Pam Roper - Executive Vice President, General Counsel and Corporate Secretary Larry Gellerstedt - Chairman & Chief Executive Officer Colin Connolly - President & Chief Operating Officer Gregg Adzema - Executive Vice President & Chief Financial Officer.

Dave Rodgers - Baird Chris Belosic - Green Street Advisors.

Good morning, and welcome to the Cousins Properties Third Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference call over to Pam Roper. Please go ahead..

Good morning and welcome to Cousins Properties' third quarter earnings conference call. With me today are Larry Gellerstedt, our Chief Executive Officer; Colin Connolly, our President and Chief Operating Officer; and Gregg Adzema, our Chief Financial Officer.

The press release and supplemental package were made available on the Investor Relations page of our website yesterday afternoon as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements.

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 as contained in our filings with the SEC.

With that, I will turn the call over to Larry Gellerstedt..

Thanks, Pam. Good morning everybody. And thanks for joining us today. The Cousins team continues to drive strong performance across all areas of our business in 2017. Our office portfolio is 94% leased and generating positive financial results for the 19th straight quarter.

We also successfully delivered our second development project this year with Carolina Square coming online during the third quarter.

Year-to-date we leased over 1.2 million square feet of office space delivered a 196 million in new developments and the Cousins and legacy Parkway portfolios when combined produced same property cash NOI growth of 8.2% when compared to the same period in 2016.

Looking forward I'm encouraged by the steady activity we're seeing on the ground in our Sun Belt markets. Accelerated job growth and ongoing economic expansion continue to support the demand for premium office space, especially in our targeted urban submarkets.

This is evident in our portfolios performances cycle as well in the markets where we operate. In Atlanta, Austin, Charlotte, Phoenix and Tampa the Class A office market has experienced 8 consecutive years of positive net absorption and 6 consecutive years of strong net growth.

Another important measure to consider when evaluating the health of our markets is new supply. Surprisingly during this cycle new supply in our Sun Belt markets has been more constrained averaging 1.7% of total inventory per year. Putting this into perspective in the previous cycle new supply in our markets averaged 5.2% of total inventory per year.

Cousins is well positioned to create value in today its robust real estate environment. While we have seen no early signs of softening conditions, we will remain prepared and well capitalized to quickly adapt if fundamental should change. Regardless of where we are in the market cycle we remain consistent with our strategic roadmap.

First and foremost our strategy is to continue to own premier urban office portfolio in the Sun Belt. We are confident that our trophy assets located in the best submarkets will be leaders in times of economic expansion and outperformed in economic downturns.

Our strategy leverages the demographic tailwinds across the Sun Belt with increases barriers to entry that have emerged in urban submarkets as a result of diminishing levels of development ready land.

In addition, the rapid transformation underway in places like Midtown Atlanta, the Austin CBD and Uptown Charlotte have created new urban living alternatives for the best and brighter shown talent at a much lower cost of living.

Second, we will maintain a disciplined capital allocation strategy, over the course of the current cycle we creatively consummated the Parkway transaction as well as invested an additional $3 billion in new development and acquisitions. We were intentional in the timing and selection at each investment decision.

Early in the cycle we focused on Class A value add acquisitions with investments like Promenade in Atlanta and 2100 Ross in Dallas. Next at mid cycle we deployed our capital and expected what is development and we're successful were projects like Colorado Tower and Research Park V in Austin.

As the current cycle as extended, we focus our efforts on strategic acquisition opportunities and highly pre-leased our build-to-suit projects like 8000 Avalon in Atlanta and dimensional place in Charlotte. During this time, we also completed a highly strategic transaction with Parkway.

All of our investments regardless of the timing or type were funded on a leverage neutral basis using the most compelling source of capital available at Cousins at the time.

At the present time, we are executing our current $517 million development pipeline with NCR Phase I set to deliver in January and the balance schedule to deliver in late 2018 through early 2019. We are also fielding for request from new and existing customers with expansion needs and limited options available in existing space.

