Cousins Properties Incorporated (CUZ) Q1 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the Cousins Properties' First Quarter 2016 Earnings Conference Call. All participants 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 would now like to turn the conference over to Ms. Pam Roper, General Counsel for Cousins Properties. Please go ahead.

Good morning, and welcome to Cousins Properties' First Quarter Earnings Conference Call. The 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 know, last week we announced a merger between Cousins Properties and Parkway properties. A separate press release is issued in the Investor Presentation with the related conference call transcript regarding the proposed transactions were posted to both companies' website. In addition, a statement regarding additional information about the proposed transactions and where to find it is provided in such press release. Also please note that the joint proxy statement will be filed soon and will contain additional information regarding the transaction. This call will focus on our first quarter results and we request that you confine 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 risk is contained in our filings with the SEC. With that, I'll turn the call over to our Chief Executive Officer, Larry Gellerstedt.

Thank you, Pam, and good morning, everyone, and thanks for joining our first quarter conference call for 2016. With me on the call are Gregg Adzema, Chief Financial Officer and Colin Connolly, Cousins Chief Investment Officer. I'll let Gregg and Colin drill down into the specifics of the quarter but overall we made strong progress. We delivered solid financial results and are pleased with our momentum on the leasing front. I'll remind you not to focus too heavily on our leasing results on a quarter-by-quarter basis, given certain timing considerations. Quarterly leasing volumes have been and will continue to be lumpy. However, let me assure you the Cousins leasing team remains quite busy. We are seeing green lights in all of our markets with the exception of the not unexpected softness in Houston. Colin will provide much more detail in a moment, but I wanted to take a moment right up front and tell you that I'm very optimistic about our leasing activity going forward. Before I turn the call over to Gregg to discuss the first quarter's results, I would like to briefly comment on the exciting announcement that we made last week. On Friday we announced our plans to merge with Parkway Properties and simultaneously spinoff the Houston based assets of both companies into a new publically traded REIT. We believe these compelling transactions unlock significant value in the Sun Belt by creating two independent REITs with differentiated strategies. Today I'd like to specifically focus on Cousins post-transaction. First we are significantly growing our portfolio. Post-transaction Cousins will own 41 properties, comprising 15.8 million rentable square feet in Atlanta, Austin, Charlotte, Tempe, Tampa and Orlando. Importantly, 81% of our properties will be in the best submarkets. Our average in-place rent will increase to almost $31 a square foot and our average age of our portfolio will improve by 8 years. Second, we will be the number one office owner in Buckhead, Atlanta, Uptown Charlotte, the Austin CBD, and Tempe. We believe this critical mass is extraordinarily powerful. It will put us in a position to increase our pricing power with our customers and vendors, enhance our flexibility to meet customer space needs, 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, we will enhance our diversification both geographically and in our customer base. We will materially deepen our presence in Atlanta, Austin and Charlotte while also entering the new markets of Tempe, Tampa and Orlando. Our customer base will be not only stable with blue-chip names like Bank of America, Wells Fargo and Deloitte, but it will also be well diversified with no single industry concentration greater than 20% of our total contractual rent. And finally, our conservative balance sheet will remain intact. As I have discussed in the past, maintaining a low levered and simple balance sheet is a key part of the Cousins strategy and that will not change post transaction. Maintaining a conservative balance sheet gave us the flexibility to take advantage of this opportunity with Parkway, and I believe it will continue to provide powerful benefits going forward. So, as you can see, once all that noise of the merger and the spin passes, we will own what I firmly believe is the best Sunbelt office REIT with an unparalleled portfolio in the strongest urban submarkets, and have an industry leading balance sheet, positioned to take advantage of market opportunities as they arise. We are quite excited. With that, I'll turn it over to Gregg to discuss our first quarter 2016 financial results.

