Good morning and welcome to the Cousins Properties Second Quarter Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd now like to turn the conference over to Ms. Pamela Roper, General Counsel. Please, go ahead.

Thank you. Good morning and welcome to Cousins Properties second quarter earnings conference call. With me today are Colin Connolly, our President and Chief Executive Officer; Richard Hickson, our Executive Vice President, Operations; 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 all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information link 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, including the risk factors set forth in our Annual Report on Form 10-K and our other SEC filings. In particular, there are significant risk and uncertainties related to the scope, severity and duration of the COVID-19 pandemic along with the direct and indirect impacts that the pandemic and related mitigation efforts, including governmental requirements and private sector responses, may have on our financial condition and operating results and those of our customers. 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 supplemental package posted yesterday and a detailed discussion of some potential risks, including those posed by COVID-19, is contained in our filings with the SEC. With that, I'll turn the call over to Colin Connolly.

Thank you, Pam, and good morning everyone. At Cousins we have always taken the approach that if we take care of our dedicated employees who deliver excellent service to our customers, our Company will drive strong results for our shareholders. In this challenging environment we have taken great care to ensure that we are staying true to our values and principles. For this I am thankful and proud. In the markets, we have adjusted our operations to ensure the safety of our employees and customers as our properties all remain open. Across our portfolio, physical occupancy has remained at approximately 15% since early June. Based on our discussions with customers, I anticipate a modest increase after Labor Day. However, ongoing health concerns related to COVID-19 and child care challenges resulting from remote schooling will likely create headwinds to physical occupancy throughout 2020. Despite the extraordinary environment, our team delivered solid financial results during the second quarter. I will share a few of the highlights. We reported FFO of $0.66 a share. We collected 97% of total rents and 98% of office rents. We leased 303,000 square feet with a weighted average lease term of 7.6 years. Second generation cash rents grew by 20.6%. Simply stated, our financial performance highlights the quality of our markets, our portfolio, our customers and, importantly, our team. It will come as no surprise that many are continuing to speculate about the long-term implications of COVID on the office sector. Work from home is undergoing a nationwide test and is proving serviceable thus far. We have spent considerable time discussing this with our customers. In fact, I recently asked the leadership of a Fortune 500 company with a growing Sun Belt footprint to share their perspective on the impact of COVID on their real estate strategy…

Thanks and good morning everyone. As Colin said, we are in the midst of a historically challenging economic environment. And I want to lead off by saying that our team and operating portfolio are performing exceptionally well during this difficult time. From the start of the pandemic, we have remained focused on the things that we can control and positively influence such as our leasing strategy, rent collections, managing deferral requests, property operations, expense control, customer outreach and relationship building. Our team's professionalism and focus in these areas combined with top-quality assets in some of the best Sun Belt submarkets led to solid second quarter results. As we all know, we felt the full impact of the ongoing pandemic for the entire second quarter, whereas we only saw a partial impact in the first quarter. Given that I'm especially pleased to say that our team executed 303,000 square feet of leases in the second quarter with an average lease term of 7.6 years. That average lease term is squarely in line with our long-term run rate. Further, 32% of our leasing activity this quarter was new and expansion leasing. I'm also pleased to report that rent growth remained exceptionally strong with second generation net rents increasing 20.6% on a cash basis, a level not seen since 2015. This was driven primarily by continued excellent rent growth in Austin. Net effective rents for the quarter came in at $25.43 per square foot, even higher than in the first quarter. We also ended the second quarter at 92.5% leased with in-place gross rents posting another company record of $39.48 per square foot. Finally, our same property portfolio leased percentage came in at a solid 94.4%. We view these as fantastic results in light of current economic conditions. I described the market backdrop…

