Cousins Properties Incorporated (CUZ) Q4 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Cousins Properties' Fourth Quarter 2015 Earnings Conference Call. All participants will be in 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 would now like to turn the conference over to Pam Roper, General Counsel for Cousins Properties. Please go ahead.

Good morning, and welcome to Cousins Properties' Fourth Quarter Earnings Conference Call. With me today are Larry Gellerstedt, our Chief Executive Officer, Colin Connolly, our Chief Investment Officer, and Gregg Adzema, our Chief Financial Officer. The press release and supplemental package were distributed yesterday afternoon as well as furnished on Form 8-K. in the supplemental package, the Company has reconciled on 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. 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. A detailed discussion of some potential risk is contained in our filings with the SEC. The Company does not take any duty to update any forward-looking statements. With that, I'll turn the call over to Larry.

Thank you, Pam. Good morning, everyone, and thank you for joining us on our year-end 2015 earnings call. Last year, during Cousins' fourth quarter earnings call, I'll walk through the Company's strategic initiatives for 2015, which included driving positive results within our existing portfolio and executing and growing our development pipeline, all while maintaining an industry-leading balance sheet. Our balance sheet discipline ensures that during turbulent times, our Company maintains the flexibility to make the best long-term decisions for our shareholders versus short-term reactive decisions, which destroy long-term value. I'm pleased to say that despite negative macro headwinds, Cousins has had an exceptional year in 2015 executing this strategy and our team's tremendous effort is reflected in our strong results. In short, outside of our share price, the Cousins -- the Company continues to perform exceptionally well. We ended 2015 with FFO of $0.89 per share, up 10% from the previous year. Leasing momentum hit another all-time high for the second year in a row as we completed approximately 3 million square feet of new and renewal leases. Our second-generation re-leasing spread was up a very strong 19.8% on a cash basis for the year, and finally, our same property NOI on a cash basis posted a solid increase of 7.3% in 2015 as compared to the prior year. Diving a little deeper, I'd like to provide some key highlights for the year in each of our specific markets. Starting with Austin, we finished 2015 with our CBD portfolio, 96% lease. This result is 600 basis points higher than the current Class A CBD market average in Austin and 400 basis points higher than where the portfolio stood a year ago. As a reminder, Cousins' Austin CBD portfolio was built through a combination of a value add acquisition, 816 Congress, and a ground-up speculative development project, Colorado Tower. Since we purchased, 816 and broke ground on Colorado Tower, both in 2013, we've executed over 676,000 square feet of new leases and renewals and have increased rents 33% over this period. These results truly reflect how Cousins' development expertise, deep market relationships and value add capabilities create long-term value for our shareholders. I'm also pleased to report, we are seeing an increase in activity in our newly delivered office project Research Park V, where we signed another 26,000 square foot lease last month, bringing the asset to 45% leased. Looking to 2016, we believe, office fundamentals in Austin will remain strong. Moving on to Charlotte, at the start of 2015, Fifth Third Center, our 698,000 square foot uptown office tower was 83% leased and Gateway Village our 1 million square foot office assets owned in a 50-50 JV with Bank of America had less than two years of remaining term. One year later, Fifth Third Center is 95% leased and Bank of America has extended their lease at Gateway Village for 10 additional years. While our Charlotte portfolio is generally stable and the supply demand characteristics remain favourable, we will continue to seek select opportunities to grow our concentration in this market. I'm happy to report, we are making progress on developing the East Coast headquarters for Dimensional Fund Advisors in the South end submarket of Charlotte. The City Council recently approved our rezoning application and the project is now slated to begin construction in the first quarter of 2017. Let's now take a look at Atlanta, which is currently our strongest market. We made significant progress during 2015, growing occupancy at two of our Trophy Towers, 191 Peachtree finished the year 91.5% leased, up 210 basis points from year-end 2014, and Terminus 200 finished 2015 at 92.2% leased, up 440 basis points. We still have an opportunity for occupancy growth in Atlanta during 2016. Specifically, at Northpark Town Center and American Cancer Society Center. Two properties with the largest amount of vacancy in our portfolio. Fortunately, we are well-positioned leasing into a market where Class A net absorption in 2015 eclipsed 3.6 million square feet of the first time in the last 30 years, and new supply accounts for only 1% of the entire Class A market. We feel especially confident in Northpark Town Center's position in the central perimeter submarket where large corporations and Fortune 500 companies prefer to locate and where there are only a few large blocks of [indiscernible] space still available. In Houston, the office market has clearly shifted from a landlord to a tenant market in 2015 as vacancy hit 14.5% at year-end up from 9.5% at year-end 2014. We expect this trend to continue in 2016 and likely into 2017 as energy markets rebalance. Given that backdrop, we're especially pleased with our Houston team's hard work and successful execution this year. Excluding the one-year extension with Apache, we signed 764,000 square feet of new leases and renewals, which represent a 26% increase in volume from the prior year. Lease economics on these deals were positive with second generation rents rolling up 32.5% on a cash basis for all of 2015. Our team took an extraordinarily proactive approach over the course of the year to mitigate our large near-term lease exposure. After completing key renewals with Direct Energy, Transocean and Apache, which account for three of the top deals done across the entire Houston office market, we now have no major lease expirations until late 2019. As a result, our Houston portfolio is well positioned for the downturn at 91% leased, which is 500 basis points higher than the Class A market average, and with a strong credit profile and 6.5 years of weighted average lease term. I know there's a lot of concern about Houston but due to this limited rollover and high credit quality, the key issue to consider with Cousins is not so much what is happening in Houston today, but where the Houston economy and the office market will be in 2020. Switching gears, I'd like to take a minute to discuss our outlook for future growth. Gregg will handle 2016 guidance and the assumptions behind that guidance later in the call. However, I wanted to take a moment to look beyond 2016. First, I'd like to remind you of the value creation potential of our development pipeline. Our $323 million development pipeline, which includes Carolina Square and NCR headquarters is well underway and will begin to come online in 2017 and 2018, respectively. Adding our recently delivered Research Park V and our future project with Dimensional Fund Advisors to the pipeline, brings a total investment of $448 million with Cousins' pro-rata share equalling $347 million. The office portion of these projects, which is currently 86% leased, account for about $300 million of our pro-rata share. Assuming a GAAP yield of office portion of approximately 8.5%, annualized stabilized NOI of this office portion would be 25.5-ish. In addition to our development pipeline, we have a significant amount of embedded NOI in the portfolio that is yet to be realized. Specifically, three large leases at Greenway as well as our recently executed transaction with Bank of America at Gateway Village will generate between $11 million and $12 million of additional NOI on an annual basis beginning in 2017. Colin will give more specifics on these transactions in his remarks. With that, I'll turn it over to Colin.