Thanks Larry. Good morning everyone. As Larry said, we are extremely excited about Cousins prospects after the completion of the Parkway merger and Houston spin-off. But in the meantime we still have to run our business and we still have to report our earnings. So in that spirit, I'd like to take a few minutes to summarize our first quarter financial performance. Overall, the underlying fundamentals of our business remain very strong. All of our markets with the exception of Houston remained in the sweet spot of the office cycle, with strong demand growth and a limited new supply. It’s a terrific time to be an office landlord in the Sunbelt. Focusing on our financials, FFO was $0.21 per share during the first quarter of 2016. With very little exception, it was a clean quarter with strong operating metrics. Same property NOI on a cash basis increased 8.6% when compared to last year, which was slightly above our expectations. And second generation rents rolled up 6.3% on a cash basis. Drilling down a bit into our first quarter performance, there's only one unusual item I'd like to bring to your attention. The mid-point of our guidance on G&A during 2016 was $5 million per quarter. We reported G&A expenses of $8.5 million in the first quarter. That is $3.5 million above the mid-point of our guidance or approximately $1.5 per share. This miss is attributable to our long term incentive compensation accrual or our LTI accrual. Our LTI is primarily comprised of 40% time-based and 60% performance-based metrics. Accounting rules require us to mark our performance-based LTI metrics to market each quarter. Mark-to-market during periods when our share price is volatile can be and has been quite large, and the first quarter was no exception. The good news is that a higher LTI accrual means better relative stock price performance, which is obviously great for our shareholders. During the first quarter, our total return was positive 11% versus the SNL office index, which is our benchmark, which dropped 1%. As I said earlier, same property NOI in a cash basis increased 8.6% over last year. This marks the 17th straight quarter of positive year-over-year cash NOI growth here at Cousins. What's particularly encouraging about this long string of positive numbers is that it has been primarily driven by revenue growth. Over those same 17 quarters, same property year-over-year cash revenues at our office properties has grown on average 4.4% annually. That’s a strong sustained period of top line growth. What makes this cycle so different and so compelling from past office cycles in the Sunbelt has been the remarkable discipline around new supply in response to this strong revenue growth. The knock in the Sunbelt has traditionally read something like this. As soon as the rents start to increase, new supply quickly emerges and overwhelms demand. End of cycle. But that hasn’t played out this time. Although it varies by market, current construction as a percentage of office inventory in our markets is remarkably low. Excluding Huston, new construction is currently only about 1.5% of total inventory, which is below the 10-year average. We know it's hard for investors who don’t live in the Sunbelt to believe there aren’t construction cranes building new office towers as far as the eye can see down here, but that is just not the case. Supply demand fundamentals remain solid and that is what is driving our continued strong same property performance. That’s internal growth. Now let's turn to external growth. We added one new project to our development pipeline during the first quarter. It's an office building called 8000 Avalon and it's located in the successful mixed used project north of Atlanta known as Avalon. We own 90% of this $72 million project. So our capital commitments is about $65 million. In total, our pro rata share of our current development pipeline is $326 million, which is outlined on Page 4 of our supplement. We also formed a joint venture with Dimensional Fund Advisors during the first quarter to develop their East Coast headquarters in Charlotte. We will own 50% of this $79 million project. So our future capital commitment here is just under $40 million. Finally, we also anticipate starting a mixed used project in Downtown Decatur, just outside of Atlanta later in the year. Although details are still being finalized, we anticipate owning approximately 20% of this $77 million project for a future capital commitment of about $15 million. Including both Avalon and Decatur, our total development commitment to both current and future is about $380 million, which represents 11% of our un-depreciated asset base. This is well within the long term range; we have historically provided. Our entire development pipeline, including these two future projects will be funded on a leverage neutral basis using proceeds from asset sales and retained cash flow. Colin will provide more details on all our development projects in his remarks later in the call. In light of the merger and spinoff we announced last week, we suspended activity under our share repurchase program during the first quarter. Prior to this suspension, we did repurchase 1.6 million shares for $13.7 million, or an average price of $8.64 per share. This brings the total amount purchased to 6.8 million shares for $61.5 million for an average price of $9.08 per share, since we initiated the program back in September of 2015. Although our share repurchase program remains in place, the merger agreement does not allow us to buy back stock until the transaction closes, and we’re subject to certain legal and regulatory restrictions. After the transaction closes, we'll evaluate additional share repurchases at that time. I would normally wrap up my portion of the conference call by updating our 2016 FFO guidance. However, we’re suspending all guidance until the Parkway transactions are complete. In light of the anticipated fourth quarter close of this transaction, we expect to provide 2017 FFO guidance once the dust settles. We know you all will still be trying to model our earnings between now and closing, and I did want to touch on one topic that will need to be addressed as you run your numbers. Accounting rules require us to expense the costs, associated with the Parkway transactions as they are incurred. We did a great job of minimizing those costs, until we thought we had a transaction and it was probable, and as a result, less than $20,000 of transaction costs ran through our income statement during the first quarter. That will obviously not be the case going forward. These costs ran through, and will continue to run through the acquisition and relative costs line item and our income statement. With that, let met turn the call over to Colin.

