Good morning, and welcome to the Cousins Properties Second Quarter Conference Call. [Operator Instructions]. Please do note that this event is being recorded. I would now like to turn the conference over to 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 Conley, our President and Chief Executive Officer; Richard Hickson, our Executive Vice President of 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 links on the Investor Relations page or website, cousins.com. 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. 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 potential risks 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. Before providing some observations on the macro environment and trends, I want to provide a quick overview of our second quarter financial highlights. On the earnings front, the team delivered $0.70 per share in FFO. Importantly, we leased 588,000 square feet during the quarter with an 11.6% cash rent roll-up. These are strong results, and we remain encouraged by the leasing pipeline in front of us. Looking at the macro environment, I'll highlight 3 important trends. First, as we all know, unprecedented fiscal and monetary stimulus supply chain disruptions from COVID were in Europe and an extraordinarily tight labor market have created inflation levels not seen in decades. Accordingly, the Federal Reserve has begun tightening financial conditions. The result is higher interest rates and a slowing economy. Not surprisingly, many companies are announcing plans to slow hiring and in some cases, layoffs. Second, the return to office, particularly premier office continues and is likely to accelerate. CEOs are growing frustrated with remote work. Culture, comradery, collaboration are deteriorating. Financial results and stock prices have weakened and attrition is at record levels. At the same time, younger workers and recent college graduates are increasingly looking for an in-person experience. They want to build relationships, they want to be trained, they want to be mentored. They are the future and their employers are listening. Encouragement to return to the office is growing from the top of organizations to the bottom and now from both sides as the job market softens. Let me paraphrase a recent statement from Shopify as they laid off approximately 1,000 employees, "we placed a bet that the channel mix, the share of dollars that travel through e-commerce rather than physical retail would permanently leap ahead by 5 or even 10 years."…

Thanks, Colin, and good morning. Despite the current macroeconomic backdrop, our operations team was able to once again produce solid quarterly results. In particular, our leasing activity this quarter is a clear indication that the quality of our portfolio is resonating well with office users in our Sunbelt markets. Diving right into results. Our total office portfolio lease percentage and weighted average occupancy were 90.1% and 87.5% respectively. Our weighted average occupancy was virtually unchanged quarter-over-quarter increasing 10 basis points. We also saw physical utilization move incrementally higher during the quarter. With regard to leasing, the quarter was outstanding. We executed 52 leases for a total of 588,000 square feet with a weighted average term of 7.9 years. Our volume in square foot terms was up 82% over the first quarter and up 12% relative to our run rate in 2021. The signed lease count this quarter is especially notable and represents our highest quarterly transaction count ever tied with the third quarter of 2016. New and expansion leases represented 45% of total leasing activity this quarter, and our activity was diverse in terms of industry mix with traditional professional services leading the way. Only 18% of our activity this quarter was with customers in the technology sector. Rent growth in the quarter was strong, with second-generation net rents increasing 11.6% on a cash basis. Our portfolio's in-place gross rents also increased yet again to $44.40. In addition to strong rent growth, leasing concessions defined as the sum of free rent and tenant improvements were $6.32 per square foot per year, more than $2 lower than what we posted last quarter and $0.60 lower than in 2021. Despite lower concessions, our net effective rents came in modestly lower compared to last quarter at $23.37, more in line with levels seen…

Thanks, Richard, and good morning, everyone. I'll begin my remarks by providing some detail on our same-property performance in our parking revenues. Then I'll move on to our transaction activity, our capital markets activity and our development pipeline, followed by a quick discussion of our balance sheet before closing my remarks with updated information on our outlook for the balance of 2022. Overall, as Colin stated upfront, second quarter numbers were solid despite the economic volatility and uncertainty. Focusing on same-property performance, cash net operating income decreased 0.2% compared to last year, driven by a 1.6% decrease in revenues and a 4.1% decrease in expenses. These numbers include 2 properties here in Atlanta, 3350 Peachtree and Buckhead and Promina Tower in Midtown that have each had large recent move-outs and are undergoing significant redevelopments as we take advantage of its [indiscernible] to update both properties. Despite this work, we've kept these buildings in our same property pool. Excluding these 2 buildings, same-property cash NOI would have increased 1.9% during the second quarter, a better reflection of the current underlying fundamentals within our portfolio. For the first 6 months of 2022, same-property cash NOI, including 3350 Peachtree and Promina Tower is flat compared to last year. We expect this to improve over the final 6 months of '22 and and we anticipate positive same-property cash NOI growth for the full year. A large driver of this improvement is Amazon's lease commencement on July 1 for our entire Domain 2 property. As a quick reminder, this building has been empty and generating no revenues since the beginning of 2022 as Expedia moved out to consolidate their operations at our newly developed Domain 11 building. Prior to this move out, we signed a lease with Amazon that rolled up the rent and extended…

[Operator Instructions]. Our first question will come from Anthony Powell with Barclays.

