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Text: If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information link on the Investor Relations page of our website.
In particular, there are significant risk and uncertainties related to the scope, severity and duration of the COVID-19 pandemic along with the direct and indirect impacts that the pandemic and related mitigation efforts, including governmental requirements and private sector responses, may have on our financial condition and operating results and those of our customers.
At Cousins we have always taken the approach that if we take care of our dedicated employees who deliver excellent service to our customers, our Company will drive strong results for our shareholders.
In this challenging environment we have taken great care to ensure that we are staying true to our values and principles.
In the markets, we have adjusted our operations to ensure the safety of our employees and customers as our properties all remain open.
Across our portfolio, physical occupancy has remained at approximately 15% since early June.
Based on our discussions with customers, I anticipate a modest increase after Labor Day.
However, ongoing health concerns related to COVID-19 and child care challenges resulting from remote schooling will likely create headwinds to physical occupancy throughout 2020.
Despite the extraordinary environment, our team delivered solid financial results during the second quarter.
I will share a few of the highlights.
We reported FFO of $0.66 a share.
We collected 97% of total rents and 98% of office rents.
We leased 303,000 square feet with a weighted average lease term of 7.6 years.
Second generation cash rents grew by 20.6%.
Simply stated, our financial performance highlights the quality of our markets, our portfolio, our customers and, importantly, our team.
It will come as no surprise that many are continuing to speculate about the long-term implications of COVID on the office sector.
Work from home is undergoing a nationwide test and is proving serviceable thus far.
We have spent considerable time discussing this with our customers.
In fact, I recently asked the leadership of a Fortune 500 company with a growing Sun Belt footprint to share their perspective on the impact of COVID on their real estate strategy with the Board of Directors here at Cousins.
I will summarize some of their findings; a heightened focus on highly amenitized buildings with outdoor space in urban settings, a prioritization of health and wellness, an increase in work flexibility for employees, a commitment to provide employees with dedicated personal space and reduction in overall density.
As one of the company executives shared the pandemic has not changed our plans.
In fact, in many ways it makes our space even more important.
We've proven that remote work can be effective but we've also learned that it is no substitute for being together for activities like collaboration, relationship building, mentorship and so on.
The executive also added, while we've been able to maintain productivity during these challenging times, we're trading on the trust, relationships and understanding we've built by being together.
After a deep dive into the real estate strategy, this growing Fortune 500 company concluded that while the layout of the office would likely change post COVID, their overall space needs would not.
Their study found that increased flexibility would be offset by an increase in personal and collaboration space.
This was an encouraging feedback.
And while just one example, we received similar thoughts from many other customers.
Personally I believe the teams are ultimately stronger together.
The observations provided by this particular company point to other trends that we have been discussing even before the pandemic reached us, migration to the Sun Belt, flight to quality, and a growing emphasis on ESG.
In many ways the COVID pandemic has not created a new paradigm, it is simply accelerating trends already under way.
Many years ago we crafted a compelling and resilient strategic plan with the goal to position Cousins at the intersection of these trends.
In short, we prioritized trophy, Sun Belt properties, a disciplined approach to capital allocation, a best-in-class balance sheet and leading local operating platforms.
We have made great strides to date.
100% of our portfolio is located in the best amenitized submarkets across the Sun Belt, 100% is Class A. Our portfolio is among the newest vintage in the office sector, with an average building age of 2002.
Our average building size is just 347,000 square feet with the overwhelming majority having multiple elevator banks.
77% of the portfolio is near mass transit while also enjoying an average parking ratio of 2.9 per 1,000.
Net debt to EBITDA of only 4.4 times and liquidity in excess of $1 billion.
A $566 million development pipeline that's 82% committed and projected to add approximately $66 million of incremental NOI by year-end 2022.
Currently there is a lot of discussion in the market regarding urban versus suburban and hub and spokes.
At Cousins we believe our portfolio has attributes that check the box for all of the above.
In addition, the Company has a fortress balance sheet and attractive embedded growth through our development projects.