Thanks Greg and good afternoon 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. Overall, lease economics were strong. Our weighted average net effect of rent for the quarter was $17.24 per square foot, which represents a 20% increase compared to our weighted average net effective rent during the same quarter in 2015. In addition, our second generation releasing spread, continues to trend in a positive direction, with an 18.9% increase on a GAAP basis and a 6.3% increase on a cash basis. While leasing velocity did slow to 220,000 square feet during the quarter, this was a function of timing as opposed to a look through to the health of our specific markets aside from Houston. To illustrate this, point the second quarter is off to a fantastic start as we have leased over 210,000 square feet. Moving on to our markets in key portfolio updates, fundamentals in Atlanta continue to strengthen. The city produced approximately 73,000 jobs over the last 12 months, while specula [ph] supply remains historically low levels. For CoStar, overall Class A market vacancy dropped to 12.3%, which represents the lowest level since roughly 2001. The development community of Atlanta, along with the capital markets continues to demonstrate great discipline as it relates to speculative new construction, resulting in some of the strongest market conditions in recent memory. The first quarter was a bit transitionary for our Atlanta portfolio. While occupancy fell, this was really a function of timing between some lease expirations and commencement of new leasing activity. We continue to see great activity across all of our Atlanta sub markets and properties. To provide more specifics, our Atlanta team, has already executed approximately 137,000 square feet of leases during the second quarter, which has more than offset that first quarter decline. Highlighting some of the more recent success, we finalized a full floor lease at 191 Peachtree just this morning and have a signed LOI on an additional full floor. Collectively, these leases upon final execution will increase our percentage leased at 191 Peachtree by approximately 440 basis points, and moving this Trophy Tower back in the low 90% leased. In Buckhead, we are having good early success with extending first generation lease expirations at Terminus 100. We renewed Wells Fargo's 47,000 square foot lease for 10 years during the first quarter and post quarter end, we extended UBS's 24,000 square foot lease for 7 years. In the central perimeter, our efforts to re-lease Northpark Town Center after the known Oracle move out is underway. We recently expanded Wells Fargo by 24,000 square feet, with 7 years of lease term. Switching to Austin, our leasing momentum at Research Park V five continues to accelerate. The project delivered during the first quarter, and is now 54% leased, as we executed another 15,000 square foot lease post quarter end. We continue to be pleased with our pipeline of prospects, and are confident that we will complete the lease up of the fifth and final property at Research Park in the coming quarters. Overall the Austin market remains very healthy with net absorption totaling almost 660,000 square feet during the quarter. Importantly, Class A vacancy in the CBD fell 6.7%. Within our Austin CBD portfolio, we are now effectively out of space. 816 Congress is 99% leased and Colorado Tower is 100% leased. This is a remarkable achievement by our team on the ground in Austin. In Charlotte, the market also remains very healthy as Metrowide vacancy fell to 8.8% at quarter's end, which is the lowest level since the early 2000s. As you know, our portfolio is concentrated in Uptown Charlotte, which continues to outperform the market with vacancy at just 7.6%. While we continue to monitor the new construction pipeline in Charlotte, our uptown portfolio, which consist of Fifth Third Center and Gateway Village is 98% leased, with no full floor lease expirations until the fourth quarter of 2018. Like Austin, we are effectively out of space in the Cousins portfolio, and this is a direct result of the tireless work by our Charlotte team. Moving on to Houston, we continue to understand the concerns about the market relating to the downturn in energy and will continue to provide as much transparency as we can. Our comments will [indiscernible] last quarter's call as it was a fairly uneventful quarter, which is a good thing at this point in the cycle. At a macro level, fundamentals remain soft as Metrowide Class A vacancy remained basically unchanged at 14.6%. However, our urban portfolio continues to hold up much better than