Thanks Larry, and good morning, everyone. I will begin my comments today by briefly highlighting some of our key leasing metrics from the quarter and then spend the remainder of my time providing more specifics on our Gateway Village property, the Houston portfolio and lastly, our recent disposition activity. The team delivered another terrific leasing quarter across the portfolio signing approximately 1.2 million square feet of office leases with strong economics. Our second generation releasing spread for the quarter was up 39% on a GAAP basis and 24% on a cash basis, which represents our seventh straight quarter with the positive rent rollup. Net effective rents for new and expansion leases signed during the quarter were up over 8% compared to the fourth quarter of 2014. I think it's important to note that over 50% of the new and expansion leases were first generation space at Research Park V and Carolina Square, which elevated our leasing costs for the quarter. Our overall weighted average net effective rent did decline to $13.47 per square foot, but this was a direct result of our large renewal with Bank of America at Gateway Village in Charlotte. This 923,000 square foot 10-year renewal was a terrific outcome for Cousins on several fronts. So, let me provide some color. First, we mitigated what was the Company's largest 2016 lease expiration, and now do not have a single expiration greater than 50,000 square feet during the year. Second, the economics are very positive. The rental rate on the surface appears low, but importantly, there were no leasing or capital costs associated with this lease. In addition, the transaction, as a result of a change in partnership economics will be NOI accretive. Cousins currently receives an 11.46% preferred return on our original investment, which generates approximately $1.2 million of cash flow on an annual basis. When the renewal commences in December 2016, the financial structure will shift to a 50-50 split of current cash flow. Based on the renewal rate, we project that Cousins' 50% share of this current cash flow will increase by an additional $5.8 million on an annualized basis. As a reminder, Bank of America does have an ongoing purchase option at a 17% look back IRR to Cousins. Moving on to Houston, we understand the concerns about the market relating to the downturn in energy and will do our best to provide as much transparency as we can. At a macro level, fundamentals clearly weakened during 2015 as a result of both slowing demand and an increase in the delivery of new supply. However, our urban submarkets continue to hold up much better than the overall market. To highlight this, the Galleria and Greenway Plaza submarkets both have sublease availability of approximately 3%. In contrast, suburban submarkets like the Energy Corridor and Westchase have sublease availability of approximately 11%. Importantly, according to CoStar, our portfolio has just 14,000 square feet of sublease space available today, which equates to well less than 1% of our Houston portfolio. Looking forward, we do expect market conditions to remain soft in 2016 and 2017 with below average leasing activity and declining economics. Fortunately, our team identified this trend early and significantly reduced our near-term market exposure through their proactive efforts. Our Houston rollover now totals just 5.2% in 2016 and 6.8% in 2017. With this limited near-term exposure, we are positioned to maintain the portfolio's leasing percentage at or near 90% over the next several years with only a modest amount of new leasing. Turning to the fourth quarter's leasing results, our team on the ground had another terrific quarter. We successfully extended Apaches's expiration at Post Oak Central through 2019. While this was only a one-year extension. We always assumed that Apache would vacate in 2018. So, we are pleased to now have almost 4 years of remaining term. We are hopeful that this additional time will position us to execute our planned re-leasing of Post Oak Central in a much stronger market. We have a great relationship with Apache and will continue to have an open dialogue with them as they evaluate their long-term real estate options. At this point, it's way too early to speculate. Regardless, we will likely have three years of advanced notice if they elect to proceed with the new headquarters, given the lead time associated with new construction. In addition to the Apache renewal, our team leased 109,000 square feet in Houston during the fourth quarter with a weighted average second generation cash re-leasing spread of 50%. The activity in the quarter included 65,000 square feet of renewals and importantly 44,000 square feet of new leases or expansions. To highlight the diversity of the customer base, industries represented in this quarter's leasing activity included real estate, financial services, legal, consumer products, government and energy. Our leasing success in Houston is making an impact on the bottom line results. Let me highlight this. Fourth quarter 2015 NOI at Post Oak Central is up over 17% year-over-year. At Greenway, our fourth quarter 2015 NOI is slightly above fourth quarter 2014 NOI, despite the known Exxon move out which lowered our occupancy by approximately 5%. This is a direct result of the significant rent rollups that we've achieved in Houston and there's more to come in the future. As I mentioned last quarter, there's $5.7 million of incremental NOI, which will kick in during 2017 as Oxy, Transocean and Gulf South convert to triple net leases from gross leases. These three leases alone will generate over 7% NOI growth at Greenway. We're carefully monitoring any changes to the credit quality of our customer base in Houston and have no new updates to report. The quality and location of our product tends to attract a well-capitalized and diverse customer base including names like see Oxy, Invesco and Camden Property Trust. Let me give you some additional highlights. Customers in energy related businesses without an investment grade rating account for just 12% of our 5.6 million square foot Houston portfolio. Drilling down on this further, a vast majority of this exposure is connected to near investment grade companies like Transocean or the private firms who have a strong credit profile but have no need for a public debt rating. Overall our exposure of the high-yield energy businesses is relatively small, less than 5% of our Houston portfolio and less than 2.5% of the Company's total portfolio. Importantly, we currently do not have any material accounts receivable issues and have no indication of any near-term bankruptcies that would negatively impact us. Despite the severity of the current energy downturn, we remain optimistic about Houston's long-term future. I think it's important to point out that Houston created 23,700 jobs in 2015, notwithstanding the headwinds from a low oil price. In addition, investors continue to show appetite for high quality real estate at record pricing. In all cases, north of $500 a square foot was achieved in the CBD, the Energy Corridor and the Galleria during 2015. Getting close to home, 2200 Post Oak Boulevard, located immediately adjacent to Post Oak Central traded for $527 a square foot during the fourth quarter. Switching gears to our disposition activity, we closed on the sale of two suburban office assets. The Points at Waterview, a 203,000 square foot office building in Dallas sold for a gross price of $26.75 million or $132 a square foot. North Point Center East, a 540,000 square foot office complex in Atlanta, sold for $92.25 million or $171 a square foot. Including our previously announced disposition of 2100 Ross in Dallas, we generated gross proceeds of $250 million from the sale of these three non-core office assets. With that, I will turn the call over to Gregg.