Nonetheless, we are not immune to the headwinds as a result of the COVID-19 pandemic and the associated economic recession.
Physical distancing and quarantines treat all markets the same.
During this period, leasing activity will likely be muted and parking income will be impacted.
The duration and severity of this downturn will be determined by the public health needs, which are and should be everyone's top priority.
Yet pandemics and recessions do end and as companies are able to safely return to work, the economy can transition from surviving to once again thriving.
However, this will take time.
At Cousins, we have long been disciplined with our strategy to build the preeminent Sun Belt office REIT.
I believe that we are in the right markets with the right portfolio.
Coupled with our strong balance sheet and an extremely talented team, we feel confident Cousins can weather this challenging environment.
At the same time, dislocation in the markets could create opportunities for us.
We are in a strong financial position to reinvest in our buildings, to take advantage of strategic land opportunities for future office and mixed-use projects and to pursue compelling investment opportunities that can add value for shareholders.
We will remain judicious and act at the appropriate time.
I appreciate your skills, your dedication and your resilience.
I'm so proud to be part of Cousins.
As Colin said, we are in the midst of a historically challenging economic environment.
And I want to lead off by saying that our team and operating portfolio are performing exceptionally well during this difficult time.
From the start of the pandemic, we have remained focused on the things that we can control and positively influence such as our leasing strategy, rent collections, managing deferral requests, property operations, expense control, customer outreach and relationship building.
Our team's professionalism and focus in these areas combined with top-quality assets in some of the best Sun Belt submarkets led to solid second quarter results.
As we all know, we felt the full impact of the ongoing pandemic for the entire second quarter, whereas we only saw a partial impact in the first quarter.
Given that I'm especially pleased to say that our team executed 303,000 square feet of leases in the second quarter with an average lease term of 7.6 years.
That average lease term is squarely in line with our long-term run rate.
Further, 32% of our leasing activity this quarter was new and expansion leasing.
I'm also pleased to report that rent growth remained exceptionally strong with second generation net rents increasing 20.6% on a cash basis, a level not seen since 2015.
This was driven primarily by continued excellent rent growth in Austin.
Net effective rents for the quarter came in at $25.43 per square foot, even higher than in the first quarter.
We also ended the second quarter at 92.5% leased with in-place gross rents posting another company record of $39.48 per square foot.
Finally, our same property portfolio leased percentage came in at a solid 94.4%.
We view these as fantastic results in light of current economic conditions.
I described the market backdrop last quarter as one of distinct uncertainty and while it is no longer quite as acute, significant uncertainty remains.
With new COVID-19 cases continuing at elevated levels, especially in the Sun Belt, leasing activity is considerably subdued and our pipeline of new leasing activity has been on the decline.
Rest assured, we are approaching all new leasing opportunities aggressively and there are some out there.
But we still expect most of our activity in the coming quarters will likely fall into the renewal category.
You will recall that our second quarter leasing activity did include the previously announced 74,000 square foot new lease with DLA Piper at Colorado Tower in Austin.
As I mentioned last quarter, this global law firm will occupy space currently leased by Parsley Energy with planned phased commitment starting early next year.
Our second quarter activity also included significant long-term renewals of a 112,000 square foot customer at The Domain in Austin and a 42,000 square foot customer at the Pointe in Tampa.
Now for some more general leasing market observations.
First, we still see leasing decisions being delayed more often than canceled all together.
The fact is most corporate real estate decision makers are still in an observation mode, evaluating their post-COVID real estate strategy and trying to determine what that might mean for existing and future requirements.
We expect this dynamic to continue at least through this year, but we are also hopeful that that will lead to some level of pent-up demand when the recovery begins.
Second it is still too early to identify any reliable price discovery trends in the leasing markets.
Transaction volume is simply too low and highly situational.
However, it is worth noting that quoted or face rents have yet to experience much pressure with most negotiations instead focusing on lower net effective rents through increased concessions.
