Cousins Properties Incorporated
Q4 2013 Earnings Call Transcript

Published: 14 Feb 2014

[Operator:]

Good day, and welcome to the Cousins Properties’ Fourth Quarter 2013 Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tripp Sullivan of Corporate Communications.

[Tripp Sullivan:]

Thank you. Certain matters that company will be discussing today are forward-looking statements within the meaning of Federal Securities Laws. For example, the company may provide estimates about expected operating income from properties, as well as certain categories of expenses along with the expectations regarding leasing activity, rail rates, leasing expense, development, acquisition, financing and disposition opportunities and expectations regarding the demographic and economic trends in markets in which the company is active. Such forward-looking statements are subject to uncertainties and risks and actual results may differ materially from these statements. Please refer to the company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2013 for additional information regarding certain risks and uncertainties. Also, certain items that company may refer to today are considered non-GAAP financial measures within the meaning of Regulation G, as promulgated via the SEC. For these items, the comparable GAAP measures and related reconciliations may be found through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of its website at www.cousinsproperties.com. Larry?

[Lawrence Gellerstedt III:]

Good morning everyone and thank you for joining us today. With me this morning are Gregg Adzema, Cousins’ Chief Financial Officer and Colin Connolly, Cousin's Chief Investment Officer. For the past two years, we've been consistent in our strategy to transform Cousins by focusing on simple platform, trophy assets and opportunistic investments. 2013 more of the pivotal year for the company's execution on this vision. I want to acknowledge our team at Cousins, who have performed at a phenomenally high level in making this transformative year a reality. I'm honored to be a part of your team. Let me start with a brief synopsis of our year. Our moment’s notable move, the acquisition of Crescent’s Texas portfolio grew the company's total market cap by 57% overnight, while adding 5.3 million square feet of Class A office assets in Houston and Fort Worth. In the first half of the year, we acquired Post Oak Central and Houstan and 816 Congress in Austin. Our Texas presence now represents approximately 52% of our total portfolio square footage in the three major markets such as Houston, Dallas Fort Worth and Austin. We simplify the platform with a $192.9 million in retail asset sales including the sale of substantially all of our lifestyle and power center assets. Additionally, we broke ground on two well positioned developments in our core markets, Colorado Tower, our trophy office building in Austin and Emory Point Phase 2 an opportunistic mix use development in Atlanta. We announced our new strategic plant in January of 2012. Our equity market cap was $665 million with 46% of NOI coming from urban trophy office buildings. Today, it's $2 billion with 85% of NOI coming from urban trophy office assets. We timed the cycle well during this period acquiring $1.6 billion of trophy assets at an average discount of 57% to replacement cost. Once again our team has done an excellent job of executing the strategy and we are now reaping the benefits in terms of earnings growth, share price appreciation and a significant dividend increase all while managing the balance sheet leverage at a level notably lower than the majority of our peers. As we move forward in 2014, we remain very bullish on the health of our targeted submarkets in Houston, Dallas, Fort Worth, Austin, Atlanta and Charlotte. These markets boss some of the most dynamic and robust demographic and economic trends in the nation and have proved to be resilient during recent tough economic times. A critical factor propelling growth in our nation has been the U.S. energy revolution and Houston has emerged