You mentioned that you had a pretty diverse set of tenants leasing this quarter. I wanted to focus a bit more on tech. What are you hearing from your current and your tech companies in the pipeline how are they reacting to the current environment? And then given a lot of incremental demand in your markets was driven by tech. What do you think the sort of incremental demand will be in your markets going forward?

Thanks for the question. Again, 18% of our activity this quarter was tech and a large piece of that was the renewal and expansion that I called out in Austin with Cadence Design Systems. And really, you look at our first quarter activity, and tech was a very small piece of our activity then. You have to really look back to 2021 to see significant levels of tech demand in our completed activity. It's very clear. Everybody is reading the headlines and is hearing what the big tech contingent is doing right now. So I think the demand is certainly not showing up in '22, like it was in '21 for us. But at the same time, I'm super encouraged by the fact that we completed close to 600,000 square feet of activity this quarter with very little of that from the tech sector. So I think what we'll continue to see based on our completed activity in our pipeline that I look at today that we'll continue to have strength in the professional services sector, just the good old fashioned legal, accounting, consulting and other miscellaneous business services companies, the demand is encouraging in that area.

Anthony, I'd just add that as you look at our markets like Atlanta and Austin, Charlotte, again, very dynamic cities with very diverse economies. And while tech has been a large driver of growth over the last couple of years, as Richard mentioned, a lot of the traditional users of office space, again, the accounting firms, financial firms, professional services really have not leased a lot of space over the last couple of years and are now returning to the office in greater numbers. And so I do believe there's some kind of pent-up demand in other sectors of the economy.

Got it. And given your comments on development, can you update us on Domain Central. It seems like you're being a bit more cautious for you on development. So is that still potentially going to be started later this year?

Look, as I mentioned, we're -- the bar for new development is higher. And as costs have gone up, those development yields relative to our other alternatives have become less attractive. I would include Domain Point in that commentary. And I think over time, we need to see costs come down and/or rents go up to -- for us to financially justify moving forward. I'm actually optimistic that that's going to happen faster than many believe and again, the flight to quality in the demand for new product, I do think there's an opportunity even if the world becomes more recessionary to see that rebalance again, the flight to quality being so pronounced. But I think it will need a little bit of time for that to get to levels that are attractive.

Our next question will come from Blaine Heck with Wells Fargo.

So Colin, your comments suggest that you guys are delevering and building up dry powder for investment opportunities that you expect to emerge, can you just provide a little bit more color on what you guys are looking for? And how do you think the current stress on the market is going to play out? And maybe where the best opportunities are likely to emerge.

Yes, Blaine, great question. And again, we're -- the balance sheet now stands at about 4.9x debt to EBITDA. So that does give us pretty substantial capacity to take advantage of opportunities that we see. And from our perspective, from spring to here later in the summer, we do think that as debt has become less available and at the same time, has repriced there could be interesting opportunities to acquire high-quality assets in our targeted submarkets at hopefully, advantageous pricing. And so I think we'll be -- continue to be on the hunt and the lookout for those opportunities, which will likely come.

Kind of related to that, you guys have 2 multifamily properties in the portfolio, both currently and JVs. Recently, we've seen a number of your peers diversify away from office into other property types, including multifamily, is that something you guys would ever consider in the future taking on multifamily exposure or exposure to any other property types?

Yes, Blaine, great question. And as you pointed out, we do have quite a bit of experience in the residential sector in a mixed-use context. We are, as I mentioned, committed to premier office and think that, that will differentiate itself over time. But as we continue to see opportunities in our urban submarkets, oftentimes, those opportunities are a mixed use of both office and residential. And so we've executed on those in the past. And I'm confident we'll execute on some of this going forward. And we've got a terrific land bank today that would support projects of that type out of Domain Central, that will be an office and residential project. We've got 2 sites in Charlotte that can accommodate both office and residential Dallas, Midtown Atlanta. So we've got a great land bank of mixed-use land. And when those opportunities arise, we'll no doubt take advantage of them.