With that said, face rates will almost certainly be impacted negatively over time with the magnitude of the impact likely correlated with the ultimate duration of the pandemic.
Third, while still at relatively benign levels compared to the past, we are seeing an uptick in sublease listings across some of our markets.
This is an expected and reliable leading indicator of the health of the office leasing markets.
In our view the CBD of Austin has seen the largest nominal amount of new subleased listings of any of our target submarkets.
Given the amount of new construction set to deliver over the next couple of years in the Austin CBD, we are watching this submarket particularly closely.
With that said, Austin was one of the first markets to emerge from the last downturn and we are confident that this will be the case once again.
Austin is a highly appealing metro area that will continue to attract great talent and businesses fleeing from areas such as California, the Northwest and the Northeast.
A prime example is Tesla's recent decision to build its newest auto assembly plant near Austin.
While this is obviously not an office requirement, the overall economic impact of this plant will be very positive for the Austin market as a whole.
On a similar note, we are also thrilled with Microsoft's recent decision to lease over 500,000 square feet in a new project in Midtown Atlanta, adding 1,500 new technology jobs in our hometown.
Like last quarter, I want to offer some insights into the condition of our current business activity beyond market conditions and leasing.
First, I'll cover rent collections.
In May, like many, we expressed concern about whether collections would become more challenging over time.
I'm very pleased to say the collections have remained solid.
97% of our customers overall paid rent during the second quarter and the collection rate among our traditional office customers was 98%.
Further 100% of our top 20 customers paid rent in the second quarter.
As of today, 98% of our customers overall have paid July rent charges.
Please note that these numbers reflect the impact of rent deferral agreements completed to date.
These numbers are very heartening and we continue to attribute them to high-quality customers and great teamwork.
As noted, last quarter we received requests for rent relief from the majority of our retailer and flexible office provider population and from a much lower share of our traditional office customers.
The team has done a fantastic job evaluating each request on its merits and negotiating relief where we deemed it appropriate.
The total cash rent deferred to date stands at $7.5 million or 1.1% of our annualized contractual gross rents.
While the volume of requests for rent relief has declined significantly relative to April and May, we do expect some deferral activity to continue until the pandemic has dissipated.
This activity is inherently hard to predict, but we view the highest risk customer segments to be our retailers and flexible office providers.
As a reminder, those two segments only represent 1.7% and 1.9% of our overall operating portfolio respectively.
Finally, I would like to touch on property operations.
Throughout this pandemic all of our properties have remained open to customers with common sense adjustments to our security, access, visitor and cleaning protocols.
Despite being open, the physical occupancy of our properties is currently only at about 15% on average with usage of our parking facilities at similarly low levels.
Gregg will touch on the financial impact of this lower parking utilization in a minute.
During the quarter, our operations team finalized, communicated and implemented a comprehensive plan for the anticipated return of our customers to the office.
The team has done a fantastic job preparing for this process at difficult operating conditions and I could not be prouder of what they've accomplished.
With that I will now hand it off to Gregg.
All things considered, second quarter results were solid and they were in line with the information we provided in April.
Looking specifically at our same-property performance, cash net operating income during the second quarter declined 1.6% compared to last year.
This was driven by a 4% decline in revenues and a 7.8% decline in expenses.
As Richard discussed earlier, we modified leases for certain customers to provide for temporary payment deferrals.
Adjusting for the impact of these deferrals, cash net operating income declined 0.1% during the second quarter.
Beyond lease deferrals, the largest item driving our same-property performance is the physical occupancy within our buildings which remains significantly below pre-pandemic levels.
Fewer customers coming to the office mean fewer cars and as a result, same-property parking income was down 30% compared to last year's second quarter.
This is comprised of a 12% decline in contractual parking and a 76% decline in transient parking.
Adjusting for the impact of both rent deferrals and reduced parking income, same property cash NOI was up 3.7% during the second quarter.
For the balance of the year we anticipate cash same-property performance will likely stay negative, potentially troughing in the third quarter.