as a leader. Since January of 2010, Houston has added 377,000 new jobs more than two jobs for every job loss during the recession and forecast showed Houston’s employment growing at a rate which is more than 50% greater than the national average. The city has also one of the largest medical complexes in the world and stands to gain the economic benefits from the upcoming expansion of the Panama Canal. Dallas, Fort Worth and Austin represent additional growth prospects in Texas with forecasted employment growth of 2.7% and 3.3% respectively. Dallas, Fort Worth added more than 80,000 jobs in 2013, the second largest gain of any U.S. metro area. Austin’s affordability strong population growth and talented workforce continue to fuel future employment with the economy forecasted to grow at nearly double than national pace. The Atlanta metro area, while slower to recover from the recent recession than its counterparts in taxes is showing encouraging sings of economic growth. Atlanta has reclaimed all the office jobs that lost during the downturn with the second half of 2013 representing the strongest two quarter period of office absorption since 2007. The natural areas diverse and talented labor force coupled with its low business cost provides an attractive value proposition for new and expanding businesses with the tech sector driving the majority of absorption in the market. Charlotte has returned its prerecession’s peak with an annual job growth forecasted to outperform the national average by 67%. All sectors of business has contributed to this economic expansion as Charlotte will continue to see growth as many corporations consider this market for corporate relocations and expansions. Confidence in our core markets is supported not only by the healthy underlying fundamentals but also by the high cost and physical barriers for new supply. The dynamic of limited new spec office product currently under construction. Scarcity of attractive office sites due to multi-family development and tightening vacancy applies to all our target submarkets providing a positive environment to push rental rates. Let me brief you on our plans for 2014, operational excellence, a core value of Cousins for the past 56 years continues to drive our business. We remained focused on capturing NOI embedded within our assets by levering our leasing and development expertise to drive value across the portfolio. Greg, will give more color on the embedded NOI later in the call. On the new development, front we continue to be on the lookout for select opportunities in all of our key markets. Austin, Texas is a perfect example of where lease economics, supply constraints and economics expansion support new development. Colin will update you on Colorado Tower in a few minute, along with additional progress in our development pipeline. In addition to sourcing attractive development opportunities we continue to evaluate value add and select core acquisitions which are below replacement costs, as well as taking strategic land positions to bolster our development pipeline. The rate recession, weakened market fundamentals providing for an excellent opportunity to acquire value add assets over the last two years. As I’ve mention earlier, we were very active during that window. We will continue to pursue value-add acquisitions but remindful of the reduced market opportunity as many of our typical targets have been stabilized nonetheless, we remain confident in our team’s ability to identify growth opportunities by executing and growing our development pipeline while selectively acquiring core and value-add acquisitions to strategically enhance our market concentrations. In summary, 2013 was truly a transformative year for Cousins, we carefully assembled a portfolio with embedded opportunities to grow value for our shareholders and markets with healthy economic dynamics and position the company to take advantage of opportunities to grow where and when it make sense. We are very excited about the prospects of [lot] ahead. With that I’ll turn it over to Colin.