the overall market. To highlight this, our Greenway Plaza and Post Oak Central assets finished the quarter at 90% leased, outpacing the market average by almost 500 basis points. Importantly, according to CoStar, our portfolio currently has just 31,000 square feet of sublease space, which equates to less than 1% of our total Houston portfolio. Turning to the fourth quarter's leasing results in Houston, our team on the ground had a very positive quarter. We leased 42,000 square feet to customers, representing a range of different industries including healthcare, financial institutions, utilities and not for profits. Large new lease activity generally remains muted, but we will continue to see opportunities and have an active pipeline in the 5 to 50,000 square foot range. Switching gears to our development pipeline, we commenced construction during the quarter on 8,000 Avalon Boulevard in a 90/10 joint venture with Hines. 8,000 Avalon will be a 224,000 square foot office project, and Phase 2 of Avalon, which we believe is the leading mixed use development in Atlanta. Phase 1 of Avalon includes approximately 500,000 square feet of retail, which is 97% leased to category leading retailers like Tesla, Peter Millar, Flywheel and Lululemon to name just a few, 108,000 square feet of office, which a 100% leased, 250 apartments and 101 for sale detached and town home residences. In addition to our office development, Phase 2 will also include 276 additional apartments, 80,000 square feet of retail, which is already 80% committed and a 330 key Marriott Autograph Hotel and Conference Center. We are thrilled to be part of such a successful project and deepen our long standing relationship with Hines. Our leasing pipeline for 8,000 Avalon is very strong, with wide ranging customer interest, including leading technology companies, large financial institutions and professional service firms. We are confident that we will have more specific leasing news to share in the very near future, which we think will provide a tremendous boost for the project. During the quarter, we also closed on land in the south end of Charlotte for an approximately 229,000 square foot office project, which is leased -- 100% leased to Dimensional Fund Advisors. As a reminder, we will develop this project in a 50-50 joint venture with Dimensional Fund Advisors and we anticipate beginning site demolition in the fourth quarter. Our Carolina Square project in the heart of Downtown Chappell Hill continues to progress well. We are developing this fantastic mixed use project in a 50-50 joint venture with Northwood Ravin, a leading North Carolina based multifamily developer. The market has received the project very well and we are pleased that the office and retail components are now 67% and 46% leased respectively, with over a year to go until construction completion. Lastly, our Decatur multifamily development is currently scheduled to begin in the third quarter. The project will consist of approximately 325 apartment units, 30,000 square feet of office and 20,000 square feet of retail. We plan to develop this project in a joint venture with AMLI and as Greg mentioned earlier Cousin's ownership will likely be in the 20% range. This is a terrific side located adjacent to Decatur MARTA station, which we believe is a clear competitive advantage and positions the project for long term success. In closing, our current development pipeline, inclusive of the Dimensional Fund Advisors project totals approximately 1.1 million square feet of office with some additional multifamily units in retail space. While we are developing these projects to very attractive yields, I would like to highlight the work our team has done to mitigate our risk through our strong preleasing efforts. In aggregate, the office component is approximately 75% preleased, with meaningful time remaining until the delivery of these projects in 2017 and 2018. As we have said on previous calls, we generally believe that we are in the last innings of the development cycle and therefore we are unlikely to pursue additional near-term projects that have significant speculative space. Before turning the call back over to the operator, please note that as Pam mentioned earlier, we are unable to respond to any questions surrounding our recently announced transactions on this call. We realize the market desires greater visibility into the mechanics and structure of the transaction. Therefore, we will keep you posted as more information is forthcoming. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jamie Feldman with Bank of America Merrill Lynch.

