Cousins Properties - Q2 2023

Transcript

Operator (participant)

Good day. Welcome to Cousins Properties second quarter conference call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. Today's presentation will be opportunity to ask questions. Note that this event is being recorded. Now, I'd like to turn the call over to Ms. Pamela Roper, General Counsel. Please go ahead.

Pamela Roper (General Counsel)

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 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 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 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 the potential risks is contained in our filings with the SEC. With that, I'll turn the call over to Colin Connolly.

Colin Connolly (President and CEO)

Thank you, Pam. Good morning, everyone. We had a strong second quarter at Cousins. On the earnings front, the team delivered $0.68 per share in FFO. Same-property net operating income increased 3.7% on a cash basis. We leased 435,000 sq ft during the quarter, with a 7.9% cash rent rollout. New leases and expansions totaled 343,000 sq ft, representing 79% of total leasing activity. These are terrific results. I will start with a few observations on the macro environment. The Federal Reserve has rapidly raised interest rates to fight inflation. As a result, the economy is moderating and financial conditions have tightened. Real estate debt is less available and significantly more expensive. A meaningful bid-ask spread has frozen the investment sales market. None of this should be a surprise.

This is all typical behavior in a tightening cycle. Over the short term, the macro narrative for the office sector is likely to get worse before it gets better. The media will highlight rising vacancy rates and accelerating loan defaults. This reporting will not be wrong. However, this news will not be all that relevant to Cousins. Why do I say this? Because as they say, where you invest matters. At Cousins, we own a fantastic collection of lifestyle office properties located in vibrant Sun Belt neighborhoods with terrific amenities. Our assets are entirely differentiated from traditional office in older downtowns and nondescript suburban locations. Importantly, we are seeing green shoots in our portfolio. I'll highlight the trends. First, the return to work is accelerating in our properties. As it turns out, lifestyle office properties are occupied by ambitious professionals who value an in-person experience, with maybe the Friday exception.

Collaboration, mentorship, and serendipitous encounters are key to advancing their careers. Come visit one of our properties and you will see a very different story than the next Kastle headline. Importantly, as the return to work process plays out, we have seen instances where our customers realize that they do not have enough space to support the hiring of the past several years. Richard will touch on an exciting example of this at our Domain 8 property in Austin this quarter. Second, the flight to quality is becoming more pronounced. The net absorption and vacancy numbers prove this out. To illustrate, according to JLL, 75% of the vacancy in Atlanta is in just 20% of the inventory. That statistic is probably eye-opening to some. Third, the flight to capital is increasingly more important. Historically, landlords evaluated the credit of prospective customers. Today, it goes both ways.

Prospective customers and their brokers are now evaluating the credit of their landlords. Not surprising, owners with sound capital structures, like Cousins, that can fund leasing costs and invest in their properties, are growing market share. Fourth, there is little to no capital availability for older vintage, lower-quality office properties or for speculative new development. What are the implications for the office sector? It is not a one-size-fits-all answer. The lowest quality, traditional offices in uninspiring locations are emptying and will stagnate until they are repurposed or torn down. At the same time, lifestyle office is filling up, and it will thrive. As I said last quarter, the office is not dead. Obsolete office is dead. The market and the media continues to underappreciate this. We believe that there is great opportunity for investors who do. What are the implications for Cousins?

Silver linings are taking shape for our Sun Belt trophy portfolio. Our customers are returning in greater force. Accelerated obsolescence is reducing competition. The pipeline of new construction is shrinking. Demand remains firmly focused on the best lifestyle properties in the best submarkets. Just yesterday, JLL announced that the inventory of U.S. office space is on track to shrink in 2023 for the first time on record. Supply and demand are rebalancing. We believe this process will lead to tightening market conditions for lifestyle office. These are clearly positive tailwinds for Cousins. In closing, we are mindful of the potential impact of higher interest rates in an economy that could slow. However, we built Cousins to thrive during all phases of the economic cycle. Today, we are in an advantageous position. We operate in leading innovation, growth-oriented markets.

We own a trophy portfolio of lifestyle office properties with modest near-term lease expirations. We have a fortress balance sheet with minimal near-term debt maturities, and we have a well-covered dividend. Importantly, we have significant liquidity and capacity to pursue compelling new investments in a dislocated market when many peers now lack capital to compete. However, the downward repricing of assets in the private market is still playing out. Thus, we will remain patient, disciplined, and continue to prioritize driving cash flow and maintaining a strong balance sheet. We are watching closely for new opportunities, though, and we will be ready when it is time. Before turning the call over to Richard, I want to thank our employees at Cousins, who provide excellent service to our customers. Their dedication, resilience, and hard work continues to propel us forward. Thank you. Richard?