[Colin Connolly:]

Thanks Larry. Good morning everyone. As Larry mentioned, 2013 was a fantastic and transformative year for Cousins. We repositioned the company through a combination of value add acquisition, several new development starts and dispositions of non-core assets. The net result is a portfolio that overwhelmingly consists of trophy office properties located in the best urban sub-markets of Atlanta, Houston, Austin, Dallas and Charlotte. The strategy behind this is simple. We believe that these type of properties if managed in a first class manner, will outperform over the long-term and generate the best returns for our shareholders. To highlight this in real time, let’s take a deeper look at the buckets of market in Atlanta which is home to our Terminus property. According to CoStar, Class A occupancy in Buckhead is about 85%. However the trophy concept in Buckhead which in our view consists of approximately 6.5 million square feet is 91% leased and significantly outperforming the broader market. There are very similar dynamics at play in our other urban sub markets including Midtown Atlanta, the Houston Galleria, Austin CBD and the Uptown Arts District in Dallas. The best assets in the best sub markets recover the quickest and command the best rents within their respective markets. And most importantly our shareholders, we are beginning to see our strategic focus on trophy urban office properties and our aggressive expansion into Texas translates into real financial results for Cousins. Our team leased over 430,000 square feet of office space during the fourth quarter at economics that continue to trend in a positive direction. Moreover, the re-leasing spread on a cash basis during the fourth quarter was 11% to the positive. The primary driver of this growth is our Texas portfolio. When we purchased 2100 Ross, 816 Congress, Post Oak Central and the Crescent portfolio, we disclosed that in place rents ranged in our estimation between 15% to 20% below market. We are now executing on this rent rollup opportunity and are excited to see it have such an immediate and powerful impact on performance. We continue to make, both leasing and operational progress at our recent value add acquisitions and are capitalizing on their embedded organic growth opportunities through the lease up of vacant space, strategic incremental capital investments and the continued rollup of below market rents. More specifically at Promenade and 2100 Ross, we had great early success on the leasing front and are now in the final stages of significantly repositioning these projects. And in both cases, these enhancements have led the robust leasing pipelines, which positions well to drive rental rates as we complete the lease up of these properties. We are confident that this will ultimately translate into meaningful value creation on our capital investment. At 816 Congress, we mitigated a key risk of the investment with the renewal of teacher retirement systems of Texas during the fourth quarter. We are underway on an upgrade of the building's amenities and believe that the properties are now ready to attract more than its fair share of the approximately 320,000 square feet of positive net absorption currently looking for a home in the Austin CBD. The Fort Worth CBD is softened, given the impact of Jacobs Engineering departure at 777 Maine and some recent spec supply that is delivered in the market. We knew this going into our transaction still very much believe in the long term opportunity at 777 Maine. Fort Worth alone added over 38,000 jobs last year and we believe it's just a matter of re-educating the market that the CBD, which has been 90% plus leased for sometime once again has high quality space available. Greenway Plaza and Post Oak Central are performing exceptionally well as both properties are approximately 95% leased. We continue to see strong demand for these properties from both existing and potential new customers. This dynamic coupled with very strong market fundamentals has allowed our team to successfully drive rental rates well beyond our original expectation. Transocean did exercise the termination rights during the fourth quarter on 82,000 square feet at 5 Greenway Plaza that also triggered a termination fee. Transocean leased this space, which is adjacent to their headquarter space in 4 Greenway Plaza to house additional legal resources following the deepwater horizon disaster that occurred in 2010. As that legal work has been winding down, we were not surprised to see this under [under-legalized] space giving back and happy to report that the team has already back built approximately 10,000 square feet of this space. Transocean has been a long standing and loyal customer of Greenway Plaza dating back to 1989. We look forward to continuing our strong relationship and serving their needs into the future. We look forward to introducing Greenway Plaza and Post Oak Central, both terrific assets to those of you attending our Investor Day next week in Houston. On the development front, Colorado Tower in Austin, Texas is on schedule for a fourth quarter 2013 delivery. We are now 25% leased, up from 22% leased at year-end with the addition of approximately 12,000 square feet of new leasing in the first quarter. As I mentioned earlier, the pipeline of net absorption in the Austin CBD is significant and Colorado Tower continues to receive very strong interest in marketplace. We are in final lease negotiations with several of these potential customers which gives us confidence that our pre-leasing will continue to increase throughout the course of the year. We also broke ground on Phase II Emory Point an opportunistic mixed use development in Atlanta. Following success of Phase I of Emory Point where the retail is now 90% leased, up from 87% at year-end and the multifamily component is 97% leased, we plan to add 43,000 square feet of retail and 307 apartment units. The project is slated to open in the first quarter of 2015. We continue to pursue to the 123 West Franklin, a mixed use development project in Downtown Chapel Hill where we hope to commence construction in the first quarter of 2015. The development is anticipated to consist of 314 apartment units, a 123,000 square feet of office and 51,000 square feet of retail. On the disposition front, we Inhibitex building located in the North Fulton submarket Atlanta for a purchase price of $8.3 million before a credit for free rent. The point of reference, this property was 100% vacant since third quarter of 2012. Our team did an excellent job of identifying a single user for this non-core property which in turned allowed us to monetize this asset at an attractive price for our shareholders. I will now turn it over to Gregg.

[Gregg Adzema:]

