Cousins Properties Incorporated (NYSE:CUZ)
Q2 2016 Results Earnings Conference Call
July 27, 2016 11:00 AM ET
Pam Roper - SVP, General Counsel and Corporate Secretary
Larry Gellerstedt - CEO
Gregg Adzema - CFO
Colin Connolly - COO
Jamie Feldman - Bank of America
Dave Rodgers - Baird
Ryan Wineman - Capital One Securities
John Guinee - Stifel
Jed Reagan - Green Street Advisors
Good morning, and welcome to the Cousins Properties’ Second Quarter 2016 Earnings Conference Call. All parties will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note, this event is being recorded.
I now like to turn the conference over to Pam Roper. Ms. Roper, please go ahead.
Good morning, and welcome to Cousins Properties’ second quarter earnings conference call. Press release and supplemental package were distributed yesterday afternoon as well as furnished on Form-8K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures, in accordance with Reg G requirement. If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website.
As you may be aware, on April 29, 2016, we announced a merger between Cousins Properties and Parkway Properties. A separate press release was issued in the Investor Presentation with the related conference call transcript regarding the proposed transaction were posted to both companies’ websites. In addition, please note that the joint proxy statement was filed in July 25, 2016 and has been posted to this both companies’ websites.
Certain of our Directors and executive officers may be deemed to be participants in the solicitation of proxies with respect to the proposed transaction. Information about the participants and proxy solicitation is contained in the definitive joint proxy statement.
With the exception of a brief update regarding the special meetings, this call we will focus on our second quarter results. And we request that you can find your questions and comments to these results and not the announced merger.
Please be aware that certain matters discussed today may constitute forward-looking statements within the meaning of Federal Securities laws, and actual results may differ materially from these statements due to a variety of risks and uncertainties and other factors. The Company does not undertake any duty to update any forward-looking statements, whether as a result of new information, future events or otherwise. The full declaration regarding forward-looking statements is available in the press release issued yesterday and a detailed discussion of some potential risks is contained in our filings with the SEC.
With that, I’ll turn the call over to our Chief Executive Officer, Larry Gellerstedt.
Thanks, Pam. Good morning, everyone. And thank you for joining us on the Cousins Properties second quarter conference call.
With me today are Gregg Adzema, Cousins’ Chief Financial Officer; and Colin Connolly, Cousins’ Chief Operating Officer.
I’m happy to report, we had a very busy and productive second quarter here at Cousins. I’ll start with a brief overview of some key financial and operational highlights for the quarter, and then focus my comments around the status of our merger with Parkway Properties and the subsequent spin off of the combined company’s Houston portfolio and to a separate publically-traded REIT.
During the second quarter, Cousins delivered FFO before merger costs of $0.22 per share or a total of $0.42 per share, year-to-date. Impressively, for the 18th consecutive quarter, we posted positive, same property cash NOI growth. We also leased approximately 402,000 square feet of office space during the quarter for a total of 622,000 square feet for the first half of 2016. This solid lacing performance was accompanied by positive second generation cash leasing spread of 4.3%. This represents our ninth consecutive quarter of positive rent rollups for the Company.
Our continued execution on the leasing front underscores the strength of our portfolio as well as the robust demand we’re seeing in our core markets. The office portion of our development pipeline, including our project with Dimensional Fund Advisors in Charlotte finished the quarter 79% leased, up from 74% leased at the end of last quarter. The notable activity here, was the execution of a 10-year 43,000 square foot lease with Microsoft and 8000 Avalon, our newly announced Atlanta office development with Gerald Hines.
Other exciting news is the recently executed 68,245 square foot lease with Cadence Software at Research Park V in Austin, which brings the building to 97% leased, just seven months post completion. Colin will provide much more detail on our development pipeline and operational performance in his remarks, but I just wanted to highlight a couple of examples of the continued great execution by our teams, particularly in Atlanta and Austin in this quarter.
Switching gears, the biggest Cousins news during the second quarter was our announced transaction with Parkway Properties, where we will merge the operations of our new companies and simultaneously spin off the operations of our combined Houston portfolios into a separate publically traded REIT. The transactions are on track and we expect to close during the fourth quarter of 2016. The S-4 went effective on July 22nd and the proxies were mailed on Monday to both Cousins and Parkway shareholders of record as of July 15th.