I'm optimistic that this will translate into one or two more projects this cycle whether it is a highly pre-leased, multi-tenant building or a fully leased build-to-suit development.

I'm especially encouraged by the progress we've made with one of our larger customers, however, it's still premature to make an announcement today; we hope to be in a position to provide more specifics by year-end. Circling back to our strategic roadmap for the future. We will continue to maintain a simple flexible and low levered balance sheet.

From fourth quarter 2009 to today, we've reduced net debt to EBITDA from 7.7 times to 4.3 times. Our conservative approach to balance sheet management has given us the opportunity to pursue transformative investment opportunities like the Parkway merger spend.

Going forward, we will continue to pair our proven capital allocation strategy with the conservative balance sheet with the ultimate build of providing long-term value to our shareholders. And lastly, we will leverage our strong local operating platforms.

This local short shooter approach has served us well in the past and is vital to the ongoing success of the company.

Today, we are well positioned in each market with the strong operating platform led by a local managing director, who in addition to having responsibility for on the ground operations also helps us to identifying new investment opportunities.

We believe that this entrepreneurial approach with the focus on deep market relationships customer service and community involvement provides the company with a competitive hedge on both the leasing and investment fronts. Many of you witness the power of the Cousins local operating platform approach during our Investor Day in Atlanta last month.

The same can be seen when visiting our teams in Austin, Charlotte, Phoenix and Tampa. Before I turn it over to Colin, I would like to once again reiterate my confidence in our strategy that urban Sun Belt portfolio we assembled, the balance sheet we secured and the team we build.

Cousins is certainly well positioned to execute and grow on our current markets where we continue to see runway, see a runway of great opportunity.

In addition, we continue to study additional Sun Belt markets where we believe our platform to create value, specifically we are focused on city to scale, a throbbing urban core, and a well educated workforce. Nonetheless any expansion will be driven by identifying compelling opportunities and we will remain patient and disciplined.

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

Thank you, Larry and good morning everyone. It's an exciting time to be part of the Cousins organization as we are well positioned to create value for our shareholders. We have a trophy portfolio and rock solid balance sheet and equally important, a focused and committed team.

With that backdrop, I would like to begin my comments today by briefly highlighting some of our key operational and leasing metrics and then I'll provide additional details market by market before closing with an update on our disposition activity.

Starting with leasing, the team delivered another strong quarter as we executed approximately 335,000 square feet as office leases with a cash rent roll up to 7% and a weighted average lease term of more than 7 years. Excluding Orlando which accounted for approximately 36% of our leasing activity this quarter, our cash rent roll up was 10%.

As a whole, conditions across our markets remain very favorable and our fourth quarter leasing pipeline looks strong. Switching gears to our markets, in Atlanta office fundamentals remain healthy fueled by steady demand and historical low levels of new supply.

Our team is active in the market as we leased approximately 119,000 square feet at attractive economics.

Our 6 million square foot portfolio remained at 91.4% leased at the end of the quarter, as we previously disclosed Equifax did vacated 68,000 square foot suit in August at Northpark, and Aetna is said to give back its 37,000 square feet in October.

On the positive side at Northpark, we were thrilled to lease an additional 25,000 square feet to WestRock during the quarter.

With this expansion, WestRock which is a growing $15 billion paper and packaging company, now as 205,000 square feet at the property and will occupy their space in Phases starting in November of this year and ending in May of next year. During the quarter, we made great progress at our 8000 Avalon project leasing 43,800 square feet to SAP.

The success in customer demand we've seen at Avalon has been quite remarkable. In aggregate approximately 68% of the building will be occupied by large well capitalized technology oriented companies including Microsoft, Crown Castle and MuleSoft in addition to SAP.

As a reminder, we purchased the second and last office padded Avalon during the second quarter in a joint venture with Hines. We are encouraged by preliminary customer interest and we'll move forward with that project when we are able to secure commitments on a significant portion of the building.