Can you talk about the percent lease moves in Houston? So Greenway Plaza and Post Oak Central off about 40 basis points and 120 basis points sequentially on percent leased?

Jamie. It's Colin. So kind of taking this one by one. At Post Oak Central, we finished the quarter as you said at percent leased at about 94.2%. What drove that was Stewart Title gave back an additional floor. They have that right as a part of their previous extension of that lease through 2018. That was the last floor that they have rights to get back to. So we don’t see any additional movement there. As it relates to Greenway Plaza, it dropped the quarter about 40 bps on a percentage leased basis, a little bit from an occupancy standpoint. What drove that was one single expiration, an architecture firm who moved to a new project.

And then I guess the same question for ACS. Had a pretty meaningful move?

That's right Jamie. And what really drove that, U.S. South, a particular customer there who has a long-term lease, had a tendency over time to take some additional space on a short-term basis. And this was -- in this quarter they had an expiration of one those short-term spaces. I will tell you we've got very good activity on ACSC. In fact, we have an executed LOI and are working very hard towards a final lease with a customer that would actually more than offset that decline we saw in the first quarter.

Okay. And would you say that that building is on your shortlist for dispositions?

Jamie, we've commented on that building in the past. It does have a loan that does not mature until the latter part of 2017. That really restricts our ability to do anything near term there. But I think as we look at our portfolio going forward, we're very excited about what we've been able to put together in Buckhead and Midtown. And so as we look to prune assets from the portfolio, I would expect just to look to some of our mixed used projects and perhaps in Downtown Atlanta as well.

Okay. And then finally, Gregg, I think, you withdrew guidance, understandably. But I think in the past you've given more building level guidance. Can you just talk about if there's any change to your operating outlook for the assets that you've laid out before?

Jamie, we withdrew property level guidance when we started to provide FFO guidance about a year and a half ago. So we don't typically now provide property level guidance. So I really can't comment on what we think is going to happen at the property level at this point.

Our next question comes from Michael Lewis with SunTrust.

So in 2013, you bought into Houston. And rightly said, it's a cyclical market that you think outperforms over time. You positioned the portfolio defensively ahead of the downturn. I think you would probably agree it's performing quite well, considering what's going on in the broader market. And now you've announced you are spinning it. So my question is if you could hop in the time machine and go back to 2013, do you still invest in Houston, and is there anything you learned or anything you think you might have done differently there?

Well, Michael that's great question, and every now and then in this business you wish you could go back. But we were talking about that the other day. I think when we had the opportunity to buy into Houston, it was a huge positive step for our company to establish ourselves in a rapidly growing market of size and scale, and be able to get in there and inherit a team which is a tremendous team. And if you look at the results that team generated, both while Houston was still going strong, and in my opinion, more importantly as Houston started cooling off with us getting ahead of those big leases, they just did a tremendous job. Again, it was interesting to me, a real sort of light came off at the end of the tunnel for me about six to nine months ago, and I can't remember what conference it was at, but I started each meeting, each individual meeting with the investors and said is there anything that I can say to you in this investor meeting about Houston that's going to change your mind about Houston, and they said no. And so I think what then happened was you looked at the size and scale of what you had in Houston, mixed together with your other assets, and you realize that you needed an opportunity to let more visibility come in to the Houston portfolio, without the distraction of the other cities, because it really wasn’t nearly as bad as people were thinking it was. And that was a key element of our conversations with Parkway, as they had a similar situation, and by putting a ring fence around those assets, we now have a tremendous group of assets in Houston which we think will outperform the down side and the upside with the management team a 100% dedicated to that. And I think that will appeal to a certain type of investor. So I think that the logic by which we made the decision was good. I think the way in which we executed while we had the assets was good, and I think the way in which we're now pooling the assets together is just fantastic. And I couldn’t have more confidence in Jim and the Parkway team to work with our collective teams in Houston and get a tremendous amount of value out of those assets for the shareholders. I'm equally glad that the shareholders of the new Cousins are benefitting from these collective assets, and both companies, they're largely overlapped. That was just one of the amazing things about Parkway and Cousins, not just in cities, but also in terms of quality urban best submarkets, and put that in its own company that can expand on its own and really distinguish itself in these other markets. So that's what I was trying to get across in my excitement and in my opening remarks.