Richard Hickson (EVP of Operations)

Thanks, Colin Connolly. Companies spanning all sizes, industries, and geographies are now decidedly bringing employees back to the office for more frequent in-person work, and our encouraging second quarter operational results are reflective of that positive trend. Before reviewing results, I want to provide an update on the bankruptcy of SVB Financial Group, the entity on our 205,000 sq ft lease at Hayden Ferry 1 in Phoenix. We have considerably more clarity on the situation now, as the bankruptcy court has approved SVB's rejection of our lease with a targeted expiration date of no later than September 30th, 2023. Upon SVB's move-out, we plan to remove Hayden Ferry 1 from operations in connection with the redevelopment of the overall Hayden Ferry project.

We believe this redevelopment will redefine the standard of quality in the Tempe submarket and are excited about the opportunity to backfill Hayden Ferry 1, especially given SVB's average expiring rent is below market. Gregg will walk through the financial details around this situation in his remarks. On to operating results. Our total office portfolio weighted average occupancy increased 0.5% this quarter to 87.7%, and our end-of-period lease percentage remained unchanged at 90.8%. Our largest percent increases in occupancy were in Phoenix and Houston, though nearly every one of our markets saw some level of improvement. Looking forward, we still expect to maintain occupancy through 2023, absent our Hayden Ferry 1 and Promenade Central redevelopment projects.

We are also hopeful we can begin to build occupancy during 2024, subject to the timing of the commencement of new leasing activity. In the second quarter, we executed a solid 40 office leases, totaling 435,000 sq ft, with a weighted average lease term of seven years. This quarter's volume was a significant increase compared to the first quarter. Notable is that new and expansion leasing volume this quarter accounted for 79% of our total activity, a level not seen since 2021. Average net rent was exceptionally strong this quarter at $38.65, the second highest quarterly level in the company's history.

In addition, average leasing concessions, defined as the sum of free rent and tenant improvements, moderated relative to the last couple of quarters, coming in just below what we reported for the full year of 2022. The lower concessions this quarter were principally aided by the previously disclosed 102,000 sq ft expansion of a large, publicly traded technology company at Domain 8 in Austin, which was completed on an as-is basis with no tenant improvement allowance and no downtime. As Colin mentioned, this is an example of a company that concluded that they simply did not have enough space to accommodate the hiring they did over the past several years. Nevertheless, with record-breaking net rents and lower concessions, our average net effective rents this quarter were also exceptionally strong at $28.20.

Again, the second highest quarterly level in the company's history. I would note that even when excluding the large as-is expansion in Austin, our average net effective rents were impressive, with only one quarter screening better since the start of the pandemic. Healthy second-generation net rent growth also continued this quarter, coming in at 7.9% on a cash basis. Our late-stage leasing pipeline, consisting of leases in negotiation, has backfilled nicely as we converted leases to sign during the quarter and currently stands at 620,000 sq ft. As a reminder, our late-stage pipeline is still almost double what it was in the beginning of 2023. We are also pleased with the momentum in our medium and early-stage pipelines, with overall tour activity up relative to last quarter.

One particularly important area of positive leasing momentum is at our Neuhoff mixed-use development in Nashville. This quarter, we completed our first two office leases at Neuhoff, totaling just under 50,000 sq ft, bringing the office and retail component of this project to 11% leased. The bulk of this newly leased space is expected to commence in mid-2024, although about 7,000 sq ft should commence in the fourth quarter of this year. We remain pleased with our growing list of prospective office and retail customers, with over 150,000 sq ft of active proposals outstanding as of today. We are optimistic that we will convert several of those to lease negotiations in the weeks ahead. The creative and unique nature of this project is coming into full view, and it is resonating with prospects.

As we look across the Sun Belt, we continue to see firsthand in our portfolio that the highest quality office buildings that provide its occupants with a superior work lifestyle continue to strongly outperform the broader market. Cushman & Wakefield has recently noted vacancy in office assets built in the past 10 years in prime locations, with plentiful amenities and services, is more than 500 basis points below the overall average, and asking rents are 34% higher. While interest rate hikes and economic uncertainty persist, our Sun Belt market should continue to outperform. For instance, according to Oxford Economics, Austin ranks number one nationally for projected job growth through 2027. In our Austin portfolio, we signed eight leases totaling 161,000 sq ft this quarter, including the sizable technology company expansion in the Domain that I mentioned earlier.

I would note that our late-stage pipeline in Austin has moderated over the course of the summer. At the end of the second quarter, our Austin portfolio was 94.4% leased, with relatively little availability to lease and no material near-term expirations, and enjoys 5.9 years of weighted average lease term. Our Austin portfolio is very well positioned to weather any near-term cyclical challenges. In Atlanta, leasing activity remains resilient, with JLL reporting that quarterly leasing activity remained positive at over 1.3 million sq ft, with the average deal size 23% larger than in the first quarter. Also notable was that while net absorption in the Atlanta office market was negative this quarter, a sizable portion of it was driven by AT&T's known move-out at the Lenox Park campus in Buckhead.