On August the 23rd, Cousins and Parkway will separately hold special shareholder meetings, whereby the shareholders of each company will vote on the merger. In addition to the approval of both Cousins and Parkway shareholders, the closing of the merger is subject to among other things, the SEC approval of the spin-off of the combined company’s Houston portfolio into a separate publically-traded rate, which will be called Parkway Incorporated and will be lead by Jim Heistand.
On July 1st, Parkway Incorporated filed its initial registration statement on Form-10, which is currently being reviewed by the SEC. We will continue to keep you up to date on the status of these transactions, as we head toward an anticipated fourth quarter close.
In the meantime, in addition to running our businesses, both companies have formed a dedicated integration team, and we are working together to ensure both the Cousins and the new Parkway will be ready to open for business the day of the closing. The teams are highly focused on all facets of the business to ensure a smooth transition for our customers, our shareholders and our employees.
Post-merger and spin-off, Cousins will operate in six markets, which will each be led by seasoned on the ground, managing director tasked to drive the business at the local and regional level. Drilling down deeper, we have completed post staffing plans for each building in the portfolio and are thrilled to soon welcome so many outstanding new team members to the Cousins organizations. These dedicated property management and engineering professional serve on the frontline with our customers every day and are critical to the Company’s long-term success.
As we make progress with our inauguration and staffing plans, I am further encouraged and quite frankly excited for the go-forward value proposition of Cousins. And let me walk you through my rationale. First, we are expanding our trophy’s office portfolio in six of the leading growth markets of the Sunbelt. Importantly, 81% of our assets will be located in the best urban submarkets which have historically outperformed the broader MSA market in each city. Also interesting to note, not a single asset in the new Cousins portfolio will be surface PAR, [ph] and the average with our portfolio will improve by approximately eight years. By way of these metrics, no other portfolio on the Sunbelt offers this type of scale and quality and the most desirable urban locations.
Secondly, our collection of high-quality assets will give us an extraordinarily powerful critical mass in our core submarkets of Buckhead, Uptown Charlotte, the Austin CBD, and Tempe, making us the number public office owner based on total square feet in each of these submarkets. We believe this puts us in a unique position to increase our pricing power with customers and vendors enhance our flexibility to meet the changing customer need and allow us to attract and retain best-in-class local market teams. Over time, we believe this will drive customer retention and occupancy.
Third, our geographic footprint expanding to six markets will enhance our diversification, both geographically and in our customer base. Our customer base will not only be stable with blue chip names like Bank of America, Wells Fargo and Deloitte as our top customers, but it will also be well-diversified with no single industry concentration greater than 20% of our total annual contractual rent.
And finally, as you all know, a key tenet to our ongoing strategy of Cousins, is maintaining a simple, low-levered balance sheet. I can assure you that post transaction, our conservative
balance sheet policy will remain intact. It is this strategy that afforded us the flexibility to take advantage of our current opportunity with Parkway, and I believe it will benefit us in the long term as we continue to opportunistically seek ways to unlock value for our shareholders.
With that, I’ll turn it over to Colin.
Thanks Larry and good morning everyone.
I will begin by comments today by briefly highlighting some of our key leasing and operational metrics from the quarter, and then spend the reminder of my time, providing more specific market, portfolio, and development pipeline updates.
The team delivered a solid leasing quarter across the portfolio. We executed approximately 400,000 square feet of leases during the quarter. Importantly, this included approximately 200,000 square feet of new leases, which represents the highest level of new leasing activity in two years, if you exclude the 494,000 square foot lease in the third quarter of 2015 with NCR for their new corporate headquarters.
Overall, lease economics continue to trend in a favorable direction in our Sunbelt markets with the exception of Houston. In addition, our second generation re-leasing spreads remained positive for the ninth consecutive quarter with the 17% increase on a GAAP basis and 4.3% increase on a cash basis. Importantly, this metric was positive across all of our markets including Houston. But before moving on, I do want to note that this particular metric is lumpy and highly dependent upon the geographic mix of where we execute leases in a given quarter.