Thank you, Colin. Good morning everyone. As I mentioned in the last quarter’s call, we expected fourth quarter earnings to accelerate, and they did not disappoint. FFO for the quarter was $0.18 per share, up almost 30% over the fourth quarter of last year. Excluding the gain on a recent sale of the third party business, this was our highest quarterly FFO per share number since 2008. It was also a clean quarter, there were no special or unusual items pushing FFO either up or down. We expect this to be the beginning of a constructive trend. Going forward, the simplicity and quality of our earnings should increase with the much larger percentage coming from property level NOI rather than fee income land profits and the like. And as such, it should be easier for you to understand, to forecast and to value. When all set and done, we expect the fourth quarter of 2013 will mark an important point in time for Cousins. It will be the beginning of a period during which we expect to generate more simple and predictable, high quality earnings. And high quality doesn’t stop with just earnings; we also have a higher quality balance sheet. I’d like to take a moment to quickly review the progress we made with our balance sheet over the past five years. It’s fairly dramatic. In the first quarter of 2009, our debt to total market cap was 70%, today it’s 29.5%. Adding in preferred equity was 80% in the first quarter of 2009, today it’s 32.8%. Our debt to EBITDA ratio in the first quarter of ‘09 was 14.9; in the fourth quarter of this tax year it was 4.7, these are significant improvements. And relative to our office peers, these are best in class ratios. The most important, this balance sheet strength puts us in an excellent position to execute the strategic plan Larry laid out earlier in the call. It’s an active not a passive plan that very few in our industry could successfully implement. It requires powerful relationships, it requires deep development expertise and it requires rock solid financial flexibility. We have all three. Now to the numbers

[Operator:]

Thank you. (Operator Instructions). And our first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.

[Jamie Feldman:]

Great, thank you. Congratulations on the quarter. Can you guys talk a little bit more about what are you seeing in Downtown, Atlanta? I know from broker contacts, we have been hearing the Midtown and Central Perimeter are doing pretty well, but it sounds like you certainly see some more signs of life Downtown, you also have some leasing at 191, P Oak, I guess you love full occupancy at 191 Peachtree. But just generally what that bring in that bring in that market and how should we think about going forward?

[Lawrence Gellerstedt III:]

Good morning, Jamie. As you alluded to in your question, what we have seen in Atlanta is significant tightening in the Central parameter, significant tightening in Buckhead, which bodes well for both Midtown and Downtown. We in the last two quarters have begun to see that demand in terms of prospects looking at both submarkets. And we, the tightening will happen in first in Midtown, but the amount of activity we are seeing in Downtown has also increased significantly. And I want to remind folks on the call as we said before there is about $2.5 billion of investment and new development investment going on in Downtown Atlanta which surpasses the amount of investment that one runs in 1996 Olympics. So that includes new Falcon Stadium, a streetcar that opens in May of this year, new College Football Hall of Fame which opens in August, National Center for Civil and Human Rights which opens in June, as well as significant expansion from Georgia Tax and Georgia State. So Downtown in addition to that, you have got Coca Cola which are moving 2,000 are paying IT jobs County to down town this year. So we are beginning to see the benefits of that in down town, but we’re also seeing an increase demand in Midtown, which is lacked a little bit of behind, thus far and obviously we've been the beneficiary of that it prominent.

[Jamie Feldman:]

Great thank. And then I guess the follow-up. In your comments you had mentioned your submarkets are not seeing a lot of new supply, but can you talk a little bit more granular about Houston, we are seeing (inaudible) to pick there and just how we should be thinking about your portfolio positioning versus maybe the submarkets that are seeing new supply?

[Lawrence Gellerstedt III:]

Yes Jaime, I’ll kick it off and then I’ll let Colin add some color to that. But in the Galleria submarket which is about $18 million fee, you’ve had two buildings the way we’re in the last year they total a little bit over 600,000 fee and there both being delivered with significant occupancy in place, I think it’s closed about 90%. So that's the first two building we’ve been added in 30 years in that submarket and obviously it is absorbed that supply easily. The other thing just happen across all of our submarkets which I alluded to in my speech, is a lot of the office sites and all of our markets have been taken up the multi-family expansion, which is great for office owners on two fronts; one it takes out competitive sites and two it just adds to the quality of life that folks are looking forward with the urban experience. So we think there is only two or three sites left in the Galleria market and a couple of other sites are taking about build the suites which are slightly to happen in the next year. Greenway has not seen any new supply. We understand that there may be one building that is starting some site work. And I will let Colin add anything that I have missed in those comments.