Thanks Colin. Good morning, everyone. As you could tell from Larry and Colin's remarks, we had a very solid fourth quarter, which capped a terrific year. FFO was $0.23 per share for the quarter and $0.89 for the year. Providing a little perspective, it was only two short years ago, 2013 to be exact, when our annual FFO was $0.53 a share. That's a 68% increase in just 24 months and we accomplished this while reducing leverage. Debt to EBITDA was 4.7 times in '13 and today it's 4 times. It's been quite a run, however, I suspect everyone on this call has followed our share price and based on its weak performance over the last couple of years, the logical assumptions is that business hasn't been great, but in fact, the exact opposite is true. The underlying fundamentals in our markets have been exceptionally strong. Drilling down into our fourth quarter performance, there are only two unusual items I'd like to bring to your attention. First, same property NOI on a cash basis increased 8.2% over last year. This is a strong number and marks the 16th straight quarter of positive cash NOI growth. However, the components of NOI growth this quarter were atypical. Revenue declined 4.5%, while expenses declined 18.3%. What drove these declines? It was property taxes. Our management team was very successful in reducing our assessment at the end of 2015 for some very large properties. In some cases, they not only reduced the 2015 property tax bill but also got the 2013 and 2014 bills reduced as well. All of this was trued up during the fourth quarter and it was this true up that drove the large same property expense decline, and since most property taxes are to us by tenants, this expense reduction also drove down revenues during the quarter. Without this property tax true up in the fourth quarter, same property NOI on a cash basis would have increased 4.6% during the quarter, driven by 2% revenue growth and 1% expense reduction, still a very solid quarter. The other unusual items flowing through FFO this quarter was our G&A expense. As has been the case throughout 2016, our G&A expenses have been very volatile as a result of our long-term incentive compensation accrual driven by our share price performance. Our most recent G&A guidance provided on our third quarter conference call assumed full year G&A expenses of between $19 million and $21 million. Actual G&A expenses for 2016 came in at $17 million. This positive variance is completely explained by reduction in our compensation accrual during the fourth quarter. We also continued to buy back stock under our $100 million share repurchase program. During the fourth quarter, we repurchased 3.2 million shares for $29.1 million bringing the total purchase in 2015 to 5.2 million shares for $47.8 million since initiating the program in September of 2015. The balance sheet remains simple and strong. Debt on depreciated assets is 27.5%. Debt to EBITDA is 4 times and fixed asset coverage is almost 5 times. These are strong balance sheet metrics from any perspective and compare very favourably not just to our office peers, but the entire REIT industry. Looking forward, we intend to maintain a strong balance sheet. As we sit here today, we have completely refunded our entire development pipeline. As Colin outlined earlier, we sold $250 million of properties since September. Adding these proceeds to the $17 million in land sales we have also recently completed as well as our anticipated retained cash over the next couple of years, this fully funds our development pipeline. Selling these assets in advance of deploying the dollars into our pipeline is certainly a bit dilutive to FFO. We thought it was important to lock down our sources of capital and eliminate any funding risk for our development efforts. With that, I'll wrap up the portion of my conference call by providing details behind our 2016 FFO guidance. Before I begin, I'd like to remind everyone that all of the assumptions I will provide align with the FFO presentation in our earnings supplement, located on pages 6 to 9 in the current supplement. This means we don't break out unconsolidated operations into their own line item, as is the case with our GAAP statements. Instead, we include unconsolidated data, along with consolidated data in each assumption. As we outlined in our earnings release and as Larry discussed earlier in the call, we expect to report 2016 FFO in the range of $0.86 per share to $0.92 per share. This guidance range is driven by the following assumptions. First, we anticipate positive same property NOI growth of between 0.5% and 1.5% on a GAAP basis. Breaking this down a bit by geography, we expect same property NOI Houston to decline about 1% in 2016, and same property NOI in the rest of our markets to grow about 4%. As Colin said earlier, there is certainly emerging weakness in the Houston office market right now, but our Houston NOI guidance for 2016 is not the result of this weakness. Our Houston guidance is being driven by one artificially low expense baseline, as a result of the large property tax adjustments I just discussed and two, lower average occupancy during the year of between 1% and 2%, driven by a timing lag between leasing execution and occupancy. From a leasing perspective, we anticipate our Houston portfolio in 2016 right about where it began. As Larry and Colin mentioned earlier, beyond 2016, we should anticipate significant NOI growth driven by our development pipeline, as well as embedded increases in executed leases we have firmly in hand. Moving on, we anticipate general and administrative expenses of between $19 million and $21 million net capitalized salaries. We anticipate fee and other income of between $8 million and $9 million. For clarity, we include termination fees in this line item. We don't include them in the property level NOI line item. Consistent with prior year guidance, we're not anticipating any termination fees in our guidance at this time. We anticipate interest and other expenses of between $39 million and $41 million net of capitalized interest. Our guidance also assumes completion of our $100 million share repurchase program during 2016. Finally, we anticipate GAAP straight-line rental income of between $15 million and $17 million and above and below market rental income of between $7 million and $9 million. With that, let me turn the call back over to the operator for your questions.