Great. That's helpful. Last one for me. Just around the decision to sell the Victory land in Dallas. Is that a mutual decision with you and your partner? I think it was Heinz or -- or was it driven more by the partner in the JV? And then just wanted to get your thoughts on the Dallas market as a whole and kind of your level of commitment to that market, given that you only have 2 operating assets at the moment, and any thoughts on future development there if you are, in fact, still committed to Dallas.

Yes. We're still committed to Dallas, and it's a large, vibrant market in the Sunbelt and we remain focused and disciplined on finding the right opportunities. for us in Dallas. As it relates to the transaction at Victory. As Gregg pointed out, we came to the conclusion that the highest and best use of that site was multifamily. And it was a joint collaborative decision and discussion with Heinz, who ultimately became he was the buyer with a capital partner as they do have a high-rise residential platform. I think for us, as I pointed out earlier, we're absolutely open and willing to invest in multifamily development, but I think it will tend to be in conjunction with a larger mixed-use site. So we felt at that time, it was appropriate in had interest to move forward with the multifamily at an attractive price. And so we felt like the right decision for us was to exit at attractive pricing.

Our next question will come from Jamie Feldman with Bank of America.

So I was just hoping to maybe get more color on just your floating rate debt philosophy or strategy. Can you just break out: a, do you plan to take the number down in the future to avoid these kind of moves in earnings from rates; and secondly, if you were to break out your debt balance by kind of like development redevelopments in process versus kind of what -- just longer-term balance sheet debt? How do you think about that?

Jamie, it's Gregg. So currently, we've got about 30% floating rate debt as a percentage of total debt on our balance sheet. This is a little higher than it normally is. Typically, if you look over the last decade, we've maintained it closer to 20% of total debt. And this was a purposeful decision that we made to provide us with some optionality. As you know and as I stated earlier in the call, we've got about $300 million of debt that matures at the end of this year and the beginning of 2023. And one of the options on the table of refinance that debt was for us to do an inaugural unsecured bond deal. And to do it right, you need more than probably $300 million. And so we built up some balance on our credit facility over the last couple of quarters so that we'd have a use of the full proceeds if we decided to go down that route. Well, clearly, the macro economics have gotten in the way of that, and we're not probably not going to do an unsecured bond deal. So we'll do something else. And there's liquidity in the market for other types of debt, bank term loans, insurance, private placements, and we'll get that refinanced in the next quarter or -- and in the process, we'll lower our floating rate debt down closer to where it has historically been.

Okay. And what's that level? Your target level.

Right around 20%. If you go back and look at our balance sheet over the last decade, it's been very close to about 20% pretty much every quarter.

Okay. And then can you talk more about the guidance risk from asset sales? Like you think numbers may have to come down if you get anything done that you're thinking about.

Well, Jamie, the -- certainly, as we sit today, I'd say there's a lot liquidity in the investment sales market. And over time, that could certainly change. And if that does change, and we see opportunity to sell what we consider to be less relevant and not core to us. We'll take advantage of those opportunities. My hope would be -- again, the balance sheet is very strong. My hope is if we were executing such a sale that we have an attractive use of those proceeds. Again, we can't always time everything perfect, the ins and the outs. But I think philosophically, we're focused on trying to match up sources and uses as best we can.

Yes. Jamie, it's Gregg. I think it's important to note, change. We don't need to sell anything at this point. That would be a choice to sell as we've talked about, with sub-5 net debt-to-EBITDA, the balance sheet is in terrific shape.

Yes. And we do -- as I said, we think interesting acquisition opportunities are going to come along. And there's also a new -- there's also an alternative today. We can look at our own stock if we felt like we had a source of capital from a noncore sale.

All right. That makes sense. And then finally, your comment on pausing on new development until you see better economic conditions. I mean what are you watching for, given it's kind of a 2-year lead time to start to finish on an office project.

Yes. Look, it -- what we're looking for are development yields that are attractive relative to our other alternatives. I think as we sit here point in time today, I want to be very clear that there's good solid leasing demand for new development, but at the same time, we don't want to lock ourselves into escalated construction costs and therefore, compress yields and just build a building to get it out of the ground. We want to build the building, to get out of ground and make an attractive return. And so I do think it's going to rebalance costs, we believe, over the second half of the year are absolutely going to moderate. And I think you'll see some customers push higher on rents to get into new products. And so that will rebalance and what it does. At Cousins, we've got a great land bank, and our hope will be that we're first out of the ground.

Our next question will come from Dave Rodgers with Baird.