However, AT&T has since re-leased a 120,000 sq ft building at that project as they implement new return-to-office policies. In our Atlanta portfolio, we signed 21 leases totaling 147,000 sq ft this quarter, with most of the activity in Midtown and Buckhead. Our recently redeveloped Promenade Campus in Midtown, which includes Promenade Tower and Promenade Central, continued to see outsized activity, with over 180,000 sq ft of leases signed so far this year. As a quick reminder, the renewal of our largest 2023 expiring customer, aside from SVB, and about 120,000 sq ft in Buckhead, has still not been signed, but it does remain on track. As we look forward, we are encouraged by our second quarter results amid an uncertain economic environment.

It remains clear that regardless of which data or methods you use to track physical utilization, more people are back in the office more often. Cousins remains well positioned to outperform going forward with exceptionally high-quality properties in the best Sun Belt markets, a strong and diversified customer base, and an extremely attractive near-term lease expiration profile, with only 18.6% of annual contractual rent expiring through the end of 2025. Before handing it off to Greg, I want to thank our best-in-class operations team for all they do. The team's level of excellence and dedication to our customers is evident across the entire Cousins portfolio. Greg?

Gregg Adzema (CFO)

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 and our parking revenues. I'll move on to our capital markets activity and our development pipeline, followed by a quick discussion of our balance sheet before closing my remarks with an update on our earnings outlook for the balance of 2023. Overall, as Collins stated up front, our second quarter earnings were solid and operating economics behind them were encouraging. Second-generation cash leasing spreads were positive for the 34th straight quarter. Leasing velocity was strong, and same property year-over-year cash NOI increased. There were two unusual items during the second quarter that I'd like to highlight for just a minute. First, we recognized $6.6 million in termination fees during the quarter.

Two customers, LiveRamp at our 100 Mill property in Tempe, and Meta at our Domain 8 property in Austin, comprised over 95% of these fees. Both move-outs were initiated by us, both have been fully backfilled at equal or higher rents and extended lease terms. Both transactions were also previously disclosed. I talked about the LiveRamp fee on last quarter's earnings call, and we provided details on the Meta fee in the 8-K we filed in early June. Second, as Richard discussed earlier, in connection with their ongoing bankruptcy case, SVB Financial has rejected their lease at our Hayden Ferry property with an effective date no later than September 30th. As a result, we recognized a $1.6 million reduction in revenues during the quarter related to the write down of net assets associated with this lease, primarily straight line rent.

Focusing on same property performance for a moment, GAAP NOI increased 6.3%, and cash NOI increased 3.7% during the second quarter compared to last year. This continues a string of improvements that began in early 2022, with the most recent quarterly gains largely driven by increased occupancy at our Buckhead Plaza, Colorado Tower, and Domain 2 properties. As Richard also discussed, we're going to take Hayden Ferry 1 offline and reposition it once SVB moves out. As a result, we have removed Hayden Ferry 1 from our same property pool. This building is part of a three-building campus, and we've left in both of the other Hayden Ferry properties.

If we had included Hayden Ferry 1 in our second quarter same property results, year-over-year cash NOI growth would have increased from 3.7%-3.8%. Among our markets, Austin remains the strongest based on same property performance. Over the last five quarters, same property cash NOI growth has averaged 8.5% in Austin, and the trend is moving upward. First quarter growth was 9.9%, and second quarter growth was 11.8%. As Colin mentioned earlier, physical utilization at our properties has continued to increase, and our parking revenues have grown along with it. Parking revenues during the second quarter increased over 6% compared to the prior quarter and were the highest they have been since the first quarter of 2020, just prior to the COVID pandemic.

Turning to our capital markets activity, we completed two previously announced transactions during the second quarter. First, we closed the refinancing of our medical offices at Emory Hospital property in Atlanta, which is owned in a 50/50 joint venture with Emory University. The new mortgage matures in June 2032, and has a fixed interest rate of 4.8%. Second, we entered into a floating to fixed interest rate swap on $200 million of our outstanding $400 million term loan that matures in March 2025, fixing the underlying daily SOFR rate at approximately 4.3% through maturity. Looking at our development efforts, our current development pipeline is comprised of a 50% interest in Neuhoff in Nashville and a 100% interest of Domain 9 in Austin.

Our share of the remaining development costs is $107 million, $72 million of which will be funded by our Neuhoff construction loan, leaving only $35 million to be funded by our operating cash flow as these projects are completed. Looking at our balance sheet, net debt to EBITDA is an industry-leading 4.9x. Our liquidity position remains strong, with only $148.5 million outstanding on our $1 billion unsecured credit facility. Our debt maturity schedule is well-laddered, with no remaining maturities in 2023. Looking at 2024 and beyond, our debt maturity schedule is three pieces of debt with extension options. First, we have a $350 million term loan with an initial maturity in August 2024, that has four six-month extension options.