[Operator Instructions] Our first question comes from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Great. Thank you. Good morning. I guess, Gregg, starting with you, do you have an outlook for cash same store NOI? I think you just provided GAAP.

Yeah, we provided GAAP. We have not provided cash GAAP, which you need to solve for your FFO number Jamie. So, that's why we provided GAAP.

Okay, and then where do you think you'd come in on AFFO or maybe can you talk us through the CapEx outlook for the year?

Well, CapEx has one up recently. Our CapEx number for example, give me a second to turn to the correct page. Our CapEx number during 2015 in total was $54 million, second-generation CapEx. That was up from $35 million in '14 and $16 million from '13. So, it's gone up, dramatically over the last couple of years and that reflects the velocity of leases that we've been signing. As Larry said earlier, we've had a couple years of record of leases that we've signed. You'll see that class fill and start to decline as the years go forward as we kind of move past this hump of leasing that we've done over the last couple of years.

Do you think a number in '16 similar to '15 would be about right?

We don't provide guidance on second generation because that depends upon leasing velocity and then the terms of those leases, but I think a number around '15 probably isn't a bad guess.

Okay. Then, can you talk about the leasing prospects for some of the vacancy at Greenway Plaza, the Exxon space? Just what's the expectation there and when you could get it filled or at least what kind of conversations maybe you're having?

Sure, hey Jamie. It's Colin, and we continue to have activity at Greenway and I think as we look at the portfolio, we don't necessarily just focus on the Exxon space. We think about the vacancy across the portfolio as a whole and I think if we look at the performance in the fourth quarter, again where we did approximately 45,000 square feet or so of new leases, I think it's reflective of the fact that we've got good activity and it's been, I think primarily not in the larger 50,000 square foot to 100,000 square foot leases, but as we work through this quarter, we had good velocity on 5,000 square foot to 15,000 square foot to 25,000 square foot leases and so, as we look forward to '16, we hope to be able to replicate what we did in the fourth quarter of '15.

Okay, and I appreciate the color on the competition in your tenants in Houston. Can you talk about maybe a watch list you guys have or maybe how it's changed in terms of how you are thinking about some of the credit risk?