Maybe Colin and Richard, this will go to both of you, but you guys usually build toward informed demand down in Austin, and so you're obviously a little bit more cautious there, but you talked earlier about record number of leases, good volume, really encouraged by the leasing pipeline, yet the tone does come across as much more cautious. Obviously, there's a lot of uncertainty. But I guess the question directly is are you guys seeing stuff from your tenants that makes you this much more cautious that this tone coming across that I feel like is much more cautious. Do you -- can you point to things that you're more worried about that you're seeing directly versus just maybe the macroeconomic view?

Again, our caution around development is not informed by leasing or demand. It is informed by construction costs that over really in the last quarter or 2 from our perspective, have materially escalated beyond what we just thought a few quarters ago. And so any cautiousness is really us being disciplined allocators of capital and looking at what those development yields have compressed to with higher costs and believing that there could be other opportunities. But as I mentioned, those costs will moderate, we believe, over the second half of this year and into next year and then perhaps those development yields become more attractive. But the last thing we want to do is lock ourselves into a GMAX at a price that -- and the costs that don't offer an attractive overall financial return. But that's going to change, and we'll be ready to go.

Then maybe just purely on the leasing side. I don't know are there any details you can share that make you cautious there in terms of maybe length of time to close a deal to our activity, anything along those lines that makes you more cautious if we separate out the development component.

Yes. Look, it is -- we're not seeing anything certainly on the ground within our existing leasing pipeline at the moment or any feedback from any of our customers. It's obviously the summer tour activity typically slows a bit in the summer, but there -- we're seeing positive signs again from some broader parts of the economy that had perhaps been on hold over the last couple of years. I would say our tone is -- should be interpreted and very constructive on the market today. but also realistic, as you read kind of headlines and see GDP numbers that if the market were to change, we want to make sure we positioned ourselves well. And as I always say, at Cousins, we are positioned to thrive during all phases of the economic cycle. But no, I mean, nothing that has shown up today, but we do read the same papers that you do every day. And so we're watching that broader headline and macroeconomic data.

Great. Maybe last question, just maybe more specifically on the Anthem and Peachtree Tower. Backlog of activity to kind of backfill that space, timing, any expectation on downtime before you're able to kind of finish up the leasing of those.

We've got activity on both properties. Again, both sit effectively on top of market stations in their respective submarkets. One right here in Buckhead and the other down in Midtown. I think kind of importantly, we are finishing up the renovation of the ground floor and outdoor amenity space of both of those projects. So they're just kind of taking shape. And so we believe our lease-up should begin to accelerate now that we can bring customers into the project and they can experience firsthand as opposed to kind of renderings and drawings that we've been showing them during the first half of the year.

Our next question will come from Vikram Malhotra with Mizuho.

Maybe just first one, you talked a little about development yields and you're pausing and when to see where things shake out. Can you maybe also talk about just where values are in trades you've seen and what that spread may look like between sort of the trophy asset that you called out versus the average product in your market?

Well, again, as it relates to development, again, we remain constructive on demand but cautious on pricing and again, waiting for those to hopefully quickly rebalance. As it relates to pricing, again, there has not been yet a lot of price discovery kind of on the other side, a material change in the rate environment that really occurred or I should say, the debt capital markets for real estate in June. And so you haven't seen really any completed trades yet I do think as it relates to kind of discussion of some deals that are out there today, we're seeing people talk about a 10% change in asset values and could be higher for more value-add type product. But again, the market is still kind of finding its pricing level.

Okay. That's helpful. And then just your -- so comments on just the tech slowdown and now they're seeing an uptick or maybe more still towards financials and professional services. What does that mean for -- if you can maybe just some of your top markets, what does that mean for market rent growth and incentives? And can you translate that into for Cousins specifically, how should we think about the mark-to-market and TI trajectory.

This is Richard. I think that from a mark-to-market and TI perspective and concessions perspective, I'm not sure I see that anything is really going to change with a rotation from technology to more traditional customers. I think the demand levels, again, like we talked about earlier, are still there. And I think that will be the primary driver of general lease economics. So I'm not sure I see a real big sea change or change in the economics that we're going to be able to accomplish in our markets.

Just I meant like softening in demand, how does that translate into both those metrics at the market level versus for Cousins specifically?

Well, Vikram, it's Colin. I would just add, again, we haven't really yet seen kind of that softening again, if the broader economy over the latter half of the year and next year does, certainly, that would have an impact. I don't want to speculate today on what that would look like because we don't know the extent of the softening. But as Richard said, the pipeline today looks pretty solid, and we haven't seen a material change in rents or in concessions.

