciplined in our approach here. We spent I think – if you were to talk to the brokers, we spent a lot of time probably more than anyone in our diligence beforehand not only on the building but on the market.

As I said, we know the customer base because we’ve done business with a lot of them in other areas. Not that we get any special information but just being able to understand their comfort level, how they view the building strategically. And then our local operating team at Charlotte have actually open the building when it was built and brought that knowledge to it.

So as you know, we’re very disciplined on the capital side and we did the market – we did pay market for that is very consistent with our strategy. It gives us another foothold in Charlotte which is a very key in Florida market for us and we’re thrilled that we’ve been able to be successful here.

Jed Reagan – Green Street Advisors

Okay, thanks. It’s helpful. And I think there is no in-place rents for the asset or joint venture [ph] could you see taking out some mortgage debt on the building?

Gregg Adzema

We’ve purchased – well Jed, it’s Gregg. We purchased the building unencumbered and we don’t anticipate putting a mortgage on it.

Jed Reagan – Green Street Advisors

Just searching here is the kind of larger releasing spread that you guys put up last quarter, again that’s kind of driven more by lumpier activity. I wonder if you could just give a little bit of color on what some of those bigger deals that might have pushed the needle up and where they took place, what types of times etcetera.

Colin Connolly

Yes. Hi Jed, it’s Colin. As I said earlier and in previous calls, we would expect that metric to continue to be fairly volatile and lumpy as you said, but directionally we believe it will keep moving in a very positive direction. What really is going to drive that quarter-to-quarter is the geographic mix of the particular leases. I think generally speaking quarters where Texas leads the leasing activity will see that to certainly drive this percentages. As I mentioned in my remarks we did sign a long-term extension with Gulf South of about 99,000 square feet that was certainly very impactful this particular quarter.

Jed Reagan – Green Street Advisors

Okay, thanks. And maybe one for Gregg. On the cash same store NOI number. It was obviously quite strong and you talked about the cost reductions in the free rent burn off. Should we look for the levels of expense reductions to kind of be maintained through the rest of the year, and do you think it is fair to expect that free rent burn off to sort of continue to taper down through the year? Just any comments you can offer on that regard.

Gregg Adzema

Hi Jed. I hate to be vague and evasive, but as you know we don’t provide same store guidance. We just provide kind of asset-by-asset guidance on a quarterly basis. And the guidance that I gave back in February is still good guidance today. Sometimes it’s flat guidance for the year where we have stabilized property. Sometimes it’s increasing NOI guidance for what we have lease up properties. But I can’t – we can’t give you specific same property revenue or expense guidance.

Jed Reagan – Green Street Advisors

Sure. I’ll figure and try to approach the envelope anyway. And we saw where Exxon is looking to sell a big development site in Greenway Plaza that can probably support $1 billion mixed used project including some office. Are you looking at that opportunity, and do you think that could impact the local market dynamics in a meaningful way?

Colin Connolly

Hi Jed, it’s Colin again. We certainly are aware of the project that you’re talking about, and we obviously particular in kind of neighboring properties. We’re very focused on understanding what the existing opportunity might be for us from an investment perspective, at the same time understanding what impact that could have on Greenway as a whole, but as you said it’s a very large potential project. I think we don’t see anything near-term having any impact on Greenway. And again we’ll continue to follow the transaction and determine if ultimately that’s something that makes sense for Cousins, but it’s still very, very preliminary.

Jed Reagan – Green Street Advisors

Should you know how many of the square feet of that project could potentially be office or is it too early to tell?

Colin Connolly

I think it’s way too early to have any ideas as to what the overall site plan could look like there, in many respects it’s a tear down. And so I think you would see a mixed use project obviously in the multifamily developers have a lot of interest in that side as well some of the retailers. So it’s way too early to understand what the mix could look like.

Jed Reagan – Green Street Advisors

Okay, thanks. And then just last one picking on the supply issue. It sounds like a competitor in Atlanta has moved forward on a stock development and maybe there is some additional stock supply coming in behind that and Buckhead services [ph] and just wondering if you feel like the market can absorb that and just how – what’s your sort of concern level on that of supply come in?

Larry Gellerstedt

Well, we’ve read the same that everybody else, it says that [indiscernible] can start up in a 0.5 million square foot building on their site. And when you look at the south of the Buckhead market and the dynamic of the Buckhead market, there is a number of few sites that are available in that market. Assuming that they start, we certainly don’t have any concerns about it from a position at our current inventory.

It will be more costly project, rents would need to be at 30 at or so. And if you look at where [Technical Difficulty] on properties that’s certainly getting better, as Colin said with addition of the retail apartment. So we take a note of it, but it doesn’t really causes any concerns.

Jed Reagan – Green Street Advisors

Okay, terrific. Thank you guys.

Operator

(Operator Instructions) Our next question comes from the line of John Guinee of Stifel Nicolaus. Please proceed with your question.