Second, we have a $400 million term loan with an initial maturity in March of 2025, that also has four six-month extension options. Third, our Neuhoff construction loan has an initial maturity in September of 2025 and has a single 1-year extension option. When taking all these three extensions into account, our next significant debt maturity is not until July of 2025. Our debt maturity schedule is laid out, including all extension options on page 28 of our financial supplement. I'll close by updating our 2023 earnings guidance. We currently anticipate full year 2023 FFO between $2.57 and $2.65 per share, with a midpoint of $2.61 per share.

This is up from our previous midpoint of $2.60 per share. It represents the 2nd quarter in a row that we've increased the midpoint of our guidance. No property acquisitions, property dispositions, or development starts are included in this guidance. The increase is primarily driven by two items. First, as I outlined earlier in the call, SVB Financial has formally rejected their lease at Hayden Ferry. Their rejection has an effective date of no later than September 30th. As of today, SVB is current on the financial obligations of their lease. They have paid July rent. They've paid August rent in full. Indications are that they will pay September rent as well. This is the assumption we have used in our earnings guidance. It is an improvement over our previous assumption of a June 30th effective date.

As before, our earnings guidance does not include payment of any portion of our unsecured claim in the SVB Financial bankruptcy case, which we currently estimate to be approximately $9.3 million, up from our earlier estimate of $8.8 million. The amount and timing of recovery against this claim is not yet known, unsecured SVB Financial bonds are currently trading between $0.70 and $0.75 on the dollar, we anticipate there will be significant value in this claim. The second component of our increased guidance is higher than budgeted parking income, driven by a continued return to the office.

Parking revenues have consistently exceeded our expectations in 2023, and they remain a reliable indicator of the physical utilization within our portfolio. Bottom line, our second quarter results were solid. Our strong leverage and liquidity position remains intact, and we're raising FFO guidance. With that, I'll turn it back over to the operator.

Operator (participant)

Thank you. We'll now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble the roster. First question will be from Blaine Heck, Wells Fargo. Please go ahead.

Blaine Heck (Executive Director, Senior Equity Research Analyst)

Great. Thanks. Good morning. Colin, your commentary over the past few quarters is focused on building up dry powder for investment opportunities that you expect to emerge. Can you just kind of provide some more color on whether deals are emerging that you find interesting, how you think the current stress on the market is going to play out, and, and maybe where the best opportunities are likely to emerge?

Colin Connolly (President and CEO)

Yeah, good morning, Blaine. We continue to highlight, we do have significant dry powder and capacity to pursue new investment opportunities. As I mentioned in my prepared remarks, you know, while I'd say a significant repricing has played out in the public markets and perhaps, you know, too, a bit too much, on the private market, that process is still playing out, and still there's downward pressure on repricing. We're finding that private sellers, you know, are not yet willing to accept probably where market clearing pricing is today, unless they absolutely have to. But we have not seen kind of that pressure fully applied.

But as interest rates continue to stay higher for longer, we do think in time that will force some opportunities, you know, hopefully in the not-too-distant future, but there's a bid-ask spread today. I think in the interim, perhaps where we might see some interesting opportunities, is on the debt side, whether that's in mortgage debt or, you know, preferred equity. I think there, the bid-ask spread is a bit less relevant, and we are starting to see some situations there as owners or developers of new construction try to refinance their existing construction loans. We're hard at work.

Kennedy Hicks, our Chief Investment Officer, and her team are, are, are hard at work and in a lot of conversations. As I said, we continue to be kind of patient and thoughtful and wait for the right pitch, but we'll be ready.

Blaine Heck (Executive Director, Senior Equity Research Analyst)

Great, that's really helpful. Just related to that, there's been some speculation. I guess, can you talk about your appetite for investing outside of your traditional Sun Belt markets? Specifically, touch on whether anything on the West Coast would be attractive and, and whether a move like that or, you know, to any additional market for that matter, would, would need to be done with a larger investment in a portfolio, or, or would you consider single assets?

Colin Connolly (President and CEO)

Look, again, at the moment, we do not feel opportunity constrained at all in our existing Sun Belt markets. The growth profile in our existing markets, the migration trends have all continued to provide positive tailwinds for Cousins. Again, I think we're gonna see some meaningful, meaningful opportunities. I do think there's a certain sense that, you know, quality is incredibly important to the future of office. We're certainly mindful, perhaps, at some of the repricing that has taken place outside of our existing markets. You know, we certainly pay attention to that and evaluate.

Again, I think the current priority for, for us, is, is to focus on our, our Sun Belt markets, where we've got great platforms and, and a real competitive advantage. We're opportunistic, and so as I said, if there's instances where kind of the intersection of price, and quality, intersect, we'll look at those for shareholders and, and try to make decisions that, that ultimately drive value for, for our investor base.

Blaine Heck (Executive Director, Senior Equity Research Analyst)

Great. Thanks, Colin.

Colin Connolly (President and CEO)

Yep.

Operator (participant)

Thank you. Next question will be from Nick Thillman of Baird. Please go ahead.

