Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Cousins Properties Inc (CUZ, Financial) delivered $0.68 per share in FFO, surpassing street consensus.
- Reported same property net operating income growth of 5%.
- Leased 391,000 square feet with a positive cash rent roll-up of 18.2%.
- Reduced leverage with net debt to EBITDA of 5.12 times at quarter end.
- Acquired two newly created mezzanine loans secured by interests in lifestyle office properties in Nashville and Charlotte.
Negative Points
- The commodity office sector continues to struggle, impacting overall market sentiment.
- Bank of America's lease expiration in Charlotte next year poses a potential challenge.
- Domain 4 in Austin will be effectively 42% occupied after August, impacting occupancy rates.
- Higher leasing concessions this quarter, defined as the sum of free rent and tenant improvements, increased to $9.88.
- The office sector remains challenged with limited and expensive asset-level debt and equity.
Q & A Highlights
Q: Can you talk about how the mezzanine loan opportunities came to you, whether they were marketed, and if you're looking for additional mezzanine opportunities?
A: The transactions were off-market, identified through relationships at Cousins. We restructured attractive win-win opportunities. We are open to more such opportunities and are also considering traditional property acquisitions, joint ventures, and other transactions. Our bias is towards equity-like investments, but debt investments at attractive returns are also considered.
Q: Are there any large short-term leases in the 244,000 square feet of lease expirations?
A: The biggest driver of the exclusions is the relocation of Accruent to the Domain Three building. They are waiting for their replacement space, which shows up as a short-term extension.
Q: Can you expand on the leasing activity and whether it's driven by market growth or tenants' flight to quality?
A: The activity is driven by both flight to quality and flight to capital. We are seeing both renewals and new customers within our portfolio. Additionally, there is a resurgence in in-migration from the West Coast, Midwest, and Northeast, which is constructive for our leasing market.
Q: How much capacity on the balance sheet are you willing to take up for additional investments?
A: Historically, we've run at around five times net debt to EBITDA. We have capacity to go up to 5.5 times, which gives us several hundred million in capacity. If we were to take it up to six times, our capacity would almost triple.
Q: Can you talk about the confidence in the borrowers' ability to service and repay the mezzanine loans and the loan-to-value ratio?
A: We purchased newly created mezzanine positions from the existing senior lender. We are comfortable with the collateral, which is high-quality lifestyle office properties. While the properties are highly levered, we are confident in the underlying real estate.
Q: Can you provide an update on the leasing pipeline and the mix between renewals and new leasing?
A: The late-stage pipeline is approximately 1 million square feet, consistent with past levels. The mix of new and renewal leases is also consistent with historical trends.
Q: Can you comment on the net effective rents on new leases and whether you are able to push face rents or reduce concessions?
A: We have been able to push face rents to offset higher concessions. Term is another lever we can pull to help offset higher concessions.
Q: Can you talk about the mark-to-market opportunity for leases expiring in the back half of the year?
A: We have had 41 straight quarters of positive mark-to-market. We are optimistic about the second half of the year, but specific details will depend on the leases we sign and the mix of those leases.
Q: Can you provide an update on the supply-demand dynamics in Austin and how it affects your portfolio?
A: Austin has a bit of supply driven by anticipatory job growth in the tech sector, which moderated over the last 12-18 months. However, Austin remains a highly desirable market for inbound growth. We view the current supply issue as short-term and expect it to rebalance as demand fills up the new supply.
Q: Can you provide more details on the mezzanine loans, such as the maturity of the senior debt and the profile of the borrower?
A: The senior debt has the same maturity as the mezzanine loans. We are comfortable with the investment and the assets in the market. The borrowers are well-positioned, and we like the underlying real estate.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