Thanks, Richard, and good morning everybody. I'll begin my remarks this morning by providing a brief overview of our quarterly financial results and activities including some detail on our same-property performance and receivables data, followed by a discussion of our balance sheet before closing my remarks with updated information on our outlook for the remainder of 2020. All things considered, second quarter results were solid and they were in line with the information we provided in April. Looking specifically at our same-property performance, cash net operating income during the second quarter declined 1.6% compared to last year. This was driven by a 4% decline in revenues and a 7.8% decline in expenses. As Richard discussed earlier, we modified leases for certain customers to provide for temporary payment deferrals. Adjusting for the impact of these deferrals, cash net operating income declined 0.1% during the second quarter. Beyond lease deferrals, the largest item driving our same-property performance is the physical occupancy within our buildings which remains significantly below pre-pandemic levels. Fewer customers coming to the office mean fewer cars and as a result, same-property parking income was down 30% compared to last year's second quarter. This is comprised of a 12% decline in contractual parking and a 76% decline in transient parking. Adjusting for the impact of both rent deferrals and reduced parking income, same property cash NOI was up 3.7% during the second quarter. For the balance of the year we anticipate cash same-property performance will likely stay negative, potentially troughing in the third quarter. In addition to continued rent deferrals and reduced parking demand, we are seeing some opportunities to execute lease extensions with existing customers that could pull forward free rent, which would impact cash NOI. However, we believe these opportunities are positive long-term real estate decisions. Before moving…

[Operator Instructions] First question comes from Blaine Heck of Wells Fargo. Please go ahead.

Great. Thanks. Good morning. Colin, can you just first talk about your markets? And I understand we're still in somewhat of a discovery phase with respect to both leasing and pricing. But can you give us any sense of your thoughts on which of your markets you expect to be most resilient, both on the leasing side and the asset pricing side and which, if any, might be showing some cracks at this point?

Well, Blaine it -- good morning first. I do think that it's still preliminary to really differentiate among our markets. And as I mentioned previously the pandemic and the lockdown really does not differentiate among markets where, appropriately so, generally observing the health guidelines throughout our markets. And so, I think, overall activity is muted. That being said, as I look across our markets and think about a reopening of the country and a recovery and you look at the underlying industries that really drive our markets, I think that gives us a whole lot of optimism. Here in Atlanta technology continues to be a big driver as it is in Austin and Tempe. I think we've got a lot of enthusiasm long term about Charlotte and you saw the recent announcement with Centene moving their corporate headquarters to Charlotte. And I think Tampa will continue to do well with the healthcare mass -- critical mass in that particular market. So I think as we look across all our markets, we've got a lot of long-term confidence that there'll be some of the markets that will be first to recover and where we will see once again sustained rent growth. And I think those underlying supply and demand factors of the leasing market will really help maintain and stabilize asset values.

Okay. That's helpful. Second one for either you or for Richard. Can you just discuss some of the prospects for the upcoming move-outs and backfilling some of that space, Bank of America, Blue Cross, Norfolk Southern? And then closer to today, you've got Time Warner, I think, toward the end of the year. So just touch on each of those spaces, please.

Sure, Blaine. Time Warner, actually we were able to renew this past quarter. So that was approximately 100 plus 1,000 square foot expiration that we've gone ahead and renewed out at The Domain in Austin. So we were thrilled to get that done this past quarter. And as you touched on, we do have three fairly sizable expirations and move-outs within the portfolio here in Atlanta at the Anthem space in Buckhead, the Bank of America space in Charlotte and the Norfolk Southern space in Midtown. I think all three of those buildings, as we've touched on in the past, are really attractive value-add opportunities that the Company has. And going into the pandemic, we had very good interest in all three of those. I would say a meaningful component of that activity is on pause, as you would expect, in the various lockdowns across those cities. So I do think the lease up of that space will take us longer. That being said, many of those prospects have not canceled their interest. It's on pause. But that will likely create some delay. But I think just stepping back here at Cousins, when we look at those move-outs we put it in perspective of the overall Company. And the total NOI associated with those three particular customers is less than $30 million. And when we compare that to the incremental NOI that's expected to come off of the development pipeline, again, the vast majority of that is or contractual obligations that's upwards of $66 million. And so we do still continue to have a great deal of confidence as we look forward to 2021 and 2022 about the embedded growth within the Company. Despite some of these move-outs in really fantastic buildings, we still will have a terrific opportunity -- our team to backfill that space and create value.