[Colin Connolly:]

Sure Jamie we are certainly very mindful of the new development discussion in Houston and track it very closely throughout all the sub markets. So really you look at it on a macro at Houston depending on whose numbers you use are anywhere from 13 million to 14 million square feet under construction. But it’s approximately 70% to 75% pre-leased. And a vast majority of that activity is either in the Woodlands which is really being driven by Exxon’s massive consolidation, national consolidation into that sub market as well as adding the energy corridor. But it is really focused on the urban sub markets being the Galleria, Greenway and Downtown which is where we are most focused on. There is a lot of talk of new development. We haven’t really seen a lot of action at this point and a large part of that is driven by what Larry alluded to it’s hard to find suitable sites within those markets. And so we are again very mindful of it. We think that there is a couple of sites that overtime could be developed in the Galleria. There is a couple of sites outside of our Greenway positive footprint where we think a couple of people might build. But again on a relative basis, the scale of those markets we don’t see a meaningful impact at this time.

[Jaime Feldman:]

Okay. And you had mentioned Downtown, is that really a core sub market for you guys?

[Colin Connolly:]

It is a market that we continue to look at. I think long-term we’d certainly like to find an entry point there. I don’t think that that’s something in the near-term that we’ll pursue I think given the cost of where we see existing assets trading well above replacement cost. I don’t see that on the near-term for us but it’s certainly a market we want to continue to be educated on.

[Lawrence Gellerstedt III:]

And Jamie I just would add one thing to what Colin said just we don’t want to show too much of our cards on this call, but obviously these markets that are tight and have few development sites and so obviously a focus of us in saying is that make sense for us to get in and get one of those sites to be a developer of new product, which is certainly a skillset that we have.

[Jaime Feldman:]

Okay, great. Thank you.

[Colin Connolly:]

Thanks Jaime.

[Operator:]

And our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question.

[Dave Rodgers:]

Yes, good morning. Maybe Colin or Larry just start with you guys. Talk a little bit more about Austin if you would and the development lease up there, you said you got two leases that you're further along in negotiations, obviously that given us too much. Could you give us a little color maybe on the sizing range of some of those tenants but maybe just more broadly on, are you seeing the in migration that that building was really predicated upon and how do you feel about it?

[Lawrence Gellerstedt III:]

Let me talk about the overall market and I'll let Colin give you a little color on the specifics of the new leasing that we're seeing. The overall market dynamics as I alluded to in my speech it remains strong. The thing that I'm particularly encouraged about and it wasn’t like things we have really spent a lot of time thinking about before, we started Colorado Tower was some of the in migrations, the lack of in migrations to the Downtown market driven by lack of supply, due to tight vacancy or was it driven by other factors in terms of what's often losing some of that capability. And the comfort level, it was certainly seen in the last year and just in a extremely significant way in the last few quarters. As if you start to look at the leasing that I'm confident that we'll begin announcing in the next six months, a large percentage of it is in migration, either in migration from other sub-markets and often or in migration from other markets around the country. And that's really what always has driven Austin. So that early leasing that we did because you’re talking about small, generally small tenants in the Austin CBD and the fact that we had not started was primarily tenants moving from one builder to another into CBD and us capturing our share of that. But you’re really now beginning to see the migration that we all count on in Austin taken place. Colin, you might give little more color on the specifics.

[Colin Connolly:]

Sure. In general, I’d say the average square foot of the leasing that we’re working on, let’s say plus or minus 25,000 square feet, we see some two-fold floor type deals, we’re looking on some half floor type transactions, but in general I would as Larry said, a big chunk of that is in migration. One of the themes that we were focused as we started the project is a little bit of the slide from California to Texas. And we’re certainly starting to see that play out of the 320,000 square feet of net absorption as I said is floating in the market. There is a big chunk of it that is exactly that California to Austin, as you’d imagine a lot of that is technology driven. The other thing that we’re actually -- have been very interested to see is some of the energy companies who might have been in smaller markets in Texas or Oklahoma looking for a larger market that is very attracted to their employee base and we’re starting to see some of that in migration as well.

[Dave Rodgers:]

Great. Maybe second question, with regard to the lease expiration schedule just looking that you’ve got three tenants I think that expire within the next two years. You’ve talked a little bit about in the past. I wonder if you have any update; you mentioned Transocean earlier but they have the remaining space, Exxon is expected a leap but the timing is unclear. Do you have any update on the timing there on those net assets, any clarity on kind of the remaining states there?

