Good morning, ladies and gentlemen, and welcome to the Cousins Properties Fourth Quarter Conference Call. At this time, all lines are in a listen-only mode. Following presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded on Thursday, February 8, 2024. I would now like to turn the conference over to Roper. Please go ahead.

Thank you. Good morning, and welcome to Cousins Properties fourth quarter earnings conference call. With me today are Colin Connolly, 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 the 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 of our 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 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. We had a strong fourth quarter at Cousins. On the earnings front, the team delivered $0.65 per share in FFO and same-property net operating income increased 3.5% on a cash basis. We leased 453,000 square feet during the quarter with a positive cash rent roll up. For the year, we leased approximately 1.7 million square feet with a 5.8% cash rent rollout. New and expansion leases accounted for 52% of our overall leasing activity during the year. Our weighted average in-place gross rent at year-end 2023 was $46.95 per square foot, which is a 25% increase over year-end 2019. These are terrific results. I will start with a few observations on market fundamentals. First, the return to work in lifestyle office properties is accelerating. Our properties are full of professionals whose lifestyle is centered around collaborating in the office with their teams, at least most of the time. As a result, our parking garages are filling up and demand for our space is increasing despite higher professional layoffs. Second, there is little to no customer or capital demand for old and tall CBD towers or suburban commodity properties. Many of these buildings will stagnate until they are repurposed or torn down. The process has already begun. Third, new supply is shutting in. The math for new development just does not work in today's higher interest rate environment. Thus, the supply of office properties across the United States is likely to contract just as demand begins to improve. The same process played out not that long ago in the retail sector. Remember when retail was dead, until it wasn't, market forces are now rebalancing the office market in a similar manner. In our view, a shortage of lifestyle office properties in the Sun Belt…

Thanks, Colin. Good morning, everyone. Our operations team closed out 2023 with another solid quarter. This past year was marked by unprecedented economic uncertainty, so I'm very proud of our team for finishing the year strong. To start, I have an update on WeWork. As a reminder, we have four WeWork locations totaling 169,000 square feet in Atlanta and Charlotte, and they represent 1.1% of our annualized rent at share. While WeWork has not formally rejected any of our leases, we are in active negotiations to modify our leases at Terminus and 120 West Trinity in Atlanta. As of today, we expect the size of both of those locations to be reduced by one-third or about 26,000 square feet at share and for rent to be reduced. Regarding 725 Ponce in Atlanta, due to strong demand from multiple traditional office users, we have decided not to negotiate with WeWork at this location and expect the lease to be rejected. Lastly, we expect WeWork to accept the rail yard lease in Charlotte without modification. As a reminder, we are a 20% owner of 120 West Trinity and we have meaningful letters of credit supporting the leases at both 120 West Trinity and 725 Ponce. I would note our negotiations with WeWork are ongoing and have been very fluid today. On to results. For the fourth quarter, our total office portfolio weighted average occupancy and end-of-period lease percentages were 87.6% and 90.9%, respectively. Both metrics were down modestly sequentially and finished the year at or above where we stood in the first quarter. Our fourth quarter numbers exclude Hayden Ferry I from the operating portfolio as it is now under a full building redevelopment. Hayden Ferry I was previously 100% leased and occupied by Silicon Valley Bank, so its removal was a…

Thanks, Richard. Good morning, everyone. I'll begin my remarks by providing a brief overview of our results as well as some details on our same property performance. Then I'll move on to our development pipeline, followed by a quick discussion of our balance sheet before closing my remarks by providing some color around our initial '24 earnings guidance. As Colin stated upfront, our fourth quarter earnings were solid, and the operating metrics behind them remain strong. Second-generation cash leasing spreads were positive for the 39th straight quarter. That's almost 10 uninterrupted years of rent growth. Leasing velocity remained consistent with pre-COVID levels and same property year-over-year cash NOI increased. It was a very clean quarter. There were no unusual or non-recurring items of note. Subsequent to quarter end, we entered into a floating to fixed interest rate swap on the remaining $200 million of our $400 million term loan maturing in March of 25. The swap fixes so for a 4.67% through the initial maturity date. For the full year, we reported FFO of $2.62 per share. This is up from our original '23 guidance with a midpoint of $2.58 per share, despite a $0.01 per share negative impact from the SVB bankruptcy earlier in the year. This outperformance versus our original forecast was primarily driven at the properties. Full year same property NOI was a solid 4.2% on a cash basis, which was our best performance since 2019. Digging a little deeper into our same-property performance during the fourth quarter, cash NOI increased 3.5% compared to last year. Cash revenues increased 60 basis points, while expenses decreased 4.6%. Consistent with last quarter, these numbers were impacted by property taxes. In addition to our regular appeals of tax assessments, our portfolio also benefited during the second half of the year…

[Operator Instructions] Your first question comes from Jay Poskitt from Evercore ISI. Your line is now open.