As I said in the past, Houston has been a key driver for our outsized re-leasing spreads. However, Houston is only accounted for 28% of the Company’s leasing activity year-to-date for 2016, compared to 66% in 2015. While the slowdown in the Houston market has contributed to the deceleration of our Houston leasing activity, the biggest driver has been the lack of any material near-term lease expirations triggering large renewal opportunities like we had in Houston during 2014 and 2015.
Switching gears, I’ll provide some color on each of the markets, starting with Houston. As I mentioned earlier, fundamentals have weakened. Trailing 12-month job growth totaled just over 5,000 jobs; and for the first time in five years, Class A net absorption was negative during the second quarter. The Class A availability rate including sublease space is now just over 20%, which has not occurred since 1995. However, as we have stated in the past, our urban portfolio in Greenway Plaza and the Galleria continues to significantly outperformed. Our Houston portfolio is approximately 90% lease, which is 600 basis points better than the market-wide Class A average.
In addition, the portfolio has relatively low risk profile with no single expiration greater than 75,000 square feet until September of 2019; and for CoStar, only 34,000 square feet of sublease space is available across our entire portfolio.
Our leasing team on the ground at Houston remains active and continues to deliver terrific results. To highlight, we leased approximately 89,000 square feet during the quarter. And while the last several years in Houston have been extraordinary difficult for all, the effects of this downturn do continue to validate Cousins’ strategy of focusing our efforts on trophy properties in urban locations. All real estate market cycle, within experience urban submarkets with the high experience entry in an attractive amenity base do outperform on the way up and equally as important, hold up better on the way down.
Switching gears to Atlanta, fundamentals remain extremely strong. The city produced approximately 77,000 jobs over the last 12 months, which is in the top five nationally. Importantly, the development community in Atlanta along with the capital markets, continues to demonstrate great discipline as it relates to new construction. Less than 2 million square feet of speculative space is under construction across the entire city, which represents just 1.6% of Atlanta’s 122 million square foot, class A office market. These are historically low numbers for Atlanta at this point in the cycle. And our team continues to take advantage of these tailwinds, as we make great progress in our Atlanta portfolio during the quarter.
We increased our percentage leased from 88% to 90% across the Atlanta portfolio, and we have terrific wins at 191 Peachtree, which is now 92.5% leased as we executed two full floor leases during the quarter, including one to the Metro Atlanta Chamber of Commerce. Also in the CBD, we executed a 38,000 square feet data center lease at the American Cancer Society, with a triple B credit. ACSC is now 87% leased, which is the highest level since the third quarter of 2011. Up in Buckhead, we continue to mitigate upcoming rollover at Terminus 100 as first generation leases begin to expire during 2017 to 2019.
If you remember, last quarter, we renewed Wells Fargo; and this quarter, we executed a full floor renewal with UBS. At Northpark Town Center in the Central Perimeter, we made great progress as well, as we executed approximately 90,000 square feet of leases during the quarter, including key renewals with Hanover Insurance and Apple. In addition, we executed a new full floor lease with Wells Fargo during the quarter and post quarter-end, we signed an additional 16,000 square feet extension with Wells Fargo, which increase Northpark Town center to 87% leased today. Equifax has announced that they will be vacating approximately 68,000 square feet at Northpark in the third quarter of 2017, as part of a broader corporate consolidation plan in the Midtown. We viewed this as 50-50 probability when we purchased the property in 2013. So, it is a small setback. However, the Equifax lease is well-below market, which creates a terrific opportunity for our team as essential perimeter submarket lacks large lots of space with direct access to MARTA.
Overall, we remain very confident in our long-term reposition we plan for Northpark. Our planned $4.5 million capital improvement project is now underway. And similar to our work at Promenade, 2100 Ross, and 816 Congress, the repositioning project at Northpark will focus on enhancing key common areas and lobbies as well as adding new amenities event to our customer base. We’ve had great success with similar projects in the past, and are very optimistic that these targeted upgrades will allow our team to further capitalize on the existing leasing momentum.