Thank you. My second question is about the rest of the geographies. So I don't know if it's too early to ask you how you feel about Orlando, Tempe, Tampa markets that you weren’t previously in, or ask you about how you think -- you're going to be a premier Sunbelt REIT. How many Sunbelt markets do you think that includes? And are there some others where you see opportunity?

Michael, I think it's early for that. I think as you see our further information come out in terms of as we get towards 2017 and start showing some numbers on where we think 2017 is, and we've had further time to get through the transaction part and look at the asset part, but you will see more of that. But at a fairly low level, if you look at these three cities that are new to us, they meet our criteria. They've got growth rates above the national average, they've got new building rates way below the national average, and in certain submarkets you're seeing near $30 rents get achieved for the right assets. So they are nothing in those new markets for us that are unusual in terms of the characteristics that we look for in highlighting a Cousins markets, but it's too early to comment on long-term.

Our next question comes from John Guinee with Stifel.

Three quick questions. First, one congratulations. Quick question. Do you still have an in house general contractor, and will you ever have one again if you don't? Two, you mentioned that you are at the end of the development cycle. You still have about $35 million of land on your books, which is roughly 1%, not a big deal. But do you have any thoughts on that? And then three, can you just give us when you expect the GAAP and cash rents to start at 191 Peachtree?

Okay, I'll take the first two and let Gregg take the others. When we had an in-house contractor, those were back in the days when we were building houses and so when we got out of that business, we got out of that altogether. So we do not have a contractor. Our land positions are really very light. And the majority of the land that shows up in that 1% is residential land that we would consider non-core and are continuing and to work to settle down. So John, I would hope that as soon as a little bit of the luster gets off the multifamily rose, and I’m not smart enough to know when that is, that we would be in a position and the key sub markets and cities that we’ve highlighted to pick up a side or two, that would give us the flexibility to be in a better position to build when the right time comes on in the next cycle. I'll let Gregg or Colin comment on 191.

John, we didn’t quite hear the last part of your question. If you could repeat that.

When does the cash and GAAP rents commence on your recent leasing at 191 Peachtree?

Thanks for the question John. The recent leasing activity that we had, those commitments are all at the beginning part of 2017. And they do, as you would expect have some degree of free rent. And I would tell you, in terms of what we’re seeing in Atlanta as it relates to that, it's anywhere from kind a half to a year to a year, or half a month to a year of free rent per year of lease term.

Okay so that if, GAAP commences 1Q ’17, cash commence thereafter.

The next question comes from David Rodgers with Baird.

Maybe Colin, I’ll start with you. You did say, as John said that you are at the end of the development cycle, very cautions going forward in terms of starting speculative space. I guess maybe does that vary by market as look at your current and potential new markets? Do you have different views, is that just a view across the board on more specs space? And I guess the second part of that question is how does that play into the Decatur development than others that you might be contemplating or anything?

Thanks for your David. Certainly as we look across our various markets, there is varying degrees of speculative construction underway. We see a little bit more of it in Austin and Charlotte and there's virtually none in Atlanta. But I think what’s really driving our comment is taking a more cautious approach, is just dealing like -- that we're kind of late cycle from an overall macro economy prospective. And so we will continue to take a cautious approach. That being said, we’re continuing to see some pretty good activity from large customers who have build-to-suit oriented opportunities and we'll continue to look at those, if they provide very attractive, risk adjusted returns. But as a general statement, we're -- as we feel a little bit late cycle, we will take a cautious approach across all of our markets as it relates to speculative space. The Decatur project, we feel very good about. And as Larry mentioned earlier, in a general sense, we believe it’s late cycle in the multifamily space as well. But that particular project is so well positioned in really a very unique and urban location here in Atlanta, over in Decatur, directly adjacent to a MARTA station. And so we think is about as defensibly positioned as you’ll find for a multi-family site in the Sunbelt.

Great, thanks for that color. And then maybe, Colin or Larry, you can comment as well, but in terms of the overall disposition environment, it sounds like with the development pipeline getting larger that there could be more dispositions. Do you expect to ramp that up a little bit more and can you talk about the acceptance and desire for the assets out there as you go to market?