Absolutely. We do spend a lot of time looking at this, not only from kind of public information, but private information that we have and relationships we have with some of the restructuring folks out there. I think as we look at our portfolio as a whole, and I did not point this out in my earlier comments is, if you look at the top 10 customers that we've published previously, 8 of those 10 have either an investment grading -- grade debt or insurance company rating and that's about 46% of the portfolio. So, as I laid out in my prepared remarks, as we really drill down to what the exposure is, we're primarily focused on those names, the smaller independent energy companies either in the upstream or services space and as we look at our portfolio, it's less than 5% of those type of names that would fit that category and we do watch those closely, and as I said earlier, we had no AR issues with any of those customers and based on the work we've done, have no visibility at this point on any kind of near-term bankruptcy or anything like that that would negatively impact us.

Jamie, this is Larry. Yeah, I think that a couple of things that just shouldn't be overlooked is just what Colin said, that credit quality, I think as people think about energy and risk in Houston, they really need to dig down and look at where our energy risk is, the size of customers and the credit quality there. That combined with the limited lease rollover we have in our high occupancy is really to be in a tough market is a pretty strong position to be in and I'm concerned that continues to be overlooked.

Okay, and I guess, just a follow up to that. I think there's been some talk in the past of maybe trimming exposure. I know it's kind of hard given the size of your assets, but how do you guys think about that these days?

Well, when we purchased, Jamie, if you think back, when we purchased Greenway Plaza, we stated our intention over time was to lower the percentage of NOI coming from Houston, and we've done that through asset purchases. Since we bought Greenway, we purchased Fifth Third and Northpark Town Center and we're doing development deals like NCR and Dimensional Fund Advisors, Carolina Square and others. So our perspective hasn't changed on that and you know, we will and are looking as we should be at joint venture opportunities in Houston to potentially achieve that objective and the thing that we aren't going to do though, because our balance sheet doesn't make us do this is we're not going to break our financial discipline. So, we're going to look at the -- we will continue to look at it, but we're not going to feel pressured to make a short-term decision that isn't in the long-term interest of the shareholders. So, the thing that I also want to reiterate is, we continue to be strong believers long-term in Houston and so we're committed to maintaining a strong presence in the future, but yes, if we found an opportunity to trend that either through any of those three methods, then that's the kind of things we look at.

Okay, I appreciate the color. Thank you.

The next question comes from Michael Lewis with SunTrust. Please go ahead.

Thanks. Following up on one of Jamie's questions, I assume that there's no bankruptcies assumed in your guidance for next year, and then I'm also wondering about tenant behaviour in a market like this. Does this cause tenants to kind of hunker down and increase the renewal rate or are they out there shopping around for the very best deal?

Well, I think that, certainly, we don't have any bankruptcies forecasted and that's based upon the credit metrics that Colin just walked through with you. Michael, I think that people's behaviour in turbulent markets is one they tend to make decisions slower and more conservative than they have in the past, but obviously, economics are a key factor when they're faced -- looking at those decisions and if you look at the basis of our assets, we've got these fabulous asset in these two, the two strongest submarkets in Houston at a $200 a square foot basis, with limited rollover. So when we're looking at those renewals or when we're looking at these new prospects, we're in a very strong position to compete, to retain those and we're confident that we will be able to.

And just to add on that in terms of -- part of your question relating to our customer behaviour, we have seen in many cases customers kind of retrenching to headquarters, which has actually benefited us. We've seen that play out with Apache, Oxy and Transocean where they have shuttered some of their regional offices and have brought some of their employees back to either Greenway Plaza or Post Oak Central and increased density in our particular properties has just been helpful.

Thanks and then on the rent spread, they've been very strong for many quarters in a row already. As I kind of do back of the envelope math, it looks like those spreads could continue to be pretty positive, but as you continue to churn and roll everybody up, what kind of runway do you have before you think those spreads start to come back down both in Houston and elsewhere?

We, as you mentioned, we've had very good success over the last seven quarters of rolling up rents and as we look across the portfolio, including Houston, we do think that there's continued runway there and that across the portfolio, our rents are below market, and so, in the coming quarters, we think you'll see more of that, but I would caution you on any particular quarter, it's going to be very much a function of the particular space that we're leasing and so that that can be choppy as we look forward, but we do think that there's additional opportunity.

Thanks.

Our next question comes from Tom Lesnick with Capital One Securities. Please go ahead.

Good morning, guys. Just on the buyback, it seems like you guys were obviously pretty aggressive in 4Q and there's only about half of the authorization left. Given that shares are obviously lower than they were in 4Q today, do you see yourself being more aggressive now and would you look to Board to increase the authorization?