Moving down the model line to Buckhead, in the third quarter we began to see a noticeable up tick in activity, a welcome change after a bit of this summer.

With three alliance now approximately 80% leased and no new additional construction underway in Buckhead, I feel optimistic about the 140,000 square feet we will get back at Terminus in 2019 from the previously disclosed move outs of CBRE and Bain.

With the two year lead time, a fantastic location and a dynamic amenity base, I believe our team is well positioned to back for the space as we are already in lease negotiations on several floors. Over in Austin, it should come as no surprise that office fundamentals remain strong.

Measure wide the 35 million square foot Class A office market has limited vacancy at 8.6% and has posted 1.4 million square feet of positive net absorption here to-date.

In the CVD, where Cousins sounds approximately 20% of the Class A office market, rents continue to claim rushing up against $60 a square foot gross for new and existing top tier product.

While construction activity has ramped up to over 3 million square feet across the city only 700,000 square feet of new supplies underway in the CBD of which 75% is reportedly pre-released. We see very similar scenes in Charlotte.

Fundamentals remain very solid across the metro and uptown Charlotte where our 3 million square foot portfolio is located continues to shine. The sub-market has absorbed 748,000 square feet year-to-date and vacancy stand at just 10%.

Our Charlotte portfolio remains 98% plus lease with no material exposure until dimensional fund advisors moves from Fifth Third Center into our built to see project at the end of 2018. We are confident that this two floor 50,000 square foot block of space will be backfilled quickly based on preliminary interest.

Moving down to Tampa, real estate fundamentals are rapidly improving especially in the West shore sub-market where our 1.7 million square foot portfolio is located. Class A vacancy dropped to another 100 basis points in the third quarter to 7.9% asking rents grew 8% compared to a year ago and no new speculative product has broken ground this cycle.

Amgen took occupancy of 33,000 square feet earlier this month and will face into the remaining 92,000 square feet through June of 2018. The portfolio was 96.9% leased at quarter end. And as we have previously disclosed Laser Spine Institute will vacate at 60,000 square foot space at Harborview upon expiration in February of 2018.

However, we have interest in some or all of this space from several groups and thus we are optimistic that we can release it quickly and minimize the future downtime. Our team in Phoenix posted another terrific quarter as well. We signed 45,000 square feet of leases with double-digit rent roll ups.

Notably we took an additional floor back from Genesis along with the termination fee and immediately backfilled this 20,000 square foot space for ZipRecruiter and a significantly higher rental rate.

While this transaction resulted in a few months of down time, our team was able to respond to the needs of a growing customer while also creating long-term value. The portfolio did drop to 95.7% lease at the end of the quarter down from 97.1% last quarter as a result of a full floor move out.

However, post quarter end, we released this 28,000 square foot space to Symantec and the lease will commence in January of 2018. Since acquiring the Phoenix assets a year ago, we have executed approximately 500,000 square feet of new and renewal leases.

While this volume is quite remarkable when compared to the total size of the portfolio, I'm equally pleased with the team's creative approach to stabilizing the rent role while upgrading and improving the rent stream.

In this process, we were able to grow customers like Amazon, Silicon Valley Bank, ZipRecruiter and Symantec while reducing our exposure to higher risk profile companies like Genesis. Lastly, I would like to take a moment to update you on our current disposition activity.

We are under contract to sell our 20% interest in Courvoisier in Miami subject to standard lender consensus. We are hopeful to complete this transaction in the next few weeks. In Orlando, we are actively marketing our 1 million square foot portfolio in the CBD, which we disclosed last quarter.

We have received first round offers and are very pleased with the depth and quality of the interested buyers. Once we complete the bidding process and select a buyer or buyers, we anticipate a year end 2017 or early 2018 closing after the completion of standard due diligence. With that, I will turn the call over to Gregg..

Thanks Colin, and good morning, everyone. Overall our markets remain healthy and we had a solid quarter. FFO was $0.15 per share and stands at $0.46 per share year-to-date. I would like to begin my comments by highlighting four items that impacted our third quarter results.