Nick Thillman (Senior Research Analyst)

Hey, good morning, guys. Thanks for the update on the late-stage pipeline. Just wondering if we could get a little bit more color on just the breakout between new and expansion leases and renewals, and then kind of where the markets, where you're seeing the most activity?

Richard Hickson (EVP of Operations)

Sure, Nick, this is Richard. We do have more, more activity on the renewal side in the late-stage pipeline than, than we had in our completed activity this quarter. Frankly, that's, that's a result of being really focused on taking care of, of expirations that may not be directly in front of us and being proactive. Again, the new and expansion activity is still, still encouraging. In terms of the late-stage pipeline kind of breakout among the markets, we're seeing continued strength in Atlanta. It's been a very strong market for us over the number of quarters from a volume perspective. Interestingly, Tampa and Phoenix are very active.

Nick Thillman (Senior Research Analyst)

That's helpful. Then maybe just on Neuhoff, sounds like a little bit pickup and demand there. Of like the 150,000 sq ft of active proposals, what's like the average space size people are looking there?

Richard Hickson (EVP of Operations)

I'd say it's a little around probably 25,000 sq ft on average. It's fairly consistent with what we completed to date.

Nick Thillman (Senior Research Analyst)

Then just quick cleanup question: Of the 700,000 sq ft expiring, that's inclusive of the SVB termination, correct?

Richard Hickson (EVP of Operations)

Yeah, for 2023, what we're showing includes SVB.

Nick Thillman (Senior Research Analyst)

Okay. Thanks.

Richard Hickson (EVP of Operations)

Sure.

Operator (participant)

Thank you. Next question will be from Anthony Powell, Barclays. Please go ahead.

Anthony Powell (Director, Equity Research)

Hi, good morning. Question on AI and office leasing. There's been some, like, speculation that we're starting to see some venture capital on AI-related leasing in San Francisco. Is that something you've seen in Austin, or do you expect that in Austin going forward?

Colin Connolly (President and CEO)

I think in time you'll see, you know, AI as this powerful, you know, part of the economy that many expect. I think in time, you'll see that activity play out in, you know, strong tech hubs like Atlanta and like Austin. I think in the here and now, I think the predominance of that activity is likely in San Francisco. But again, like the technology sector has migrated over time, we would anticipate in the future to see some of that demand.

Anthony Powell (Director, Equity Research)

Thanks. Maybe on parking fees. How have the actual fee levels changed since-- over the pandemic? Is there an opportunity to maybe increase those fees as people start coming back to work more often?

Colin Connolly (President and CEO)

Could, could you repeat the question? I had trouble hearing.

Anthony Powell (Director, Equity Research)

Yeah, just on, on, on parking fees. I, I know the parking revenue was a source of upside in the quarter. I'm just curious about the actual fees and if you can increase those over time as more people come back to work.

Richard Hickson (EVP of Operations)

That's a, that's a great question. The answer is yes, we have been able to and have, have been proactive about raising, where we can, parking rates through the pandemic. It's been, I wouldn't call it broad-based, but there have been opportunities. At the same time, we do have some constraints in our leases as to how much we can raise them any given year or how often. A lot of times those, those rate increases will only apply to transient parking generally.

Anthony Powell (Director, Equity Research)

Okay, great. Thank you.

Operator (participant)

From John Kim, BMO Capital Markets. Please go ahead.

Regan Sweeney (Equity Research Senior Associate)

Hi, good morning. This is Regan Sweeney on with John. You highlighted some strong leasing in Atlanta. Alternatively, in this market, there have been some reports related to NCR Corp. listing its space for sublease. Can you just comment on if you're working with them on marketing this space, and then the ultimate potential mark-to-market of their current space?

Colin Connolly (President and CEO)

Good morning, it's, it's Colin. You know, N-NCR is in the process of, of splitting the company into two separately publicly traded companies, one, one a software company and one the ATM and, and hardware component. As a part of that corporate restructuring, they, they have put on the sublease market the smaller of the two buildings in, in that Midtown, Atlanta urban campus, and that's approximately 250,000 sq ft. We've had active discussions with NCR as they attempt to move forward with that sublease.

We do have quite a bit of a term left on, on that lease, so if there's an opportunity for them to bring in a subtenant, if they were interested in going direct, if the economics work for us and our shareholders, we'd absolutely consider that and to work with NCR in that future prospect. The economics would, again, have to make sense. We do believe that that rent is below market today.

Again, I think it, it's an opportunity, and, and over time, we think it could be a great outcome for, for our shareholders in the sense of, you know, similar to what we've done at 300 Colorado in Austin, where we could effectively multi-tenant a really terrific, you know, trophy building in Midtown while we continue to collect rent from, from NCR.

Regan Sweeney (Equity Research Senior Associate)

Thank you. I appreciate the color. Just one follow-up question on Neuhoff. Has there been any impact to the leasing there due to Oracle's delayed HQ opening? Is there any expected shift in the tenant pipes going forward with who you're currently trading paper with?