Over in Austin, fundamentals also remain very healthy. We continue to watch for signs of a slowdown, given Austin’s exposure to the technology sector. But, we have not yet seen any meaningful changes to leading indicators. In fact, job growth remains robust with a 4% increase over the last 12 months and Class A net absorption is just under 8,000 square feet through the second quarter. New supply remains slightly elevated in Austin with almost 2 million square feet under construction. We are actively monitoring this development pipeline. But it does not pose a significant risk to our portfolio, which is now 97% leased after our recent lease with Cadence Software at Research Park V, and has seven and a half years of weighted average lease term.
Charlotte also continues to deliver very steady growth. Job growth remains well above the national average of 2.7%, and the office market continues to absorb space at a healthy pace with approximately 580,000 square feet of net absorption through the second quarter. Vacancy in the Class A office market has fallen to 8.2%, which is the lowest level since the early 2000s. And Class A vacancy in Uptown now stands at just 7.4%. Developers have taken notice of these attractive fundamentals as approximately 3.2 million square feet of new supply is now under construction. However, like Austin, our portfolio is very well-positioned relative to this new supply as we are approximately 99% leased with approximately nine years of weighted average lease term.
Moving on to our development pipeline, which inclusive of the Dimensional Fund Advisors project in the south end of Charlotte, totals approximately 1.1 million square feet of office with an additional multi-family units and retail space. Importantly, our team has done a fantastic job to sensibly positioning our development projects given we are relatively late in the economic cycle.
As Larry mentioned, with the recent Microsoft lease at Avalon, the office component of our pipelining is 79% leased with meaningful time remaining until the delivery of these projects in 2017 and 2018.
We have also made exciting progress on the retail component of our pipeline. Earlier this month, we announced that Target’s urban concept will anchor the retail component at Carolina Square, which is now 61% preleased. From a timing and cost perspective, the development pipeline remains on track. We will likely close on our Decatur multifamily development in August. The project will consist of approximately 330 apartment units, 30,000 square feet of office and 20,000 square feet of retail. We plan to develop this approximately $79 million project in a joint venture with AMLI, and Cousins’ ownership will be in the 20% range. This is a terrific site located at adjacent to the Decatur MARTA station, which we believe is a clear competitive advantage and positions the project for success.
On page 21 of our supplemental, you might have noticed that we have increased, both the size and estimated cost of our NCR project. As I previously said on our Q3 2015 conference call where we announced this exciting development, these numbers will likely continue to fluctuate, as we finalize the design and size of the project with NCR over the coming quarters. But as a reminder, the structure of our lease is based on a return on cost concept. So, our financial return will not be impacted, if the size and/or cost of the building fluctuates.
With that, I’ll turn the call over to Gregg.
Thanks Colin, good morning, everyone. As Larry said earlier, we are extremely excited about Cousins prospects after completion of the Parkway merger and Houston spin-off. But in the meantime, we are still running our business and reporting our earnings. So in that spirit, I’d like to take a few minutes to quickly summarize our second quarter financial performance.
Excluding merger and spin-off costs, which were $2.4 million or a little over penny per share during the quarter, FFO was $0.22 per share during the second quarter. Accounting rules require us to expanse transaction costs as occurred. So, these numbers run through our income statement and they reduce our FFO.
Outside of the merger, it was a quiet solid quarter, reflecting the strong underlying office fundamentals in our Sunbelt markets. Same property NOI was firmly positive; rents continued to roll up, and leasing velocity accelerated.
Beyond running our core business, we are laser focused on satisfying the conditions to close the merger and spin-off. For those of us at Cousins involved in finance and related support areas, this means completing significant integration of both people and systems as well as closing numerous capital markets transactions, which are all proceeding well. But we know the work associated with the Parkway transactions is a confine to us just here at Cousins.
For those of you that track our financial performance or harder yet forecast our financial performance, the merger and spin-off will require more view time and resources. Although, the transactions themselves are pretty straight forward, the next couple of quarters will be difficult to model with absolute precision. The exact timing of the closing, the cost to unwind various interest rate swaps, deal maintenance required and the debt that’s been paid, these variables and many more are largely out of our control. However, rest assured that when the dust settles, we will continue on the path we’ve been on for the last few years, a simple and compelling strategy executed with the strong balance sheet.
With that in mind, I thought it might be helpful to remind everyone about just how far we’ve already come down this path. About three years ago, on our fourth quarter 2013 conference call, I said we’d arrived at an important tipping point. After years of complicated financial statements, we committed to improving the transparency and the quality of our earnings as well as the simplicity and strength of our balance sheet. I’m proud to say, we have delivered on those commitments.