Then, I will move to our capital markets activity during the quarter and I will conclude by updating our 2017 earnings guidance. I will start with termination fees. For a little perspective, between 2009 and 2016 annual termination fees ranged from a low of $500,000 to a high of $4.5 million.

So, the $10.2 million in termination fees we received so far in 2017 is unusual. Although, the 2017 totals comprised of almost 20 customers, 75% of these termination fees had come from just three customers. At our Hayden Ferry project at Tempe, Zenefits moved out to make way for Amazon and ZipRecruiter.

At our 1011 West Real Building also in Tempe, U.S. Areas moved out which allowed us to sign a full building lease with ADP. And at our Northpark project in Atlanta, we proactively worked to move out [indiscernible] to make way for WestRock. All three spaces have been fully backfilled.

These are huge wins that I don't -- that not only generate fees in the short-term but create real long-term value with properties. Later in the call, I will update our termination fee guidance but as a quick remainder, termination fees are not included in our property level NOI. We include them in the other income section of our supplement.

Second, our general and administrative expenses remained elevated during the third quarter, again, driven by an increase in our long-term incentive compensation accrual.

As this has been the case for many years, in order to ensure management's interests are aligned with our shareholders, the vast majority of our performance based long-term incentive compensation here at Cousins is determined by out total return performance relative the SNL office index.

During the third quarter, Cousins total return was positive 6.9% compared to negative 0.3% in the office index. I will also update our G&A guidance later in the call. Third, we recognized the $429,000 gain on debt extinguishment during the third quarter. This was the result of prepaying the 3344 Peachtree mortgage that we assumed in the Parkway merger.

This mortgage had an above market interest rate that created a premium we were amortizing over the remaining life of the mortgage thereby reducing interest expense. We prepaid it without penalty three months prior to majority accelerating amortization of the premium and recognizing a gain on debt extinguishment. This is only a timing issue.

Mortgage was scheduled to mature later in 2017, so from a GAAP perspective all we did was pull forward the amortization of the premium and moved this amortization from interest expense to gain on debt extinguishment. There is no impact on full year FFO numbers. Finally, we continued to clean up the accruals associated with the Parkway transactions.

This quarter that clean up led to an adjustment that reduced transaction costs by about $600,000. It's not a big number considering the size and complexity of these transactions, but I wanted to call it to your attention. It again just not effects our 2017 guidance. This number is included in other expenses on our income statement.

In the capital markets, we funded the second tranche of our inaugural $350 million private placement of senior unsecured notes during the third quarter. This tranche is an eight-year $250 million note at 3.91% fixed rate that we drew on July 6. With this funding, we have now locked down our balance sheet for the next several years.

We have no debt of any consequence maturing until 2021 and no balance outstanding on our $500 million unsecured credit facility. We have a weighted average debt maturity of almost seven years at a weighted average interest rate of approximately 3.6% and net-to-debt to EBITDA continues to hover around 4.0x, where it has been since 2012.

A rock solid balance sheet has been and will continue to be core tenant of our company. Low leverage supports our development efforts and provides dry powder during times of economic stress. I will wrap up my section of the call by providing detail on our updated earnings guidance as well as some color on our same property performance.

Overall, we are raising and narrowing our 2017 FFO guidance to between $0.60 and $0.62 per share from previously between $0.50 and $0.63 per share. This change is driven by updates to three of our assumptions.

First, we raised our fee and other income assumption to between $19 million and $21 million from a previous range of $18.5 million to $20.5 million primarily due to an increase in anticipated termination fees.

Second, we raised our general and administrative expense assumption to between $27 million and $29 million from a previous range of $26 million to $28 million primarily due to an increase in the long-term compensation expense.

Finally, we lowered our interest and other expense assumption to between $40 million and $42 million from a previous range of $45 million to $47 million primarily due to transaction timing and interest rate variances. Although, we are not changing our same property NOI assumption, I would like to take a minute to talk about it.