Colin Connolly (President and CEO)

Yeah, there, there really the, the Oracle delay in, in kind of building out their campus, again, that's, that's across the river from us and, and would really be kind of new jobs into Nashville. As given kind of coming out of the pandemic, you know, that, that has, has slowed a bit. They, they, they are still planning to move forward with building the bridge across the river from, from their project to, to Neuhoff. It, it has not impacted us at all. Again, that's gonna be, you know, a 100% kind of user owner-occupied building with, with Oracle. We continue to see really positive demand at, at, at Neuhoff.

Nashville is a market that continues to benefit from, from in-migration, and Neuhoff is, is by, by, without question, the, the most differentiated product that, that exists in, in Nashville today.

Regan Sweeney (Equity Research Senior Associate)

Thank you very much.

Colin Connolly (President and CEO)

Thank you.

Operator (participant)

Our next question will be from Jay Poskitt of Evercore. Please go ahead.

Jay Poskitt (Equity Research Associate)

Hey, thanks. Good morning. I was wondering if you could just provide a little bit more of a breakdown, just in tenant type and tenant size, just in that leasing pipeline, and kind of how that breakdown has changed throughout the year?

Richard Hickson (EVP of Operations)

Sure. This is, this is Richard. I, I, I honestly don't see that this changed all that much. Again, I, I would comment similar to what I said earlier, we do have some renewal activity in our late-stage pipeline that is a little bit larger, as we look forward to some, some of our expirations, you know, next year and, and even a little further out. Generally speaking, I think we've been fairly consistent on, on average transaction size.

Jay Poskitt (Equity Research Associate)

Okay, that's great. Thanks. Then just on the expiration front, do you have any update on-- I know you have a larger lease expiration, I believe, in the fourth quarter. Do you have any update on that as well?

Richard Hickson (EVP of Operations)

In terms of larger lease expirations, we have SVB, which we've already covered, is now a new 2023 expiration. I gave a quick update on the other expiration that has been pending and in lease negotiations. That's on track here in Atlanta. We don't have any other large expirations until the latter half of 2024. We have about a 100,000 sq ft customer at Domain 4 in Austin that expires in August of next year.

We're actually having dialogue right now with them, but like we've mentioned in the past, that property is a low-rise, it's creative office, really good product and interesting product for the right user, but could be more compelling for us over time as a, as a development site. Time will tell what we end up doing there, but, but a full renewal may not necessarily be the right option for Cousins. We also have a 113,000 sq ft customer expiring at the very end of 2024 at Hayden Ferry 2 in Phoenix. We are in advanced discussions with them right now about a partial renewal.

Jay Poskitt (Equity Research Associate)

That's great. Thank you.

Operator (participant)

Next question will be from Camille Bonnel of Bank of America. Please go ahead.

Camille Bonnel (REIT Analyst)

Hello. In our Austin channel checks, we've been hearing that the tech is not very active, and there are really no large tenants in the market. Yet, as you highlighted at Domain 8, and also the news of TikTok taking back sublease space in one of your buildings, I was just hoping to get a little bit more color on the Austin market, given your comments of the moderating demand. Do you think this moderation is driven by a summer lull, or are you expecting it to continue throughout the year?

Colin Connolly (President and CEO)

Yeah, good morning, Camille. You know, broadly speaking, we've seen a bit of a pause in, in tech leasing, not just in Austin, but, but really, you know, around the country. That, that shouldn't really come as a surprise as you look at kind of the latter half of last year and into this year, where, you know, a lot of those businesses were retrenching, you know, preaching years of efficiency. As a part of that, you know, typically real estate decisions, you know, get, get delayed. Though, over the course of this year, you've started to see, you know, some of those businesses tick back up. You're seeing their equity valuations do a whole lot better, and we are starting to see some signs of, of, of tech kind of reemerging.

You touched on the 100,000 sq ft lease that we did with one of the largest tech companies in the world at Domain, Domain 8, and we're seeing kind of other, you know, smaller examples, full floor type examples, of large tech users across our portfolio, in particular here in Atlanta. You know, as we look at Austin over the next several years, you know, demand is over the medium and long term, is really never something that we worry too much about in Austin. It will continue to attract businesses from different parts of the country. Their economic development arm is hard at work, and we have several potential large relocations, circling Austin. Any slowdown in demand, I think, will be short-lived in, in Austin.

The, the, the challenge for the city over the next year or two will just be, there's a good amount of supply. You know, perhaps folks got out in front of themselves, but, but I think as demand returns, we're confident that, that will, that will rebalance and, and fill up. For us, you know, as Richard pointed out, our portfolio is 90, almost 94.5% leased, with, you know, just about six years of weighted average lease term. And really, other than the one customer out at the Domain, that, that really potentially is in a land site, we have no material expirations over the next couple of years. If the market softens, we plan to, you know, candidly be on the sideline.

Camille Bonnel (REIT Analyst)

Appreciate the color. You've talked about driving occupancy as the key priority right now, but could you expand on the rent change dynamics you're seeing and put that into perspective with what's going on with market rents?