In 2012, total net fee income along with our land sales gains, totaled approximately $24 million or 36% of our total FFO. Through the first six months of 2016, these same categories have totaled only $3.7 million or near 4% of our total FFO. Over that same period, we also reduced our debt-to-EBITDA from about six times to a very healthy 4.5 times today. All else being equal, both of these very strategic, very positive trends should reduce earnings. However, we’ve actually increased FFO per share over the last four years by over 60%. But, we’re not finished. This merger and spin-off are fully consistent with our stated strategy and they allow us to take some very large and significant steps in the path we began down several years ago. But, these are not our last steps. Our goal is to become the premier, Sunbelt’s urban office REIT, a must own name in the REIT industry.
Before turning the call over to the operator, I want to quickly review the dividend policy surrounding the Parkway transaction. For the merger agreement, Parkway and Cousins will maintain their existing dividend policies through the closing as well as coordinate the timing of their respective dividend payments. Parkway has already declared its third quarter dividend of $0.1875 per share to be payable on September 6th to shareholders of record on August 23rd. Cousins anticipates declaring its third quarter dividend of $0.08 per share in the near future to also be payable on September 6th to shareholders of record on August 23rd.
Assuming a fourth quarter close for the merger and spin-off, each company’s post merger individual boards will decide the amount and the timing of the respective fourth quarter dividends. New stub, partial our prorated dividends are anticipated at this time.
With that I’ll turn the call over to the operator for your questions. Clearly, the merger and spin-off are top of mind and will likely generate most increase, but please note that we’re unable to provide more details beyond we have already discussed on this call. Thanks for your interest. And now, I’ll let the operator take over.
[Operator Instructions] And the first question comes from Jamie Feldman with Bank of America.
So, post transaction or post spin, you’ll have market concentration about 49% according to our numbers in Atlanta. I know, you said market conditions are doing pretty well. But, can you just talk about how you think about single market concentration risk, and any steps you might able to take, either, A, are you comfortable with Atlanta at half year business; and B, how you think about that pie chart going forward?
Jamie, this is Larry. As I said when we had our merger call, Atlanta is really in a very unique supply-demand position. And so, a heavy market concentration here is a positive thing to have. And there is very limited new supply -- and I think at this point in the cycle, you won’t see those numbers change that much. Having said that, I also said in the call that long-term, we don’t want a concentration for long period of time, greater than 40% in any single market, and that will still be our objective. And once the merger is closed, then we’ll being able to give more thought to the, strategic concentrations that the Company has and where we want to investment more, and where we may want to harvest some of what we have.
Okay. And you think about -- I guess even more so, you think about Charlotte and Austin markets -- you’re talking about supply is picking up there. I guess, would it give you a pause to sell out of some of those markets, just to because it would weight you even higher in Atlanta, as you think about the strategic allocation?
No. I would say one of the strong rationales behind this transaction from our standpoint is the market position that we are left with in Atlanta and Austin and Charlotte. And we’ve demonstrated in Austin most recently that having multiple buildings in the best submarket gives you some competitive advantages, both on what you’re able to offer your customers as well as some operating efficiencies. So, we’d like the physical assets and we like the concentrations in Austin and Atlanta and Charlotte. Having said that, no building is sacred and we get to where we have a trade we want to make in one of those markets, we won’t hesitate to do so. But, we think that’s one of the real strengths of the merger is those market concentrations.
And Gregg, you have talked about -- or I guess looking at the numbers, it looks like your same store expenses year-over-year declined. Can you talk about the sustainability of that or you think maybe we will make that up in the back half of the year?
Jamie, it’s Collin. Really what’s driven the decline in expenses has been really terrific work by our team in the field. It primarily relates to us renegotiating some utility contracts as well as going through the real estate tax appeal process, which has brought our expenses down. So, we will continue to do that same type of work year-over-year. But, those changes in expenses are primarily attributed to those two particular reasons.
Okay. And I know it’s kind of a minor move here, but it looks like your percent leased at the Carolina Square office actually declined in the quarter?