I was wondering if you could just be a little more specific on the timing for getting back to that occupancy to 90%. I know you kind of defined it as the intermediate term, but any more color there would be great.

Yes. As we don't provide forward earnings guidance, we're not going to provide forward occupancy, specific forward occupancy guidance. But I think Richard walked through the building blocks of kind of the ins and the outs there. And as I said, we do feel very comfortable over a multiyear process that will drive earnings back up over 90%.

That's helpful. And then just on a more broader view. I was wondering if you could just provide any commentary on your markets, which ones you're most excited about and which ones you're more cautious as we head into '24?

Yes. It -- again, I'd say broadly speaking, the Sun Belt continues to perform very well, specifically looking at our markets and I think where we've seen the strongest leasing activity to date has certainly been here in Atlanta, which benefits from a very diversified customer base. And so we have a lot of great space here, and we've had a lot of success leasing it up. And so a couple of other of our markets of note that have been, I'd say highly active has been the Tampa market continues to perform very well. It's probably the lowest vacancy rate market within our footprint today. And then out in Phoenix, we've got a lot of activity looking at Phoenix today, and I'd attribute some of that to the overall market, but also very specifically to I think what's a really exciting repositioning project we're doing out at Hayden Ferry.

Your next question comes from Blaine Heck from Wells Fargo. Your line is now open.

The commentary on quarter-to-date leasing activity was helpful, but just thinking about your overall leasing pipeline. Can you just talk about how much of the activity you guys are engaged in today is driven by tenants that have lease expirations and are either renewing or relocating at the same square footage or downsizing versus tenants that are either adding demand that's new to the market or expanding within the market and maybe how those proportions might be trending?

Yes, this is Richard. Yes, I'd say if we look back to 2023 as a bit of a proxy, we're still showing that of the customers we renew, they're net expanding rather than contracting, but there's certainly a dynamic that's generally based on industry, maybe tech, a little bit of financial services where there is generally some reduction in space on average when a customer is renewing. But we feel like -- again, overall, we're in an optimistic position in stance when looking at our pipeline and looking at the product we have to lease and that we're actually seeing as well some interesting inbound activity or new to market activity in certain markets. I wouldn't call it robust, full-blown major primary headquarters leasing, though there's a little bit of that brewing, but we are seeing some interesting regional headquarters that are moving into particular markets, whether they be Tampa and Phoenix, as Colin mentioned, also here in Atlanta for certain. But we feel like they're good, good optimistic things happening in the early-stage pipeline.

Very helpful, Richard. And then just my second question. You guys are sitting just above 5x on a debt-to-EBITDA basis right around your kind of targeted long-term leverage goal. Can you just talk about how much dry powder you think you have for opportunistic investments? Where you'd be comfortable bringing that leverage up to you for the right opportunity? And just how much investment capacity that affords you? And also how you think about using equity or OP units in a deal to keep leverage levels down?

Yes, Blaine, it's -- we've got significant capacity. And it -- that leverage, low leverage profile, I think oftentimes is painted with a kind of a defensive posture, and it is defensive and certainly been provided a lot of support over the last several years. But we really do think about our balance sheet and that low leverage from an offensive perspective. And in years past, we've done some of our, I'd say, most interesting transactions in times of dislocation and have moved leverage up, I think, in the past as high as 5.5x or even in the high 5s, but then made it a priority to bring that leverage back down as we could. So today, if the right opportunities come along, we'll certainly take advantage of those. But really, our willingness to do so is going to be a function of opportunities that have got product that fit with our lifestyle office characteristics and are we able to do a transaction that will drive earnings and provide accretion. And so we look at that in totality, and we look at that in terms of what our sources of funding might be, whether that is debt or equity or property sales and think about that holistically, but it's focused on investing in high-quality lifestyle office and doing it in such a way that will provide accretion to our shareholders when stabilized.

Your next question comes from Camille Bonnel from Bank of America. Your line is now open.

Your portfolio has such a wide healthy spread between leased and occupied space. Can you quantify how much of this is commencing in 2024? And from a timing perspective, are the commencements pretty even throughout the year or back half weighted?

Camille, it's Richard. So -- of that $730,000 that I had in my prepared remarks, about 650, a little over that 1,000 or in '24, and that is weighted kind of early 2Q.

Appreciate the details. And the color also on the lower leasing spreads in the fourth quarter. As we look forward, can you provide any details around the mark-to-market across leases rolling over the year?

Camille, it's Colin. The -- as Richard mentioned, the mix this past quarter impacted those leasing spreads. As we look forward over the course of the year. And I guess I'd narrow our focus to the late-stage pipeline that we've got and where we've got very specific visibility and our hope is that we'll continue to drive positive rent rollouts.