Great. That's helpful. One last one maybe for Gregg. We appreciate all the commentary and all the detail in the supplemental on same store. I wanted to ask about same-store expenses as they declined pretty meaningfully year-over-year this quarter. Is all of that savings just due to lower utilization at your properties or are there other drivers that might be more sustainable?

The vast majority of the same property expense decline that you saw this quarter was driven by a lower physical occupancy. So items like utilities and cleaning and similar items were driving the vast majority of that.

Next question comes from Jamie Feldman, Bank of America Merrill Lynch. Please go ahead.

Thank you and good morning. So in your press release you talked about potentially opportunistic buying. And I think in the call this morning you also mentioned, land, buildings. Can you just talk about -- more about what's in the pipeline, what we might see where you want to do it and what types of assets.

Well, Jamie, it -- anything that we do will be consistent with the strategic plan that we set forward and we'll continue to focus on the best submarkets across the Sun Belt. And I think as we're kind of moving through this current cycle we are starting to see some opportunities on the land side that I think could create opportunity for future development opportunities for office and mixed-use projects. This will obviously -- the execution of those will obviously take longer term. But from our perspective now is an interesting time to look at land and we'll keep our discipline within our 3% or so target for land. On the building side, I think that's going to take a little bit longer for those specific opportunities to materialize. As we just worked through the system, I think obviously the environment over time could create strain and stress, particularly on private folks that have relied on leverage. But those will likely come later. We are starting to see some of the discussion that has piqued our interest and given us some visibility on what might come. But as I said, those will likely be in the coming months and quarters.

Okay. And as you think about picking up additional land, what is your -- what are your thoughts on -- you had mentioned before hub-and-spoke, maybe satellite offices. Do you think it makes sense to get more land in more suburban locations across your markets or stick with the urban model?

Yeah, look, obviously as I said in my remarks, there's been a lot of discussion on urban, suburban and hub and spokes. And I think some of that narrative and discussion I think makes sense in larger geographic metro areas like New York City and San Francisco. But as you look at our markets, Atlanta, Austin, Charlotte, again, I don't believe and we have not heard any differentiation from our customers in really what that building experience is, whether that's the elevator or the parking experience in a building in Buckhead or Midtown relative to the Northwest or Alpharetta type submarkets. And I think ultimately what we've heard from customers and I think the Microsoft lease validates that there was another very large technology company that we understand signed over 300,000 square foot lease in Midtown this past quarter. I think that continues to validate customers and its knowledge economy are focused on highly amenitized markets that garner the type of talent they want to grow their businesses and we think that will continue post pandemic.

Okay. And then we appreciate the commentary on the Fortune 500 company you had to speak at your Board meeting. What were they saying about space per employee in terms of actual square foot per employee kind of pre-pandemic and maybe post vaccine? Do you have any view on that [indiscernible] on that?

They were very clear, it's going up. And I think it's -- I think it's going to come through a combination, as I said, of a commitment from them to continue to offer dedicated personal space. But they also, as they look at their collaboration space, think that that will need to -- will continue to be important, but will need to be grown to accommodate increased physical and social distancing post pandemic, but even looking at things like the width of corridors was one that they mentioned. Again just to continue to create more space in the office and so that overall from their perspective and their individual company was going to lead to a greater space per square foot.

Can you quantify like on a percentage basis or actual [indiscernible]?

Yeah. They didn't -- and still kind of early in the process I think for them to drill down and give a specific space per square foot. But I think one of the things that I found interesting is they talked about again the remote working option and providing flexibility to their employees. Pre-pandemic they target that about a 10% number on any given day he would be in the office. And I think in their view post pandemic that could potentially increase to 20% on any given day. But that being said, with commitment to dedicated space, more collaborative space, more open space, I think their view was that the increase in remote working would actually help them not to have to add space, again if that space per employee continues to grow.

But they're saying each employee still gets a dedicated desk, even if they're home more often?