Jamie, it’s correct. We had a minor typo in the first quarter supplement. It’s footnoted in the supplement. There was no backup, it was just a mistake in the supplement.
Thank you. And the next question comes from Dave Rodgers with Baird.
I think, Larry, you made some comments about a slowdown in the lease process among your tenants; and Colin, I think in your comments today, I didn’t really hear any of that tone. Was there kind of just a minor slowdown in the first half, you’re seeing a pick up again? Maybe just kind of reconcile the comments of what you’re seeing today, what you’ve been seeing and maybe those comments that you made at NAREIT?
Yes, I think it in general across all of our markets, again with the exception of Huston, the markets remain strong, lease activity is good. I think what we have seen, and what I tried to communicate at NAREIT is the length of time to get deals done has taken longer. And I think that’s just corporate America taking a closer lens to any decision that they make whether the cost decision or investing capital, people are taking a little more cautious approach which has made deals -- the length of time to get them done take longer. But we haven’t seen a significant pullback at activity in Atlanta, Charlotte or Austin. It’s a good pipelines, just slower to get them done.
And then, coming back to one of your earlier comments I guess on lease economics overall, I think you said that you still felt really good about your lease economics. And maybe if we could bifurcate between Houston and the other markets in the portfolio, it seems like economics came under a little more pressure in the quarter; I don’t know if that’s just Houston driven. Clearly spreads are still positive, but just kind of on an overall basis it looked like there was a little bit of a -- I don’t know, if a mixed shift or what. But, maybe dive between those two, if you could.
Yes. It -- across the three markets excluding Huston, again from a base rent standpoint, we continue to show positive ret spreads. I think looking on our statistics where you might see some softness would be in the costs of the leases, TIs and free rent. I think similar to the rent rollup statistics, it can be a little bit lumpy and highly dependent upon, both the geography of the lease and the type of lease. So, in this particular quarter, I think our costs could look a little bit elevated but those include some first generation leases at Avalon and Research Park; those tend to come with a higher TI as you would expect on a new development. Here in Atlanta, we had a huge amount of activity. Downtown which tends to come at a little higher cost, all fantastic deals that are positive for 191 and ACSC but tend to come a little bit higher price tag. And I think specifically to ACSC, as I mentioned in my remarks, it was a almost 40,000 square foot lease to a data center customer, which does come with a higher cost to build out that space. It does also come with a higher rental rate. And so, from NER, NPV perspective, a very, very attractive lease for that building. So, it’s highly specific to the particular quarter. I think as you look over kind of the long-term, if you kind of normalize those new construction TIs, we would be fairly consistent with previous quarters.
Last question, I guess -- and maybe for Colin or Larry, talk a little bit about -- you kind of looked at the portfolio years ago and you began to kind of go from Atlanta to Houston and expand in Austin and Charlotte. What kept you out of Florida? I guess was just the ability to gain scale and not a market and not a set of markets that you like, I mean maybe dive into your historical perspective on that please?
I would say when we look at Florida and we didn’t take a real deep dive look at it, but there were a couple of pretty good REITs that were already down there and operating successfully on a long-term basis. It’s not a very -- if you look at any of the individual markets, they’re not real large. And so, we just saw better opportunities in some other markets in the short-term. Having said that, we have noticed that some of our peers have been successful down there. And so, we’re all about getting with our teammates down there and running those markets better and get to where we understand them better.
The only thing I would add to that is we evaluated there our geographic opportunity. I think at Cousins we always believe our relationships are competitive advantage. And so, we’ve been active over time in Charlotte for many, many years, and similar to that over in Texas as we’ve been in Dallas, we’ve been in Austin. And so, as we looked at markets with highly attractive demographics and fundamentals where we have relationships, we felt like we could leverage those and that got our attention first.
Thank you. And our next question comes from Tom Lesnick with Capital One Securities.
Hi, this is Ryan Wineman with Tom Lesnick here. It seems like there is still some continued pessimism around Houston leasing right now. And I was just wondering, do you guys have any sort of sense as to whether these energy companies still just need to get their CapEx budgets under wraps to try and make money at these low energy prices or do they still have some overhead downsizing to do?