You know when we announced this share buyback, we stated that our philosophy is when we announced the share buyback, we intend to do the share buyback, so, Gregg and his team will continue to aggressively buy the shares back as the quarters move forward. I think as we look forward, it falls back on what I talked about in terms of the balance sheet strength of where we are is we just will continue to look once we get through this share buyback, we'll continue to look at where the share price is and where our capital options are and the most compelling thing to do is to buy shares back and we'll continue to buy shares back and we can do that by a number of measures. We're not going to take the balance sheet -- lever the balance sheet way up to do that, but we've got non-core assets and other options that we can look at. So to us, our intention is to stay aggressive particularly at these prices and once we get done, then the Board and management will sit down and decide where we go from here.

Appreciate the insight. Then, Gregg, just one quick one for you. Obviously I know you said that the driver for G&A was the stock based comp accrual, but given the sequential change in kind of where the stock price was, between 3Q and 4Q, it seems pretty depressing in both cases, I was just wondering are there any other mechanics that are going on there besides the stock price [indiscernible]?

No, no Tom, really not. Maybe just a little too much detail, but it might be helpful. There's really two levers here. So, it's a relative performance versus our office peers and then if the absolute share price, so if we knew -- if the share price goes up and our relative performance goes up, it's like a multiplayer effect. You get this big swing upward. Exact opposite has happened over the last couple of quarters. Our relative performance has declined. At the same time our share price has declined. So, that's why we have this really volatile move to the downside. Our compensation committee who looks at this, they're very comfortable with where that portion of our lump sum comp is comparing us to our peers. I think it makes sense as well, but unfortunately what it leads to is volatility, not typically, I mean we haven't changed this compensation plan in several years. So, if you go back two or three years ago, this wasn't an issue. It only emerged as an issue in the last 12 months, because of the relative underperformance of our stock and at the same time our share prices have been declining

Got it, makes sense. Then just one quick one and sorry if I missed it earlier but what drove the delay in the close of that final North Point Center building?

It was -- working with our buyer as they had certain kind of tax issues that they needed to work through and so we were accommodating to them with that.

Got it, okay. Thanks guys. Appreciate it.

The next question comes from Richard Schiller with Baird. Please go ahead.

Hey, good morning, guys. Quick question on the debt side on your balance sheet. You guys have 18% or so that's floating rate. How are you guys seeing what rates are today, the potential to go higher and even some reports they've a potential to once again go lower. How are you envisioning adjusting your floating versus fixed rate heading into '16?

It's Gregg. Our floating rate is really just comprised of two items. It's our credit facility and our construction financing. We really only have one construction loan that has anything drawn on it. That's the Emory Point construction loan. At 18%, that actually is very consistent with what we've run at over the past five years. If you go back and you look over the broad span of time, I mean, we have a corporate objective of being somewhere between kind of 15% and 25%. So, we're right in the meat of where we want to be. So, we're very comfortable with it at that point, and we've got no strategic objective to significantly lower it or raise it.

Sure, and with your leverage relatively lower against officer peers and any plans to go fixed or floating, probably more fixed in the next coming years or no?

No. Like I said, I think that we're generally comfortable with the fixed to floating ratio, about 20% floating to 80% fixed.

Okay, great. Thanks guys.

The next question comes from Jed Reagan with Green Street Advisors. Please go ahead.

Hey good morning, guys. How are you thinking about development at this point in the cycle and how much do you think you might start in the near term, excluding the DFA project and are there any new acquisition opportunities you're focused on today?

Jed, we are -- I think we are much closer to the end of the development cycle than the beginning of the development cycle in terms of what you will see us do. So, if you see us do anything additional to what we've already named or had in the shadow pipeline, it would not be anything that's on my radar screen right now, so it would be something that came up that was just extraordinarily compelling. We don't see buy opportunities in our markets today and as I said, when we get through with this current share repurchase then we'll certainly continue to look at that. So we've got, I think, our development pipeline, which has been years in the making is just phenomenal, and is a great utilization of capital for our shareholders and there may be a deal or two more, but there won't be much more. We think we're pretty much through this cycle and we'll start looking to position ourselves with maybe some land purchases here or there and get ready for the next cycle in our key markets.

And is there any update on the Victory project in Dallas, how you're thinking on that?

We are not -- we have our leasing people in Dallas and there's a large build to suit that wants to look at the building, then we certainly are showing that, but it's not something that we have in our capital plan just once again, where we are in the cycle and where we look in terms of the amount of new supply in Dallas. We've got a phenomenal site at $70 a square foot that would be significantly worth more than that. We think that site will be fantastic for future development, and outside we think that slightly fantastic for our future development and you outside of landing a big customer then we don't see moving forward with Victory anytime in the next year or two.

Okay, and then on dispositions for 2016. How much do you think you might be able to sell and what do you think of as being non-core in the portfolio at this point?

Hey Jed, it's Gregg. We've got nothing in the base case right now to sell in 2016. As I said at the beginning in my comments, we sold everything we need to sell to fund the current development pipeline, and so we don't typically provide kind of unnamed assumptions around acquisitions or dispositions. When the point in time comes that we identify an acquisition or disposition, and we get the details on it, we'll tell you about it and we'll adjust our numbers accordingly.