Absolutely. It was a commitment they felt was important over the long term even post pandemic for their particular company.

Okay. And can you say what sector they are in?

We shared with them that we would provide confidentiality as they are continuing to kind of work through their real estate strategy. Again some of what I'm sharing with you, they haven't necessarily even shared with their underlying employees. But a growing Fortunate 500 company.

[Operator Instructions] Our next question comes from Dave Rodgers of Baird. Please go ahead.

Yeah, good morning. Maybe, Richard, I'll start with you. You did mention some sublease commentary in your prepared comments. But I was wondering if you could just dive a little bit deeper in terms of the competitiveness of that space, maybe the term and maybe just focus on a handful of the larger markets that you guys are in. But just getting a sense for where that's shaking out and how competitive that might be as you look to release some of your space.

Sure. Yeah, that's a great question. And like I alluded to in my remarks, the amount of sublease space today that we're seeing is actually pretty benign but we are seeing that uptick trend. But just looking at all of our markets today, we're really 2% or less of inventory in the Class A segment in virtually all of our markets but for Austin and that's at about 4% right now on the numbers that we're seeing. So the competitiveness of that space, it's across the board to be honest. But I think just stepping back, what we're seeing is that the recent sublease space that's come online, especially in Austin but in other markets too, is really probably more space, the companies that were in a high-growth mode going into COVID kind of had to step back from those growth plans. And so there was space that they were really almost inventorying or expecting to fill over the near term and that forced them to kind of walk that back. So the implication there would be that it's space that they do have decent term on. It's not just somebody trying to backfill a two-year opportunity which -- that would not be competitive to most of our space. So -- and then -- again, it is just generally the sublease space that we see coming back is being driven by technology, financial services, but we're seeing it across the board. It's also law firms, some energy, but in that tech component it is interesting to see that, from our view at least, that most of the sublease space is coming from companies that are more VC-backed, private, smaller, where they were on a high-growth mode, not necessarily the big cap tech names that are publicly traded.

Thanks for that color. And then maybe a follow-up then on that, Colin, that kind of dovetails into what I was going to ask and the question is about development. And maybe specifically Domain, but just thinking about development, with those big tech firms being the ones that are still committing, the Microsofts of the world then obviously the tech component that you have out at Domain. I mean, I guess as you sit here today and I realize there is no clear crystal ball, but -- I mean, is that an area where you expect demand to increase for that single building user on Domain 9 etc.? And how did the Time Warner lease, does that preclude you guys from kind of going forward with a redevelopment at Domain Point in the next couple of years?

Yeah, look, I think the Domain is going to continue to do very well. And again, as you think about kind of coming out of the pandemic a submarket that is proven to attract the fastest growing companies in the world and I think that's obviously the location of the Domain. But it's the mix of uses and the amenities, the walkable nature, the buildings are an attractive size for those type of companies. I think you'll see even more coming out of this. Some of those large cap technology companies wanting to control their entire building. And so the size of those buildings works well, the parking ratios work very well. And so we continue to be extraordinarily bullish about the long-term prospects for the Domain. I think while we currently -- we're presently still in, whether they are official or not, the lockdown, which again is appropriate for this point in time, I don't think you're going to see a lot of companies make long-term strategic decisions that weren't already in the queue. And so that could create a pause. But again I think some of the conversations we had with companies that are interested, they are still checking in and making sure somebody is not getting in front of them for some of those opportunities. So that gives us a lot of confidence, those kind of incoming check-in calls, and I think we'll do well at The Domain. The Time Warner lease does not prohibit our long-term redevelopment of Domain Point. That -- the plans there have always revolved around taking down one of the existing parking garages and then expanding that over time with podium style buildings. And so that's still absolutely in play and part of our long-term plans.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Colin Connolly. Please go ahead.

Well, thank you all for joining us on this last day of July and we appreciate your time and interest in Cousins. And if you've got any follow-up questions, please do not hesitate to reach out to the team. If we don't speak to you before NAREIT, we will look forward to catching up with many of you all at that time. Hope everybody has a great weekend.

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