Well, I’m not an expert on oil companies, but there was a good article, I think this week in the journal that was talking about how in general the oil companies’ CEOs were feeling a little bit better about the long-term prospects. But, at the same time, there were still some downsize going on at the troupe level. So, our guys in Houston would tell you the headline news of so and so. Cutting back employee count is not as frequent, but it also has disappeared from the market. I think one of the great things that long term for Houston, it doesn’t mitigate the last few years and the impact of the energy. But, the fact that it still job is positive. And the medical center and the chemicals businesses and some of the things like that are showing that the economy certainly isn’t as one category dominated as it was in the 80s, when Houston went through the big downturn. But, I wouldn’t say we had heard a lot of people go out declare that we’re absolutely through and this is the bottom. I hope that’s right, but that’s not what we’ve been hearing. We also hadn’t heard people say, there is a lot more to come; it just keeps dribbling out.
Just one more question, is the absolute oil price right now, or the volatility in that oil price, more important to stabilizing the Houston office market right now?
As Larry said, I’m not an energy expert either, but I think the folks that we talk to in Huston, I think they are looking for stability. And ultimately that price settles out, that will dictate what -- on the supply chain, what the services companies you can charge, because it’s ultimately not about the price of oil, it’s about the margin to the oil company, how much money they are making. So, I think they’re all looking for stability across the board and all upstream, downstream, midstream and services company to be able to plan their business and run their business. And right now, the uncertainty as it’s bounced around, it’s been extraordinarily hard, which has led to folks just making kind of no decision. So, I think stability is probably the most important.
Thank you. And our next question comes from John Guinee with Stifel.
We were looking at your leasing stats, and I think someone already talked about them slowing down a little bit in the first half of this year. What we were sort of stunned by was the dollar in CapEx and the dollar CapEx per square foot $7 or so, $7 per square foot per lease term. Is that here to stay; what’s your thought process, or are you consciously making the decision to spend a lot of upfront dollars in the near term to help deface rates?
John, it’s Colin. The first thing I would say, just to make sure we’re looking at apples to apples, I know a lot of our competitors, when they publish those states are just including TIs and leasing commissions. Our published stats include TIs, leasing commissions and free rent. And so, I think on an apples to apples basis, it looks -- it makes us look a little bit higher. As we look at the trends over last couple of years, quarter-to-quarter, this particular quarter is slightly elevated to past quarters, here at Cousins. And again, kind of what’s driven that is a little bit of first generation TI that’s been included in there and then a little bit of the -- downtown Atlanta leasing does come with a higher costs. But I think the costs that were attributable to the leases this quarter weren’t necessarily higher than they were in downtown Atlanta a few quarters ago. And so, I think as you look at it, we’re fairly normalized excluding the first generation cost. We would hope as our markets stabilize and Austin and Atlanta and Charlotte that our team will be able to continue to push those down. We think it’s certainly kind of landlord favorable and are starting to see that trend happen as TI and both free rent come down on per year basis.
John, I think it’s just what got in the bucket this quarter, was some expensive leases Downtown, and then our new projects. And one thing, when we -- outside of Huston, we don’t see the pipeline of potential prospects in any of our markets is slowing down when we have less space to lease. But what we see is the decision making taking longer, which is I think just a function of corporate America as it has been for since the great recession is very expense minded. And so, if you are dealing with the big corporation, it goes through a lot of layers before the lease comes back approved.
Great, I’ll probably call you offline to get apples to apples here. Thank you.
John, I’ve got the luxury of the table in front of me that has long-term trends on kind of second gen CapEx. And just to step back from this quarter and this year and take a look at the longer timeframe, our average second gen CapEx divided by total NOI over the last 10 years has averaged 17%; over the last three years has averaged 18%; and through the first six months this year, 18%. So, when you take a step back and smooth this out for lumpiness, it’s not exceptionally high relative to NOI.
[Operator Instructions] And the next question comes from Jed Reagan with Green Street Advisors.
Just curious if you are seeing any changes in cap rates or values in your markets recently, particularly for value-add or riskier assets?