[Colin Connolly:]

Sure. Over the next two years, we don’t have a significant number of material lease expirations. I guess I’d characterize that as in anything over 50,000 square feet. As we look forward into 2014, Firethorn, which is a two-floor tenant at Terminus has an August of 2014 expiration. We believe that they will be leaving that space but we’re actively in the lease negotiations to backfill about 25,000 square feet of it. Some of the other expirations that you will see in 2014, were either close to or have signed extensions to those [Coast Roads] which is a large of law firm in Greenway Plaza. In 2015, as you mentioned, Exxon does have their 300,000 square foot expiration in February of ‘15. That being said, they do have two to six month renewal rights and we will start to get some visibility on whether they are going to trigger those extensions sometime in the middle of the year. One other large expiration in Atlanta is net assets at North Point that’s about 120,000 square feet that expires in June 2015 and we’re actively in those renewal discussions today.

[Dave Rodgers:]

Great. Gregg, last question for you, the term fee that the Colin mentioned for Transocean, was that in the fourth quarter or will that be in the second quarter? And if it’s in the second quarter, is that embedded in your fee income guidance?

[Gregg Adzema:]

Yes. So, fee income in the fourth quarter of this year was about $800,000, about 600 of that was portion of the Transocean term fee. We have to amortize their entire term fee over the -- from period of time they gave us notice to the period of time that they actually vacate, so they gave us notice at the beginning of the fourth quarter. They vacate in mid 2014, so we recognized about our third of bit in the fourth quarter and we will recognize the balance as the year progresses.

[Dave Rodgers:]

Thank you.

[Operator:]

And our next question comes from the line of John Guinee with Stifel. Please proceed with your question.

[John Guinee:]

Great, thank you very much. Larry, you talk a lot about replacement cost, buying at a discount to replacement cost et cetera. And back of the envelope, it looks like Colorado Tower is going to cost you about 340 square foot, can you give us a rundown on what you think replacement cost is in the better business districts where you are doing business Greenway Plaza, Galleria, Arts District, the various submarkets in Atlanta even Birmingham?

[Lawrence Gellerstedt III:]

John, they vary a little bit market to market, because there is some differentiation just in terms of land prices and construction cost as well as tenant improvement cost from market to market. But I would say back of the envelope is Colorado Tower is a pretty good measure of what new construction is going to be. So 350 to 400 on the upper side would be a good benchmark to use. So in most of our markets that translate back to be able to do new development you need net rents and high 20s to low 30s, to be able to make the numbers work. As you know, we generally underwrite to trying to get a 150 to 200 basis points spread over what we think is a conservative sort of 10 year cap rate. So that's the way we generally look at it. It varies a little bit market to market, but not a whole lot.

[John Guinee:]

And if you kind of cover backwards the two major components are base building and then land, can you just give us a number and if not, we can talk offline, in terms of land for available square foot in some of these markets for example Galleria and Greenway where residential makes a lot of sense, may have a different land basis than some of the other markets, is there a sense for the difference or the disparity in the land cost per available foot?

[Lawrence Gellerstedt III:]

Well, there is a little bit just because as you would imagine of a market where like the Galleria and Houston or Downtown Austin where there is a little bit more active supply coming on, on the multifamily side and little bit on the office side, they get a little bit higher. But generally you are looking on an SAR basis I would say low to high, you are going to be in the $25 to $30 square foot range for land in the other markets, and some of the tighter markets you may get up in the $40 square foot range, that type of variation.

[John Guinee:]

Okay. And then just a little clean up question, what’s going on in Charlotte with the big gateway, the joint venture you have with the Bank of America?

[Colin Connolly:]

Sure. John, it’s Colin. As you’ll recall that property in Charlotte is about 1 million square feet; it’s effectively 100% -- it is 100% leased to Bank of America. That has term through December of 2016 and also has a -- and the maturity on the loan at December of 2016. We continue to have conversations with Bank of America about that and their long-term plans. I think at this point, they don’t have the clarity to make any long-term decisions. That being said, they certainly identify this asset as mission critical to them. But I think that will be a conservation that will continue to unfold over the next 12 months to 18 months.