John Guinee – Stifel Nicolaus

Okay, John Guinee here. Thank you very much. Just a little bit so we understand how you’re thinking about replacements costs, Larry. Colorado Tower looks like it’s going to cost you about $340 a square foot to build. Do you think that’s an appropriate number for midtown Buckhead or uptown Charlotte?

Larry Gellerstedt

John, I think that’s a little low. In Colorado Tower, that’s on a ground lease and so there is no land in that. I saw that there was a report that one of them was put out that speculated that new supply would be in the $350 a square foot. We think it’s probably a little bit north of that. We certainly think if you started Colorado Tower today and put land in it and just where construction costs have moved, it would be more in the $360 or $370 range. It would be more where we would see it in our markets.

John Guinee – Stifel Nicolaus

Okay. And then just, maybe Colin or maybe Gregg, I am just looking, and this is purely curiosity. It looks like your Colorado Tower has initial occupancy in the fourth quarter of ‘14, but project costs incurred today are only $57 million of the $126 million total project cost. Can you really get people in that quickly if you spend less than half the money?

Colin Connolly

John it’s funny that you ask that question, because when I saw that preliminary numbers, I asked the same exact question. And the answer is that number is accurate and we’ll get people moved in at the end of the year.

John Guinee – Stifel Nicolaus

I was hoping you knew the answer because I sure didn’t. Okay. And then refresh our memory, now that you’ve bring up Charlotte again. What is the status of Gateway Village? When does that buy/sell kick in, when does the debt mature, when is the lease expiration etcetera?

Larry Gellerstedt

Debt matures coincident with the lease expiration, 2016. And so Colin has been talking to Bank of America and we’ve got to figure out something before ‘16.

Colin Connolly

John I think we do. We have ongoing conversations with BofA about it and ultimately what their long-term space needs are. I think it’s fair to say that the new Gateway is a mission critical facility, but over the coming year or so, I think we’ll gain more clarity on exactly how much space overall that they decide to keep.

John Guinee – Stifel Nicolaus

And then for additional taxes by sellers, there is something complicated in the unwinding of it.

Larry Gellerstedt

It’s a little more complicated than that because one of the choices that they can make is just to bias out and provide a return over the period of our investments to 17%. So that’s actually I think what most people have in their earnings models for us is assumption of that is a base case. And that could happen, but there is lot of other things that can happen along the way too. And specifically, I didn’t say it is December ‘16 maturity, so it’s end of the year ‘16, John.

John Guinee – Stifel Nicolaus

Great. Okay, thank you very much.

Larry Gellerstedt

Thanks John.

Operator

We have a follow-up question from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.

Jamie Feldman – Bank of America Merrill Lynch

Thank you. I know you guys mentioned a couple, but can you walk us through your largest expirations in 2015?

Colin Connolly

Sure. Hi Jamie, it’s Colin. In terms of the large expirations in ‘15 can really anything over 75,000 square feet or so. It really is ExxonMobil which we talked about, 215,000 square feet, and then MedAssets is a customer at North Point 100 and 200. They are roughly 121,000 square feet and they have an expiration in mid-2015.

Jamie Feldman – Bank of America Merrill Lynch

And that’s it for the greater than 75,000?

Colin Connolly

Yes, that’s correct.

Jamie Feldman – Bank of America Merrill Lynch

Okay. And do you have a sense of your mark-to-market on your ‘15 leases at this point?

Colin Connolly

We do in terms of – in general, we don’t provide specific metrics on that, but I think it’s fair to say that the expirations are below market. Again there is a significant component of the material expirations. Next year, Exxon would be a big chunk of that. It’s a Texas asset and that in general those rents have been characterized as below market.

Jamie Feldman – Bank of America Merrill Lynch

And then how long do you think – for the Exxon space, how long do you think you could have it back in service?

Colin Connolly

I mentioned in my remarks, we’re in the process later this year, we’re going to start a full lobby renovation. I think again we’re pre-marketing that space and I think we’re excited to get that renovation up and running to – we think that’s really going to help us drive the market rent there, but we could start to potentially kind of layer part of ‘15.

Jamie Feldman – Bank of America Merrill Lynch

You could actually have tenant moving in by late ‘15?

Colin Connolly

In late ‘15.

Jamie Feldman – Bank of America Merrill Lynch

Okay. All right, great. Thank you guys.

Larry Gellerstedt

Thanks Jamie.

Operator

(Operator Instructions) There appear to be no further questions in the queue. Mr. Gellerstedt, I’ll now turn the call back to you. Please continue with your presentation or closing remarks.

Larry Gellerstedt

Well, we appreciate everybody attending the call today. We continue to be very excited about where we sit in our markets and our opportunities. Hope everybody has a great summer, rest of summer. And please know that we’re available to talk whenever you want to reach out to us. Thanks very much.

Operator

Thank you, ladies and gentlemen. That does conclude today’s presentation. We thank you for your participation and ask that you please disconnect your lines. Have a good afternoon everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Cousins Properties (NYSE:CUZ): Q2 EPS of $0.18 beats by $0.01. Revenue of $84.51M (+98.8% Y/Y) beats by $6.27M.