Hey, Jed, it’s Collin. I would say -- again, putting aside Huston where I think activity has just really stalled, given that the weakening fundamentals, buyers are looking for a deal where as the owners or sellers are very well-capitalized in the urban markets and have chosen to wait this cycle out. We turn our attention to Atlanta and Charlotte and Austin, I think we’ve seen values kind of hold constant. I’d say they’ve kind of generally plateaued. We are not seeing any more kind of cap rate compression but we haven’t seen it expand either. If there is any change over the last six months and you probably heard this from others, it’s just really the depth of the buyer pool and the number of bidders that are getting to that price, but they generally stayed fairly steady. Candidly, we’ve probably seen fewer value-add type yields that are out in the market. And really I think that’s just a function -- or those that really garner a lot of buyer interest -- and I think it’s just a function at this point in the cycle where markets in our states are predominantly healthy. If you got a value-add asset at this point, there is probably something with it in terms of why it hadn’t leased. So, those maybe performed a little not as well but they are probably lower end quality product. But overall, it’s just steady and a little bit thinner.
And just shifting to Houston, do you expect further occupancy declines in your Houston portfolio, later this year? And then, just maybe a comment on how subleasing trends are fairing in your Houston submarkets?
Sure, in terms of our specific portfolio to tackle that first, as I mentioned in my prepared remarks, we really just don’t have a lot of material expirations over really the next three years in Houston; it’s a big credit to our team on the ground you’ve got out in front of that. And so, as we look forward to the rest of 2016, we’ve already taken care of our largest expiration, which is just 35,000 square feet. And kind of looking out in 2017, I think our team feels pretty good about the activity that we have, but it’s just on a material percentage. So, I don’t think, we’re forecasting big declines within our portfolio over the next couple of years.
And just more broadly speaking, in Greenway and the Galleria, again the sublease space relative to some of the other submarkets being out west and really downtown has been far more muted. Out there, you’ve seen sublease space in 6%, 7%, 8% of the inventory available, whereas in Greenway and the Galleria, it’s a much smaller percentage. Certainly, we’re going to continue to see that growth, but the pace of acceleration with the sublease space is definitely moderated. And we’ve heard some people saying, it’s going to across the city could arise the 10 million square feet. I don’t know that it’s going to truly hit there, because it seems that it’s now moderated. But, I think far less impactful in Greenway and the Galleria.
And just last one, what are your guys’ latest thoughts on the land bank; how much of what remains there is core at this point; and maybe what would be the timing for paring that down further?
Yes, Jed. We continue, as Gregg mentioned in his comments, it’s been a big focus of paring it down. And there is not a lot of what’s left on the land that we would consider core; a lot of it is still the hangover from when were in the residential business. And it just takes a while for the market to turn and there be a buyer. Some of it will actually be sold for timber. And so, I think it will take a few more years for us to work our way through. There is a parcel here and there that we want to keep. What we’ve been really watching and making sure that we’re ready to move is that whenever the apartment’s [ph] multifamily cycle current that there are some key size in the submarkets that are so important to us that we would like to buy, so that we’ve got and ready for the next cycle. And, we were talking about one of those yesterday in the market is probably still a little bit early. But, the multifamily really across our footprint for the last four years has been able to outbid office guys on sites. But some of those sites are still undeveloped, and we think there will be some opportunity in next couple of years to give some key core size in these markets, and that will be our intention to do. We’ve always said that we expect to keep land under somewhere in that 3% to 5% of the total portfolio value.
And just to be clear, these multifamily sites you are referring to, these would be with an eye to rezoning back to office or move forward with multifamily?
No, to rezone back office, which is very easy to do.
Just to put some numbers on this, we only have $35 million of land in our balance sheet at the end of the quarter and inside of that $35 million, it’s really 1% of the Company right now. You’ve the Victory of land down, the Texas TFA, which we’re about to start and the NCR phase 2 piece that we’re about to start. So, we have kind of three core pieces of land that comprise the vast majority of that $35 million. In terms of that kind of residential stuff that we still have in the books is $8 million. So, it’s just -- will wind it down, but it’s just not -- it’s absolutely not significant.
Thank you. And as there are no more questions at the present time, I would like to return the call to Larry Gellerstedt for any closing comments.
I would like to thank everybody for joining us today. This has been a good solid quarter and really proud of what the team’s accomplished. We’re extraordinarily excited about the completing the upcoming transaction with Parkway and look forward to sharing more on that, as we get further down the road. Thanks.
Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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