Colin Connolly (President and CEO)

Well, I'd say, again, as Richard pointed out, you know, earlier, when you look at our net effective rents over the last year, you know, compared to 2019, our overall net effective rents continue to track meaningfully upwards. You know, at this point, I'd say, right, the market is very much bifurcated, and if you're in traditional office, you're, you're very much, you know, an order taker. Within our portfolio, while we've seen, you know, leasing costs go up, both in the form of, you know, perhaps slight uptick in free rent and a, and a larger uptick in tenant improvement allowances, we've been able to more than offset that with driving rental rates. As we look forward, we're, we're, we're optimistic that we can continue to maintain base rates.

Camille Bonnel (REIT Analyst)

Thank you.

Colin Connolly (President and CEO)

Thanks, Camille.

Operator (participant)

Two. Question will be from Georgi Dinkov of Mizuho. Please go ahead.

Georgi Dinkov (Equity Research Associate)

Hi. Thank you for taking my question. I was just wondering, can you share more examples of tenants that, you know, need more space as employees return to work?

Colin Connolly (President and CEO)

It is, again, I, I think we're, you know, in conversations, you know, with folks. As I, as I mentioned earlier, there, there's, there's several existing tech companies within our portfolio that perhaps have 25, 000 sq ft or 50,000 sq ft, that over the last quarter or so have, have inquired about, you know, additional full floor leasing activity. Again, I think that's been a very positive sign for us. But you are starting to again see some larger users out there, not, not just in our portfolio, but, but across our markets and, and beyond. The AT&T, you know, coming back in for a large space that they had recently given up. We've seen some reports out of Snap on the West Coast, who've given back space and now is releasing space.

It's still in the early part, you know, early innings of that, but it's great to see some of that, that activity taking place. It's not just tech. We've, we've seen some professional services firms that have downsized and now, again, back in the market, accounting firms, law firms, you know, taking incremental space to grow their footprints.

Georgi Dinkov (Equity Research Associate)

Great. Just a second one for me. You mentioned you're expecting to increase occupancy in 2024. I was just wondering if you can provide some more color on what gives you a confidence that that will be the case. Thank you.

Colin Connolly (President and CEO)

Well, it's a - it's really a function of positive kind of new leasing momentum that has really developed here in the second half of the year, combined with low upcoming lease expirations. So we're really well positioned with the portfolio. Now, you know, bear in mind, as we do new leasing activity, there's always a lag, you know, anywhere from 8-12 months, between signing that lease and getting the customer space built out, you know, occupied and rent commencing, commencing. So that'll ultimately dictate the extent at which we can drive occupancy in 2024. But again, if you pull out our redevelopment projects and new development projects, the kind of the supply and demand of our space is in a good spot.

Operator (participant)

Let's move on to Peter Abramowitz from Jefferies for the next question.

Peter Abramowitz (VP and Equity Research Analyst)

Hi, yes, thank you. I think Colin spoke earlier about sort of a lack of adjustment in seller expectations, but they're really only meeting market clearing prices if, if they absolutely have to. I guess, could you talk about that dynamic? It seems like, especially from private equity, with the amount of redemptions they faced, they have had to sell and come meet market expectations and other property types, at least. Could you talk about that on the office side, if, if you're seeing any, any kind of signs of that or if that's something you expect to see?

Colin Connolly (President and CEO)

Yeah. Yeah, you've seen private equity, as you, as you mentioned, as they've got redemption, selling kind of other property types where perhaps the, you know, the pricing hasn't, you know, faced as, as, as much of a repricing. So, you know, I think, I think there's been more of a reluctance to, to sell down kind of office, office exposure at market clearing prices. Again, I think there's a somewhat of an expectation in the private market that perhaps rates come back down and that, you know, cap rates kind of readjust. That, that would certainly should show itself in the, in the public market pricing as well. So, you know, if you've gone through previous cycles, this kind of delay, this bid-ask spread, kind of takes a little longer for the activity to resume.

It really is not surprising, and it's very consistent with past cycles. Ultimately, as you look at kind of where rates are today and kind of a pretty big wall of loan maturities, that's, that's really finally starting to rear itself here in the second half of 2023 and 2024, we, we do think that that's going to kind of begin to, to, to, to force action. These assets need capital. They need new capital for, for leasing costs. We do think that that will start to drive some transaction activity at, at, hopefully, attractive market clearing prices.

Peter Abramowitz (VP and Equity Research Analyst)

Okay, got it. Then one other one. Since your last call, I think there's probably there's, there's a lot more confidence in the Fed's ability to, to engineer a soft landing here, certainly reflected in the equity markets. Any sense of, of, has that impacted kind of tenant psychology in, in your conversations around leasing? Does it seem that that's something that's kind of making them feel better about committing to, to leases long term?