Well really, everything that Greg has -- that we've shown and talked about today, we’ve already sold in ’16 and so have fully funded. We wanted to take the capital markets risk out of our development pipeline. So -- including the Avalon project. So the only thing that you would see us look to sell another asset, if the purpose of that sale is to generate capital for a development need, would be a new development prospect, and I would tell you as Colin said really, the only type development prospect that I think you could see us take on today would just be another project like in NMC [ph] or where you have a big company with good credit that wanted to do a long term lease and it made sense for us and Dimensional Fund Advisors. I've learned -- I'm long enough in my career that I’ve learned that I’m not smart enough to guess when the cycle is going to go down, but I'm willing to give up some of the fourth quarter, just to make sure I’m ready for the first quarter or the next one.

Our next question comes from Jed Reagan with Green Street Advisors

How did you get comfortable moving forward on spec with the with the Avalon Project? And then do you see that type of asset location being a long term hold for Cousins?

Yes, Jed, that's a perfect question and I think what we see is that in all of the cities, and we can name them, that we're in, there appears to be what I would call an Urban Lite node, and it tends where the high income suburban household demographic is. The domain in Austin would one, and it's a way out from the city in terms of how we think of urban. But then once you get there, you look at household formation, you look at densities, you look at income levels, you look at school levels; then it tends to lead, get led off with a mixed used project as this one did, and this one actually started, and then cratered during the recession and then restarted. But the first phase. which included single family homes to buy, to rent offices of retail et cetera, it's just been a huge success. And the second phase, which there are only two phases of it, gave us comfort. The other thing that gave us a lot of comfort is we had about six months of predevelopment. And as Colin alluded to the pipeline of leasing and we're quite confident of some announcements that we'll have coming up validate our thesis. It really is a topic we debate in here. I think when we first got to know the market, we thought of this more as probably a merchant build, because of the distance out from the cities. But then when you start to look and you go here's a whole site with all this infrastructure, and there can only be one other office building program, which we control that site, maybe we define a category of Urban Lite and hold it for a longer period of time. So that will just be a jump ball for us to call a couple of years out when the thing's leased up.

Jed, I'll just add to that, as we think about the type of asset we want to own long-term, it's those that are going to command premium rents. And we're obviously just coming out of the ground on the office building, but as we have some transparency on the rents there achieving on the multi-family side, on the retail side and this project and the sales that they're doing, they're very much Buckhead like. And so as we look at that, I think that gives us a lot of confidence and we'll perhaps then form our long decision once we stabilize the asset.

That's helpful and then just on that, what kind of rent premiums might you expect a project like that versus the surrounding submarket. And are you able to disclose a stabilized yield you expect for Avalon?

Well Jed, we've never given specific guidance on any one particular development project just from a competitive standpoint, but I think we've given past guidance that our development pipeline has penciled out to a mid-8%, kind of 8.5% GAAP yield on a weighted average basis, and we think that the addition of this project, that that remains relatively unchanged. There is a premium in the market for Avalon relative to what's fair, but we really think about Avalon -- it's competitive set isn’t just what's around it, because there's truly nothing like it. The competitive supply for the most part is surface part type assets and we've seen a real demand for customers in that market. As I mentioned a lot of large cap technology type companies, large financial institutions, who are very much focused on recruiting and retention of the best caliber employee, and really see this is an opportunity to locate out that in submarket versus having to go Buckhead or the central perimeter. So there will be a premium but we think we're very close to validating that.

But as Colin said in his earlier remarks, the office rents on an early basis look more like Buckhead office rents.

That's helpful. And then just switching gears to the sales transaction environment in Houston, what trends have you been seeing there, and do you sense that sellers are maybe getting more realistic and -- near bid-ask spreads are coming in a little bit there finally?

Jed, it's really been, there was good activity as we detailed in the past in 2015, and really all submarkets Downtown, the Galleria even out west. As we've moved into 2016, we've seen activity really slow. And I think it's probably a function of buyer's expectations continuing to -- got to increase and sellers holding firm. One of the things we've always looked at as we evaluate the Houston market; and I think it's important to note, is really the quality of the underlying owners within the market, particularly in our urban submarkets, in the Galleria and Greenway downtown. It's very, very large, well-capitalized groups like Invescos and JPMorgans, who own those assets on a very low leverage basis and have the ability to take a long-term perspective. So we just haven't seen that bid-ask spread narrow to the point where we've seen a lot of transactions this year.