Okay. And then just last question. You mentioned look at the forward curve in terms of thinking about interest rate impacts to 2023. Would it be fair to say the magnitude which you've adjusted the guide just from the rate impact, the $0.08, I think you mentioned. If we were to annualize that, would that be a reasonable way to think about how much '23 numbers need to come down by just isolating for higher cost, debt costs?

Vikram, it's Gregg. That's a terrific question. So the $0.08 adjustment we made for '22 was clearly not a full year annualized number. And if you were looking at '23, you would use a full year annualized number. However, the current forward LIBOR curve is assuming that short-term rates peak kind of in the first, second quarter of '23 and then come downward. So the increase over the last 3 months to short-term rates in '22 of the 200 basis points I mentioned earlier, is much lower in '23. It's probably closer to 100 basis points. So it's a smaller adjustment upward from what we previously had in, but applied to a longer time period.

Our next question will come from Daniel Ismail with Green Street.

Great. Colin, maybe digging into the construction comments a bit more. The lens you guys sold in Dallas looked at pretty healthy pricing, are you guys seeing any softening on the land side of the equation when it comes to development?

I wouldn't say we have not seen a change yet in land pricing. It tends to sometimes be a little bit sticky. But I would say we have seen, over the last quarter, more land become available. And so we are starting to look at some of those opportunities, but that -- we have not seen a change in that pricing. I would expect likely there to be some change in the price. But I'd say we've seen more of it but not yet at different prices.

Got it. And then you mentioned the ability to be opportunistic given a potential backup in pricing in your balance sheet. I'm just curious on the potential opportunities you all are evaluating, are those mostly coming up as a function of higher rates? Or is there any, say, specific tenant issues in those potential acquisition opportunities you guys are evaluating?

I wouldn't say that any have been tenant-driven. But I think you've seen some instances for whatever reason, different funds, perhaps have cues, trying to find liquidity and with less debt available, they're smaller buyer pools. And so I think that could create some interesting opportunities for us given we could be a cash buyer. And I think we'll continue to focus our efforts on opportunities that a trophy quality premier office that we think over the long term will generate outsized demand. And so I think that will be our focus on that quality of properties. And I do think there'll be some opportunities. And then hopefully, at some point down the road, the development market will rebalance and we'll pivot to development opportunities like we have in the past. And so we continue to be kind of agnostic allocators of capital and willing to pivot between acquisitions and development and again, focus on whichever provides the most compelling return.

And then just last one for me. I asked about Life Science on the last call. But now there's confirmation the largest life science owner in the country is developing in Austin, just curious, updated thoughts on potential expansion in that submarket sector and any potential acquisition opportunities within the life science on the horizon for Cousins.

Yes. Again, we're obviously taking note and seeing that life science activity in Austin. We're actually also seeing an uptick in that activity in Atlanta, but again, we're open to a mix of use. And as I mentioned, have have been active in the residential sector, and I think we'll be active in the residential sector going forward in the context of an urban mixed-use projects, we'll evaluate and understand the life science market. I think today, we likely -- I think we lack the expertise, but it's something that we'll get smart on over time and perhaps there could be opportunities to partner with groups and we could offer some local market experience. But given our lack of experience in history of life science, I think it's a lower priority for us.

Our next question is a follow-up from Blaine Heck with Wells Fargo.

Colin, you've mentioned repurchases a few times as a potential investment given where your implied cap rate is. Can you just remind us if you have a repurchase program in place? And if so, what capacity for buybacks at this point? And I guess where does that option rank at this point in your preference for capital deployment?

Ben, it's Gregg. I'll start with the first part of the question. I'll let Colin answer the second part. We do not have a share repurchase program in place. But as you know, it's a very simple program to put in place, Board approval and a few days of set up. And within a week, you could have it in place. So it's not complicated, it's not time consuming. And so when we identify a potential source of capital, and share repurchase emerges is the most compelling use of that capital we can put in place very quickly.

Yes. Blaine, I don't have a lot to add to Gregg's comments. Again, as we if we're able to generate sources of capital, we along with our door, sit down and look at the strategic and financial merits of acquisitions, development and/or share repurchases, and we have done that in the past. We have executed on all 3 -- and again, I think today, where our share price is, that's certainly going to be part of the conversation, and it will be dependent on, again, the source of capital at the time and what those uses are in front of us and we'll try to be dispassionate agnostic investors and focus on the right opportunities to drive value for shareholders.

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

Thank you all for joining us today and your continued interest in Cousins Properties. Please feel free to reach out to myself, Gregg Adzema, Roni Imbeaux, if you have any further or follow-up questions. Thank you all very much. Have a great weekend.

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