[John Guinee:]

Great. Thank you very much.

[Lawrence Gellerstedt III:]

Thanks John.

[Operator:]

(Operator Instructions). We'll go to Brendan Maiorana with Wells Fargo. Please proceed with your question.

[Brendan Maiorana:]

Thanks, good morning. Gregg, if I did the math correctly on the NOI progression by the lease up assets, it sounds like by the end of the year, I guess that $6.5 million of kind of signed, but not yet cash flow either recognized NOI should be in place, is that correct? And then at Post Oak, the jump in NOI seems pretty significant. How much of that is attributable to the change in structure of the Apache lease versus I think you mentioned that you expected a little bit more lease up as that asset progresses as well?

[Gregg Adzema:]

So, I'll answer the first question which is of the $6.5 million that's which is the delta between the $10 million and the leases that we have signed in the 3.5 of revenues that we've actually captured up that $10 million. You're correct, the vast majority of that will come through in the balance of ‘14, but not all of it. We have a couple of leases; one in particular at Promenade that has kind of a staggered move in and you'll see some move in ‘15 and ‘16. So, I'm just going to around for you Brendan, but I'd say 90% to 95% of that should roll in by the end of ‘14. And then in terms of Post Oak Central, we typically don't get that granular in terms of breaking it down, but those are the two primary drivers. The Apache driver is larger than occupancy driver at Post Oak in 2014. That's a big lease and that’s a big number.

[Brendan Maiorana:]

Is there change in the Apache lease? Does that give us -- is anything related to their expiration and what they may do and I forgot if that was 17 or 18 I can’t remember exactly when that expiration was, but is there change in least, give us any indication of what they may do upon expiration of their term?

[Lawrence Gellerstedt III:]

The lease expires in ‘18 and no it doesn’t that was cooked in there already. We have got no fresh information from Apache on their intentions.

[Brendan Maiorana:]

Okay, great. So, if I just do the math it sounds like your annual NOI is probably have somewhere between $10 million and $12 million run rate by the end of the year just from kind of the Post Oak and the big assets in terms of lease up, I guess is that we should think about it?

[Lawrence Gellerstedt III:]

Yes. If you sum up everything you get to a number right around there.

[Brendan Maiorana:]

Okay, great. And then I am not sure if this is for Colin or maybe Larry, but the lease spread in the quarter were very high on both the cash and a GAAP basis, year-to-date they were modestly negative on cash basis, but still pretty healthy on a GAAP basis. So, I think Colin you mentioned in your remarks that you felt like the Texas assets coming into the portfolio over the past couple of quarters, really helps your mark-to-market on a cash basis. So I guess the question is what you did in the quarter kind of more indicative of how you see the portfolio and the trends going forward or do you think that kind of year-to-date number that posted in terms of rent spread is more likely as we look out over the next year or two?

[Colin Connolly:]

Hey Brendan, it’s a good question. And again, we don’t provide forward guidance on our releasing spreads. I guess I would take a look back in terms of my comments, my prepared comments where we said that at the time of acquisition the Texas assets we disclosed those properties anywhere from 15% to 20% below market and those obviously comprise a pretty significant chunk of our large portfolio today. So as you said, that’s ultimately what’s driving those spreads.

[Brendan Maiorana:]

So I guess maybe just asking in a little bit of different way, is the fourth quarter -- was there anything unusual in the fourth quarter or is maybe that more and more represented a look of your portfolio as it stands today then thinking where you were first couple of quarters of the year?

[Gregg Adzema:]

It’s Gregg, Brendon. There was nothing unusual in the fourth quarter in terms of new leases that were signed that would drive that number up or down. But again, we don’t get so granular as to provide guidance on this going forward.

[Brendan Maiorana:]

Yes, no fair enough, okay, thanks guys.

[Lawrence Gellerstedt III:]

Thanks Brendon.

[Operator:]

And our final question comes from the line of Michael Knott with Green Street Advisors. Please proceed with your question.

[Jed Reagan:]

Hey, good morning guys. It’s Jed Reagan for Michael. So I am not sure if I missed it early, but maybe if you could just talk specifically about the renewal prospect to Transocean just given the recent contraction of your outlook for that has changed at all?