Colin Connolly (President and CEO)

Yeah, again, I, I think our experience in our, in our lifestyle portfolio is, is throughout the, even the pandemic to, to now, you know, our, our, the, the term of our, our leases have stayed pretty steady on average, between call it 6.5 years-7 years on average. Our, our customers and our quality of properties have been pretty confident to, to make long-term decisions. I, I do think there are, there is more confidence in companies and their underlying business to, to start to kind of make decisions. I'd say the, the biggest driver for us has been, you know, really kind of the return to work initiative and, and more of our customers utilizing space.

I think, you know, CFOs have a whole lot more confidence allocating capital into, you know, more real estate spend when they've got confidence that the employees are gonna use the space. That's really been positive. As I think about our business, you know, if it was a year ago, you know, I was up at night worrying about both the secular and the cyclical. You know, I'd say today at night, you know, I'm just really more worried about the cyclical. I'd say that's a much better place to be. Again, the quality of our balance sheet and the portfolio, you know, gives us a lot of confidence, as I mentioned, to thrive during all parts of the cycle.

Operator (participant)

Got it. That's all for me. Thanks. Next question will be from Dylan Burzinski of Green Street. Please go ahead.

Dylan Burzinski (Analyst)

Thanks for taking the question. I guess just going back to, you know, potential acquisitions and whatnot, and realizing that it's still in the early innings, and you guys are being patient, but just from markets and whatnot, are there any markets within the portfolio today that you're more interested in growing in versus others?

Colin Connolly (President and CEO)

Yeah, Dylan, great, great question. You know, we, we, we love all our markets the same. I think as we look at the, the current kind of portfolio construction, that, you know, has pretty large exposure in Atlanta and Austin, you know, we'd love to find opportunities to allocate capital to some other really strong markets, where perhaps today we have less exposure. I'd certainly look at Dallas, Charlotte, Nashville. We'd love to grow our presence in those markets. At the same time, you know, given how strong our operating platforms are in Atlanta and Austin, if great opportunities come along there, we will absolutely invest in them. In time, we, we would like to see, you know, our...

A path to increasing exposure in some of those other markets.

Dylan Burzinski (Analyst)

Thank you for that detail. Then just going back to some of the comments made regarding office utilization, are you guys able to share sort of where utilization is at today or maybe over the last several weeks versus where it was at in the portfolio at the start of the year?

Colin Connolly (President and CEO)

Well, again, utilization, I think is, to be clear, is a bit of an imperfect science. You know, it's one that, again, I think a lot of folks rely on the Kastle data. I don't know that we've got a ton of confidence in that data or perhaps that data is reflective of, you know, not necessarily the quality of assets that we own or some of our peers own. But we do kind of exhaustive physical counts as best we can, parking garages, discussing kind of metrics with our customers. We've even, you know, had some discussions with some of these companies that use cellular data. I'd say, in all cases, really, we're probably around 70%-ish today.

That's kind of where those numbers have come back. I think as we, you know, think about adjusting that for kind of the Friday exception, as I mentioned earlier, we, we think we're making great progress, and that, that was probably closer to 60%, you know, a year ago.

Dylan Burzinski (Analyst)

That's helpful. Thanks.

Colin Connolly (President and CEO)

Sure.

Operator (participant)

Thank you. Next question will be from Andrew Rosivach of Wolfe Research. Please go ahead.

Ally Yaseen (VP, Equity Research, REITs)

Thanks for taking our question. This is Ally Yaseen for Andrew. Just one quick question. I was wondering if you could provide any guidance around the amount you expect to spend on the redevelopment of Hayden Ferry 1?

Colin Connolly (President and CEO)

Yeah, good morning. It is, we, we are still in process of finalizing our budget there. We, we hope to have that completed by the fall and, and ready to, to move forward with that project. Again, as, as we look at it, I'd say, the, the, the overall kind of priority in that project is going to be, you know, Hayden Ferry 1, but, but while we're at it, we're gonna go ahead and, and do work across the entire campus. As Richard said, I think we have a great opportunity to differentiate Hayden Ferry with our redevelopment work as the leading property in, in all of Phoenix. And, and we've had great success doing that at Cousins.

John McColl and our development team do excellent work, and I think many of you all have seen what we've done at Buckhead Plaza and the Promenades, and we'll do something along those lines there. I'd say excluding anything that's gonna be kind of revenue-producing, you know, historically, we spend anywhere from $30-$40 a foot on, on those type of, on those type of projects. Based on kind of preliminary numbers, I would expect it to be somewhere in that neighborhood when we finalize it.

Ally Yaseen (VP, Equity Research, REITs)

Great. Thanks, that's helpful. That's all for me.

Colin Connolly (President and CEO)

Great.

Operator (participant)

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Colin Connolly for closing remarks.

Colin Connolly (President and CEO)

Thank you all for joining us today. We appreciate your time and continued interest in Cousins. If you have any follow-up questions, please feel free to reach out to Gregg and Roni. We'll look forward to hopefully seeing you all at some of the conferences as we head into September and October. Have a great day.

Operator (participant)

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.