As a reminder, we originally provided full year 2017 same-property year-over-year NOI growth on a GAAP basis of between 2% and 4%. That range remains unchanged and we still anticipate hitting it. However, as I discussed on our previous earnings call, the quarter-to-quarter same-property results can be lumpy.

In the third quarter, this lumpiness was primarily driven by an unusual expense comparison to the previous year. In the fourth quarter, this lumpiness will be primarily driven by several large move outs. I will start with the third quarter expenses.

On a year-over-year basis, same-property expenses were up 17.3% in the Cousins pool and 22.6% in the Parkway pool during the quarter. When combined same-property expenses were up 20.7% over last year. This is a big number, but it's driven by an unusual prior year comp for property taxes.

As I discussed in our call last quarter both Cousins and Parkway were very successful in our 2015 tax appeals which resulted in a large reduction tax expense that rolled through in the third quarter of 2016. This created an unusually low prior comp for our third quarter 2017 performance.

Excluding property taxes in both years combined expenses for both same-property portfolios increased 4.9% during the third quarter, which is more consistent with previous periods. Looking to the fourth quarter, we anticipate same-property revenues to remain positive but below the recent trend.

This will be temporary primarily driven by the several large move outs that we have at Northpark. However, occupancy at Northpark will quickly return to its previous level as soon as WestRock moves in over the next few quarters.

Bottom line, a little lumpiness in our same property results, during the second half of 2017 but no change to our original guidance. Finally, as Colin mentioned earlier we anticipate closing the Orlando and Miami dispositions at or around year-end.

Although, these sales won't impact 2017 earnings, they will impact 2018 earnings and we will include them as should you in projected numbers. Before wrapping up, I would like to point out an item from last quarter's financial supplement that has been corrected.

On the development pipeline page, we reported $15 million in total project costs incurred and $3.1 million at our share for our 121 West Trinity Project. These numbers should have been $12 million and $2.4 million respectively. With that, I will turn the call back over to the operator..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Okay. The first question comes from Dave Rodgers of Baird. Please ask your question. Thank you..

Yes. Good morning, guys.

Colin, I want to follow up on your comments about Tampa, I don't think you are the first one to point out that Tampa is going to resurge lately and you provided some statistics, are you going to talk about the tenants that are active in that market what you are seeing in addition to obviously Amgen?.

Good question, Dave. We have been very pleased with our activity in Tampa since we closed on the Parkway portfolio a year or so ago. And as I mentioned in my prepared remarks there has been kind of little to no speculative development across the entirety of the market and we have seen a real pick up in demand in Tampa.

And I would characterize Tampa is a bit different than Orlando where we do see some large kind of national, international corporations that really find Tampa attractive from a quality of life standpoint adjacent to obviously waterfront and they have got a view that they can attract really high quality talent.

So, we have seen another large scale corporations like Amgen looking for space and it's in a lot of different sectors, it's certainly in the healthcare space like Amgen, but also you see a lot of large financial services that use that for some of their back office operations.

And so as I said, we're continuing to see good activity from those type of users..

And again, Colin or maybe for Larry on the development side of the equations, sounds like you are having some good discussions on potential build-to-suit, but you had kind of success at Avalon obviously going in with a little bit less pre-leasing and giving yourself some space to work with.

Are there any markets or submarkets where, you'd think about that today or you'd be comfortable taking on some speculative leasing risk just give in your comments about how strong the Southeast is in the limited amount of supply?.

Yes, Dave. This is Larry. A measured amount of speculative risk we'll take if the leasing pipeline that we see, on a particular project is really, really strong. But we're going to want some pre-leasing some significant pre-leasing even on a project got the second building in Avalon up.

If I remember correctly, we started Avalon with about 20% pre-leasing, but it was Microsoft and we had visibility behind it of a customer interest with the strong roaster that you see. And so we don't ever look at a new development opportunity with a 6 percentage of pre-leasing that we have to get to.