The next question comes from Tom Lesnick with Capital One Securities.

My first one has to do with development. I was wondering if you guys could talk a little bit about kind of your underwriting assumptions. Are you guys underwriting, particularly with build-to-suits, are you guys underwriting to specific rents or are you underwriting to a fixed yield where if there's any cost overruns or anything, that's simply built into the tenant's rent?

Yes, great question Tom. We -- I would say we look at it through a couple of different lenses. First, I wouldn’t say that we're underwriting to a specific cap rate. It's really more what's the spread over that going in yield relative to where we see spot cap rates today. And obviously even with the build-to-suit we like to have a healthy development margin. And that will even -- and in terms of what that particular margin is, it's really dependent on the underlying credit of the customer that we're working with. I don’t want to go into specific details, again to kind of put us at a competitive disadvantage in the future, but we do underwrite a margin to protect ourselves. We also look at, as we're doing those projects, what is the overall project cost, and therefore what does that translate into an underlying rental rate, to make sure that we're not developing a too specialized building or put ourselves in a position with a kind of a way above market rate. So we kind of look at all those areas, factors to ultimately determine whether it's a right transaction for us and put a price on it.

That's very helpful. And then my final question, just has to do with leasing. I think the merger agreement specifies that both parties have to sign off on transactions of over 50,000 square feet. Are there any spaces we should be aware of in the next couple of quarters or is it just business as usual?

Business as usual.

[Operator Instructions] The next question comes from Jamie Feldman with Bank of America Merrill Lynch

Focusing on the big picture here, as you guys sit back and think about what Cousins has done well over the years, in my view, it seems like local sharp shooter, finding development sites, buying value-add assets, leasing them up, but really having market concentrations and a deep bench in your markets with long-term relationships. And then you look at the presentation you guys gave that talked about being a premier Sunbelt urban office REIT. That seems like it would be a broader market concentration than that, and kind of really needed to build out platforms in other markets, if you're going to expand. How can we -- how should we think about -- maybe the conversations you've had internally, as you think about your future, about the balance of those two and what this Company could look like?

Well, I don’t want to get too much into that until we can get past some of the merger conversations. But at the end of the day, two things drive where you love to go, and the part of the business we're in. One is you've got to look at the cities and you've got to have the dynamics that allow you an opportunity to go in there and be successful. And then the second is the human talent, which is the most important part. Like Tim Hendrix that we have in Austin that are very much embedded with the core values and relationships that are necessary to make those. And I think that’s the key drivers for us, is looking at both. You have to look at the cities, but you also have to look at the competition that's there, and see if there is an opportunity to bring your value. And then you have to either have somebody on your bench or find somebody that can really bring you to the table quickly as a local sharp shooter. I would give an example of that, is that’s one of the reasons we were comfortable by Greenway, is we had a 20-year team there with much of shared value. And so when it came down to figuring out how to do some of those big leases early, we were able to act like a local sharp shooter, even though we had not been in the market a long time. But we are excited about the opportunities, post-merger, but it will be driven by really looking at cities, and those dynamics. There's the population dynamic, there's the competitive dynamic, and then there is the human dynamic. And those will be the things we'll continue to look at.

Okay. And do you think as a manager, as a team, you guys have the skill sets to manage a lot of markets. Because it seems like you've been more focused on a select few?

It's all incremental. If you look at where we are, we've been in Charlotte a long time, we've been in Austin a long time, we've been in Atlanta since our founding, and we've been in and out of other markets. We've been in Dallas, we've been in Fort Worth, we've been in other markets. So it is not unusual for us to take a look at two or three or four other markets but we're going to always be driven by quality of return versus scale. And that's the game, is you get the densification that's occurred in the Sunbelt, and then these urban submarkets. There is an opportunity to have concentration and diversification in return, and that's always going to be more important than scale.

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

We appreciate everybody being on the call today. These are exciting times at Cousins. I hope you hear that in our voices and in our answers. We look forward to talking to you all as banks move forward, and appreciate your continued interest in our Company. Thank you.

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