Okay. And if I can sneak one more in. Just more broadly in the submarkets where you're seeing positive net absorption. Can you talk to the type of pricing power landlords or yourself have? Is there a possibility for office rents in your market to continue to grow even with the challenges for the industry?

Well, I think today, it is still -- I think the market generally still favors the tenant. But I think when you really narrow your focus down into lifestyle office properties today, as I mentioned, there are a lot of market forces at play. We do see the overall supply of office in the United States coming down in real time and without any meaningful new construction and demand beginning to return, we can see that pendulum swing in the not-too-distant future for the best quality product. And so over -- while today, I think rents are generally flat over the course of the next 12, 24 months. I think that, as I said, I think the market could shift and bring back pricing power to owners of lifestyle office like Cousins.

Your next question comes from Tony Paolone from JPMorgan. Your line is now open

Okay. First one, just for Richard, I just want to clarify, make sure I caught your comments right. So you think occupancy at the end of 2024 in your guidance is better apples-to-apples than where you ended '23. Is that right?

Generally in line.

Okay. All right. And then, Colin, you talked about just playing offense and you have the balance sheet capacity. Can you maybe talk to what you think deals that start to emerge look like economically in terms of where you think maybe either cap rates or IRRs or whether you're going in as a debt investment, like what this might look like as it unfolds?

Yes. Tony, great question. I -- as I've mentioned, we do think the -- we are seeing an increasing amount of interesting opportunities that we think are increasingly becoming more actionable. We've been -- we've been very patient over the last 12, 24 months, and I think will ultimately be rewarded for that patient because I think, ultimately, as we invest the cap rates will be higher and the IRRs will be higher than they were 24 months ago. I think ultimately, how those pencil out, as I said, it's less of a function of a specific cap rate as it is holistically as we look at, again, investing in lifestyle office properties and funding it with the most efficient source of capital that's ultimately going to drive accretion of stabilization for our shareholders. So those metrics, it's hard to specify a specific cap rate that's not really ultimately what's driving -- will drive our investment.

Okay. And if I could just sneak one more in. Just on Neuhoff. I think in the past, you talked about that being product that once completed, can maybe drive a bit more traffic because it's just the nature of it, how unique it is. Just wondering if you can comment on what that looks like now and just if anything shifted either on the demand side in that market or just if there's any competitive supply that's getting in the way?

No. It is the most unique property certainly in Nashville, the adaptive reuse component of it and then the mix of uses with the office, the multifamily and what will be really some compelling retail and food hall right along the banks of the Cumberland River. So we think that, that will continue to drive strong demand, and we're seeing that demand broad-based across all industry types, from professional services, marketing and advertising to legal, financial services. We've seen very broad-based interest. And our -- I'd say, really, our goal is to drive 25,000 to 50,000 square feet of leasing a quarter and ultimately have a really attractive multi-tenant diversified rent roll at Neuhoff to complement the apartments and retail.

Next question comes from John Kim from BMO Capital Markets. Your line is now open.

Colin, on your opening remarks, discussing older commodity assets being repurposed. What are you seeing in your markets as far as what they're being repurposed into? Is it another type of office like medical or lifestyle? Or is it other asset types? And is there any opportunities for Cousins to participate in this?

Yes. John, we are starting to see that actively play out. And it's -- gosh, it's probably every week, you see a media headline about a building that is being either turn down or repurpose. We could cite some very specific examples across our markets. I'd say if I had to characterize it today, you're seeing -- you're seeing more suburban office, commodity office product, be purchased at a very low basis and that product ultimately being torn down to be replaced with multifamily residential and mixed-use type properties. And I'd say the larger, older towers. In some cases, the cost to bring those buildings down is prohibitively expensive. And so there, you're seeing some of those assets trade at very low basis where developers are looking at converting that into either multifamily, some hospitality and combination of both of those, I think from our perspective, we have looked at some. We'll continue to look at some of those and study. But again, I think our focus more broadly speaking, is going to be an asset that we feel have a great deal of conviction that either already are or can be converted into lifestyle office.

Okay. That's helpful. My second question is just a clarification on Domain 4. Is your plan to place this asset into redevelopment once accruent leaves? Or are you looking to execute short-term leases? I think that was mentioned as an option and keep it as is until you form development plans?

Yes. I think we're at a point where we're not ready to make that decision. As Richard mentioned, that accruent lease does expire later this year. There is one other customer in the building that's got an exploration, a year or so later. And so our intention is to definitely not sign any long-term leases in the short term. If we can find customers who want space for a very short specific period, we're absolutely open to that and if we can drive some NOI that way, we'll consider it. But I think we'll kind of continue to wait and see and make a decision on specifically what we do with that asset at a later date.