Jed, this is Larry. I would add that as we look to the future, we've always been fairly clear that the apartment deals we do are not long term holds for us. We're not anticipating selling those either, but we're not a -- we're an office company that opportunistically develops and so we found needs for capital, whether it's for a new investment opportunity or share repurchase, we've got, still have a fair amount of asset sales that we could do look to do at that time.

Okay, that's helpful, and just in terms of Houston leasing activity, is it fair to characterize that leasing velocity and rents have been continuing to decelerate just given the recent new let-down in oil prices and then is there any color you can give on the larger tenants in the market, their level of activity, call it the 50,000 square foot to 100,000 square foot plus category?

Hey Jed. It's Colin, and I think that the best way to answer your question, I think at a high level in Houston, obviously, the economics are weakening and we're kind of seeing that across the market. I think, certain submarkets are positioned better or worse, and so as you go out to the suburban submarkets, the headlines in terms of significant drops in rental rate and concessions that's absolutely happening, but I think again, in an effort to provide as much transparency as we can as to what's happening in our portfolio, last quarter, I walked you through a two floor deal that we did at 3 Greenway Plaza and that starting rental rate was $24. It was a 10 year deal, and about a $40 TI and four months of free rent and we just recently in this past quarter, signed another full floor deal in Greenway and the economics on that were call it, $23.50 with a 12 year term. This is a large financial institution that we're excited to have and in the underlying economics the concessions with that were similar, with four months free on a 12 year deal, $55 TI on a 12 year deal, and that wasn't just in isolation. We signed over 50,000 square feet at 9 Greenway Plaza, in total, which again will be very comparable to 3 Greenway Plaza, during the fourth quarter and the weighted average rent on that 50,000 square feet was about $23.90. So we haven't seen a big move in our portfolio and to kind of put that in context, looking backwards, the other full-floor deals that we've done in 9 Greenway Plaza or 11 Greenway Plaza over the last couple of years, those levels were kind of $22 and $23 for some of our large leases in 2012, 2013. So, it's held up relatively well, but obviously as we look forward we're going to continue to monitor that and would expect that conditions would weaken further.

And as far as the big block tenants, any activity there or is it really most of the smaller tenant crowd?

As you look downtown, there's quite a bit of larger customer activity. I would say that some of that has been driven by -- there's kind of been some pent-up demand, I would say over the last year. Large users have been reluctant to kind of make decisions and so as we look forward to 2016, 2017 at some point, some of these larger groups will be forced to make some decisions, but overall I would characterize that larger deal activity is being much lower and muted than the full-floor deals or the 50,000 square foot deals. There, our pipeline has actually held up relatively well.

Thanks, and then just last one, some of your peers on the office side have been talking about seeing leasing pipelines slowing down in general, obviously Houston is kind of its own story, but in your other markets, any sign of tenants kind of tapping the breaks early this year just given some of the global market uncertainty?

Jeff, we are certainly keenly aware and watching for that. I would not say we've seen anything in our other markets that would indicate it yet, but we wouldn't be surprised if we start to see it in the balance of the year, but actually in Austin and Charlotte and Atlanta, the pipeline has come out pretty strong in 2016 in terms of leasing thus far, but it's something that we're keenly watching and would anticipate, there's got to be some slowing we would start to see things sort of stay the same.

Thanks very much guys.

The next question comes from Brendan Maiorana with Wells Fargo. Please go ahead.

Thanks. Good morning. Really great execution on Gateway, getting that lease done. Has there been any updated discussions with BofA about, what long-term ownership of Gateway Village may look like or do they feel pretty comfortable kind of in the 50-50 structure as it stands now?

You know, when we had the discussion with our partners, Bank of America on Gateway, the partnership structure never came up in terms of wanting to change that, and so we were successful working together as partners to extend this deal, but I really couldn't -- I don't have any color about what BofA's long-term plans are other than this is clearly a mission-critical building for them and today I know that's been the reason they have kept their ownership stake in it and they really appreciate the skill of our team in Charlotte because it has so much critical -- mission-critical space in it that we're able to work with them on those aspects but long-term, I don't have any color about what Bank of America's intent might be.

Okay, and this is probably for Gregg, but from the accounting standpoint, I think you mentioned $1.2 million of, I think you said, cash flow that comes through today versus what'll be $5.8 million of your pro rata portion of NOI, starting in '17. Is the $1.2 million, is that also kind of what gets recognized from a GAAP earnings perspective or is $1.2 million net of the debt amortization and that's actually just kind of a cash flow, but maybe not the actual earnings impact?

Brendan, the $1.2 million is what we get paid economically in cash that equals what we recognize from GAAP. It's a preferred return, solve for using an 11.43 return based on our initial kind of $10 million investment, 10 years ago. Then the $5.8 million that Tom referred to, that's an increase. So once this new renewal kicks in December of '16, so about 11 months, 10 months from now, the 17% look back IRR that we've always had remains unchanged. Just the cash flow's changed and we go from receiving that $1.2 million number to receiving something closer to $7 million, the delta, the variance is the $5.8 million that Tom referred to.