We do want to see some meaningful pre-leasing just where we are in the cycle. But it's also a combination of looking at what's behind it and how strong we think that the product is positioned in the interest level of the customer.

We feel really good, about the second building at Avalon and we've been in the design process and getting it through of it owning a requirement, so that we can be ready to go in the short amount of time when we do see that demand.

And the demand looks good so far, we just have to see how much of it we can get converted into actual leases before we start..

And this will be the last from me and this one is for Gregg or Colin, in terms of the low point of maybe what we call your transitional NOI number as you kind of transition from some of the older tenants to some of these leases, is that low point in the fourth quarter kind of given what you've said and you start to kind of work higher as you move into 2018?.

I think if you look at our same property performance in the fourth quarter, I mean as I mentioned in my prepared remarks you'll see a dip in revenues and a dip in same property occupancy. But as Colin pointed in his prepared remarks, I mean the pipeline behind that fills it up rather quickly in 2018, so to recover quickly.

So, in terms of same property occupancy, kind of fourth quarter, first quarter that will be the low point..

All right, great. Thanks guys..

The next question comes from Chris Belosic of Green Street Advisors. [Operator Instructions] Mr. Belosic, please go ahead..

Hey good morning guys.

So just another question on the build-to-suit interest that you guys are talking about, I believe last quarter you said that is Tempe, Tampa and Austin is where you are potentially seeing those tenants expanding where that could possibly happen is that still the same mix or has any of that change from last quarter?.

We certainly still have those type of opportunities that we're looking at in Austin and Tempe, I think that, but we also have opportunities that are as far along that we are looking at in our other three markets as well.

So, it really is it a point in terms of our portfolio and where we want to be in the cities of just being disciplined and making sure that we have the right customer under the right terms and moving that way. And as I said I'm optimistic that we have one that should, we should be ready to talk about hopefully in the next quarter or so.

And then we've got a couple behind that that, we'll have to see, but we feel positive about them as well.

And it's very encouraging, it's just it's a faction once again of the markets we're in and then the submarkets we're in and it's just where the customers want to be and then the limited amount of new speculative supply that's been added in these markets.

So, a big customer that wants to do a significant expansion whether it's dimensional fund advisors or an NCR, the build-to-suit option is a viable one at this time in the cycle..

Okay, great.

And then can you guys remind me with the, kind of delivery and putting Carolina Square into operations what are your thoughts again on Raleigh kind of long-term is that somewhere that you are looking to grow whether it's this cycle or next and so is that primarily there going to be few developments that you are going to acquire there?.

We really, as we look at our go forward strategy as I said, we overlap the stain in Sun Belt looking at major cities and then looking at the amount of space that qualifies in terms of a truly urban submarket.

And we really scanned by a combination of city, but then drilling down within each city to is there an urban submarket that really fits our - our model here. And I would not say that Raleigh is a primary focus of ours right now.

We're always opportunistic and Raleigh is a great market, but it wouldn't be one that we are, prioritized at the highest level right now.

And as primarily just there is a very strong player in the reach space, it does a terrific job and the true urban core Raleigh in the CBD is a relatively small sample size in terms of the type of assets that we look to own..

Thanks Larry.

And then just one last one from me, just want to make sure I understand on the kind of year-over-year tax difference for 3Q that's something that is just more effective of the one-time kind of reimbursement 3Q last year and something about 4Q there is not some kind of tax hike it will be a similar increase year-over-year in 4Q?.

Hey Chris. It's Gregg. You should expect, we don't provide quarterly guidance on expenses, you should expect to see our same property as well as the Parkway same property expenses drop more in line with recent trends during the fourth quarter..

Okay, great. That's it from me guys..

Okay. As we are not showing any further questioners, this will conclude our question-and-answer session for today. I would now like to turn the conference back over to Larry Gellerstedt for any closing remarks..

We appreciate everybody being on the call. As always we're available for any follow-up calls or questions that you have. And we appreciate your interest in our company and we look forward to seeing a lot of you all at NAREIT next month. Thanks very much..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..