In addition to continued rent deferrals and reduced parking demand, we are seeing some opportunities to execute lease extensions with existing customers that could pull forward free rent, which would impact cash NOI.
However, we believe these opportunities are positive long-term real estate decisions.
Before moving to external activities, I did want to touch on customer receivables.
During the second quarter FFO was reduced by approximately $400,000 due to a combination of rent write-offs and an increase in our allowance for uncollectible rents.
The comparable number for the first quarter was approximately $500,000.
These numbers are tied to specific customers and leases.
No general COVID-19 reserve has been taken to date.
To put these numbers in perspective, charges related to collectability averaged approximately $170,000 per quarter during 2019.
Turning to external activities.
We closed one acquisition during the second quarter, the purchase of 1,550 space parking deck in Uptown Charlotte for $85 million.
We also closed a one-year extension of the existing construction loan on our Carolina Square property in North Carolina during the second quarter.
Not only did we extend the maturity of this loan, we also reduced the interest spread from 190 basis points to 125 basis points and eliminated our repayment guarantee.
With this extension we've no further debt maturities for the remainder of 2020.
Looking at the balance sheet, we entered this period of volatility with exceptional financial strength, among the very best of our office peers.
Not only do we have low leverage, our liquidity position of over $1 billion at the end of the quarter represented over 15% of our total market cap at quarter-end and is more than enough to fund the remaining $160 million necessary to complete our current development pipeline.
Looking forward, our 2020 outlook remains generally in line with the information we gave in our previous earnings call in April.
Assumptions around the impact of COVID-19 on speculative leasing and rent deferrals remains within the ranges we provided.
First, we currently anticipate the parking deck that we purchased in early May to generate net operating income of between $1.5 million and $2 million during calendar year 2020.
To be clear, this is a pro-rata number and represents just under eight months of our ownership.
It's not an annualized number.
In addition, this number is not a stabilized figure.
It reflects our current belief that the physical occupancy of our buildings and the commensurate parking income will continue to be significantly impacted by the COVID-19 pandemic through the end of 2020.
We anticipate the annual stabilized NOI on this parking deck to be between $4.5 million and $5 million going forward.
Second, we continue to take a hard look at our general and administrative expenses.
Prior to COVID-19, our G&A load was already exceptionally low and we have taken steps to reduce it even further.
Our current 2020 forecast assumes corporate G&A expenses net of capitalized salaries of between $27 million and $29 million.
On both an absolute basis and as a percentage of enterprise value this range represents a very low cost to our shareholders.
Third, when we provided information around parking revenues in April, our range was primarily driven by the duration of the pandemic's impact on our portfolio's physical occupancy.
The low end of the range assumed we would start to see an improvement in occupancy beginning early in the third quarter while the high end of the range assumed improvement wouldn't take place until year-end.
As we sit here at the end of July at 15% fiscal occupancy, we clearly need to adjust low end of our range in this metric.
Finally, we have now completed the lease amendment with Parsley Energy at Colorado Tower that we discussed in our last earnings call.
Upon finalization of the accounting treatment, the amendment was deemed a lease modification rather than a termination.
The total earnings impact of the amendment remains unchanged at $2.1 million.
However, it's the timing of that impact that's now spread out over the remaining term of Parsley's retained space.
Specifically, instead of recognizing $2 million as a termination fee in 2020 and an additional termination fee of $100,000 in 2021, we will recognize $300,000 as property level NOI in 2020 and $1.8 million as property NOI over the course of the remaining lease term through mid-2025.
When taken together, we anticipate these four changes will net each other out in our 2020 earnings.
The positive impact of the parking deck purchase of approximately $1.7 million, if you use the midpoint of our guidance, combined with a reduction in G&A of $1 million equals the negative earnings impact of accounting for the Parsley lease as a modification and the commensurate $1.7 million reduction and the adjusted range in parking revenue of $1 million, again at the midpoint.

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cousins properties releases second quarter 2020 results.
cousins properties inc quarterly funds from operations per share was $0.66.

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