Your next question comes from Upal Rana from KeyBanc Capital Markets. Your line is now open.

Just on the three leases with WeWork, that you anticipate to reduce or cancel. What are your plans associated to that going forward? Yes, I'd be curious on any color there.

What are our plans on the three WeWork leases?

Yes, with the ones that are going to be reduced and potentially canceled?

Well, again, I think with WeWork, again, there's three of the leases that -- well, one in Charlotte that we don't believe will be modified. It's a very strong performer for them. Two, we are going to modify and those will shrink in space and have you reduced rent. And our hope and our view is those are in -- those two stores are in really strong buildings that we own today. Our customers view them as a nice amenity to have in the building. And our hope is on the other side of the bankruptcy that WeWork emerges as a much stronger company with little to no debt and will be a terrific partner for us in those buildings. In the case of 725, Richard mentioned this earlier, from our perspective, there was just too much demand from traditional office users that were interested in that space to move forward with economics, restructured economics. So we've chosen to pass.

Okay. Got it. That was helpful. And then just on Neuhoff coming online in June, where are rents and concessions there today? And where is the current development yield relative to when you originally started construction?

Yes. The -- Neuhoff continues to perform very well. As we look at the net effect of rents without being specific, I would say that the TIs are higher than we originally expected, but so are the rents. And so the net effect of rents have been effectively flat to date. We'll as we move forward to finalize the project, we'll kind of continue to monitor that and if we have to give more TIs to stabilize that in a faster time line, that's certainly something that we'll consider. But to date, the net effective rents have been effectively flat. The overall development yield, I'd say we certainly have had a -- would be lower than we started the project, and I'd attribute it solely to higher cost of our interest expense. That's a floating rate loan. And obviously, that SOFR has moved. And so the interest expense on that project has been higher than we originally anticipated.

Okay. Great. And if I can squeeze one more in. Richard, you mentioned Austin has been doing -- had some seeing some decent momentum here. Can you elaborate more on that? What's going on in the ground there? And what's really driving some of that momentum?

Well, I guess to clarify that I think I'd call Austin still less active than our other markets at this point. We are seeing positive dynamics as in, I'd say, the sublease listings have stabilized, and that's been a big dynamic in Austin for a little while now. So that, to me, is a nice leading indicator of things starting to potentially stabilize in turn, but it is still more quiet, let's say, than our other markets.

Your next question comes from Dylan Burzinski from Green Street. Your line is now open.

Most of my questions have been asked, but I guess just going back to sort of as you guys are looking at acquisition opportunities, are there certain markets across your footprint that are currently more attractive than others? Whether it’d be because of just a better outlook for supply and demand? Or whether it because pricing has sort of degraded a little bit more?

Dylan, it -- I'd say we'll certainly would pursue opportunities in any of our markets. We've got great confidence in all of them. They're perhaps summer today have more strength than others. Most of that really driven by supply and the time it will take to absorb some of the new supply in certain markets. But I'd say, generally speaking, as a company over time, we would like to see our investment grow in some of the cities beyond -- or to a greater percentage beyond Atlanta and Austin. And so, we certainly have a lot of interest in markets like Charlotte and Nashville and Dallas and Tampa because we'd like to enhance that geographic diversification over time. But that doesn't mean that's a really compelling opportunity emerges in Atlanta or Austin, where we've got great expertise and great platforms. We'll absolutely pursue those. But I'd say over a longer period of time, I would like to see the geographic diversification enhanced just a bit.

Your next question comes from Peter Abramowitz from Jefferies. Your line is now open.

Yes. One of the themes that's been emerging this quarter is either lenders or partners that are pretty willing to take on unfavorable terms just to get out of office and trim their exposure there. So just curious, if you've seen any signs of that in your markets, and what's the role of distress overall in the transaction market right now?

Peter, I appreciate the question. It is -- the answer is yes, we are beginning to see that. I would say there's a couple different trends that are all kind of coming together, which is you are seeing lenders or -- and a lot of investors in real estate, trying to diversify out of their office exposure. And at the same time, you're starting to see catalysts for things to happen in that you've got a significant amount of debt maturities that are starting to occur in 2024. And you also have increased leasing activity, which requires capital to pay tenant improvements and leasing commissions. And so that forces a conversation as who is going to fund that. And so that's all ingredients to create transaction and investment opportunities. And as I mentioned, that's why we've got some confidence that over the course of this year, we're going to begin to see much more actionable investment opportunities for Cousins.

There are no further questions at this time. Mr. Connolly, please proceed with your closing remarks.

Thank you all for joining us today and your continued interest in Cousins Properties. We look forward to hopefully seeing you soon, but please feel free to reach out to our team with any questions in the interim. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.