Okay, that's helpful. Great. Then just final one, I don't know for Gregg or Larry, so you guys have done a really great job with the balance sheet, got it in, leverage is very low, I think probably the lowest for any office company or at least in my coverage universe. You've got some spend on the development pipeline, but that still keeps kind of your pro forma leverage pretty low even when you kind of run that spending out. If we're in an environment where prices weakened for assets that you guys might like to acquire, where do you think you'd be willing to kind of let leverage go to if the opportunity set does become attractive out there?

Well Brendan, first of all, as a key part of our strategy to put our balance sheet in that position for exactly the type of market we're in today. As I said, if we're able to take a long-term view and balance the short-term view and then have ultimate flexibility in making decisions, whether it's buying assets or repurchasing shares or buying a building or whatever, but the key driver in doing that was exactly what you just outlined, is that when prices do drop in markets that we have called strategic, then that's the opportunity when we'll take leverage up opportunistically to take advantage of those buy opportunities and we don't want to miss those in the right time of the cycle and what we would take it to, those would be decisions that we would make at the time, but that's the key element of why to keep -- the two elements to why to keep the balance sheet so conservative. One is, so that we don't have to react in times of turbulence. Second is, so when that opportunity comes on the buy side of the market, that's where you use the leverage and take it up a little bit to take advantage of that, we intend to do that.

Great. Thanks guys.

[Operator Instructions] The next question comes from John Guinee with Stifel. Please go ahead.

Great. Thank you. First on Page 13 of your supplemental, probably Colin, I think you're the only office REIT we cover that does this. You really get down to what real estate guys look at and you're basically saying your net rents signed in 2015 were $18.30, spreading out your leasing costs on the lease term, you got down to $14 '16 net effective rent, where do you see that going in the next year or two?

Yeah John, thanks for noticing the level of detail that that we provide, as we talked about earlier, we do think that within the portfolio there continue to be mark to market opportunity and as we look at all of our markets, I'd say with the exception of Houston, we are seeing the underlying net effective rents in places like Atlanta and Charlotte and Austin continue to have a little bit of runway as it relates to driving rental rates. Obviously, that will be dependent on kind of the macro market trends, but as we see it today, in a market like Atlanta, where we hope to have a good chunk of our leasing, with new development being such a small percentage of the market and in really kind of historically low levels and now occupancy is up close to 90%. We think that that's going to afford us the opportunity to push the rental rates.

Right. Okay, and we have you trading at about $190 a square foot. So, this is a -- these are stunningly good economics relative to your basis. Changing subjects and talking a little bit more about BofA's purchase option, probably Gregg, for some reason, rightly or wrongly, we have Gateway Center valued at about $35 million, which for some reason we think equals BofA's purchase option. If I just sort of take what you said with a 17% IRR look back means staying in place and your cash flow on your $10 million investment going from $1.2 million to close to $7 million, that would imply that the purchase option is going to decline in years two, three and four and five, because you're getting a $7 million return on your $10 million investment. Is that the right way to look at it?

Well, let's start by saying kind of a good measurement today before we move forward to the transaction that changes the immediate economics. If you solve for -- the worst we can do, John, the absolute worst we can do is that they buy us out. We have a 17% IRR on our original investment and if you do that simple math, and they were to do that today, they would write us a check for about $45 million. Worst case scenario we have today is $45 million and hopefully it's significantly better. That's the worst that could happen. When this rolls forward in the transaction in December of this year that 17% number stays in place. The only thing that's changing is that instead of getting $1.2 million currently, we get $7 million currently. The 17% percent number stays in station place. So then you just have to make an assumption about timing. So immediately the value to us doesn't change materially the day after this transaction takes place, because then we're still solving for 17% IRR, but as you roll forward, the growth in that $45 million number that I provided to you will come down because we're just receiving more of it currently instead of it being deferred.

Right. Okay, and then the second thought process there is -- my understanding is the loan is fully amortized, so there'll be a zero debt outstanding on that asset, sometime in 2016. So BofA, essentially can take 100% control of that asset for $45 million with that number declining, our friends at SL Green with 380 and 390 Greenwich, City Bank have the same sort of situation. What it does is it allows these banks I think, correct me if I'm wrong, allows these banks just to keep these major assets off-balance sheet as long as they want and then just bring them on at any time. Is that how BofA's looking at this?

Well, I can't say how BofA's looking at this, but your first statement about loan amortizes completely in December of this year and they could buy us out for approximately $45 million and could take control of the building, that's true. That's a wonderful outcome for us by the way. We'll have earned a 17% return on our money for a 10 year period of time. It's a terrific outcome, but that's true. They could buy us out in December of this year. The loan will be fully amortized. They could take control of the building for $45 million.

Okay. So then -- and then when you -- your cash flow increases from $1.2 million to $7 million in about 10 or 11 months, where will you be looking at $7 million?

Right through NOI at the property level.

Okay, so we just have to think about it differently at that time.

Yes.

Great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Larry Gellerstedt for any closing remarks.

Once again, it's been a great year for Cousins and we appreciate everybody being on the call. As always, reach out anytime if you have any questions or comments you want to give us. Have a good day.

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