[Gregg Adzema:]

Not early, as Colin said, they been there since late 1980s and this was space that they added immediately after the disaster in the Gulf. And so the space was occupied by their lawyers, we just care to think how many lawyers those repossess, but that was occupied by lawyers working through all the claims. And so it never really was core Transocean space. So we were not surprised by the early termination, we could certainly see it as the space just become underutilized for them. But it really is not connected in any way in terms of the core corporate Transocean options. And so we feel good about our chances in terms of when that lease roles and this was really after that was more of a one-time event there.

[Jed Reagan:]

Okay thanks. And you talked a little bit earlier about the Houston supply picture, can you talk a little bit about the demand picture there, maybe how tenant demands has changed versus maybe three months ago? And can you talk a little kind of on top of that about just a magnitude of market rent increases you are seeing in the submarket there?

[Colin Connolly:]

Sure. [John] it’s Colin, Again from the demand perspective in the sense we talked last quarter, really remains unchanged and it’s and we would characterize it is very strong, across the submarkets that we’re active and across the market as a whole. What was the second piece of your question?

[Jed Reagan:]

Just sort of a magnitude of rent increases, you have seen or expect to see in your market in Houston?

[Colin Connolly:]

It’s very good and a large part of what drives those increases yet is what was the effectively the retiring lease term. In terms of the tenants who had -- who we’re kind of rolling off a 10 year lease term has obviously been when very, very dramatic increases to those rents. So you could in find different buildings in our submarkets where some of these rolls-up can be north to $10 square foot.

[Jed Reagan:]

Okay great. And what would you consider to be non-core in your portfolio at this point?

[Lawrence Gellerstedt III:]

The (inaudible) list is getting pretty small, but we certainly look at the Watkins portfolio that has the grocery anchored, a public center is something that is non-core and we may look to monetize that over the next year, year and a half. We also, if you note in our supplement we move Birmingham to held for sale and we will be marketing those assets in the next few quarters. So, those will be the two things that would come, we certainly continue to have some land that’s non-core that we continue to look to move off the balance sheet. And as I said in my remarks, imagine that we’ll as we move some of that land off and just would general moving more into development cycle we probably add some strategic land hold positions in some of these core submarkets as we alluded to. So those would be the main thing.

[Jed Reagan:]

Thanks.

[Michael Knott:]

Hey guys, it’s Michael. Gregg quick question for you now that the business is much simpler just curious I can thought about the decision to continue giving guidance where you guys have as opposed to just give me more conventional FFO per share guidance.

[Gregg Adzema:]

Yes it’s something that we think about a lot Michael and it’s something that we’ll consider as the year progresses.

[Michael Knott:]

And then also just curious as well looks like your operating expenses have been growing at a pretty healthy rate in the same-store pool, it’s interesting to compare that to Highwood that were about flat just curious what’s driving those numbers there?

[Gregg Adzema:]

Well our operating expenses during this past quarter grew at 5%, but if you go back and look at kind of an eight quarter average, they grew up less than 1% on average over the previous eight quarters. So expenses can be lumpy and sometimes it’s driven by property taxes and sometimes it’s driven by one-time events. But I think if you broaden your horizon a little bit beyond just one or two quarters, you'd see that we've actually had a pretty good track record of keeping expenses under control.

[Michael Knott:]

Okay. And then I appreciate the new disclosure on releasing spreads and showing on an after CapEx basis. Just curious how that 11% -- you would think that if your, some of your rents are 15% to 20% below market and I presume those comments were on a gross rent basis not sort of a net effective. You might think that the 11% might have actually been a little higher. Do you have similar rents that are in the rolling that are even more below market than what we saw in the fourth quarter?

[Colin Connolly:]

Michael, it's Colin, just to clarify. That [threat] is on a net rent basis that are not under the net effective rent basis. And again, I think at 11% we feel like I got the very healthy spread and as I refer Q1 earlier with the addition of the Texas portfolio, I think that's where you’re really starting to see kind of drive that through as we added Greenway in the fourth quarter and Post Oak in the second?

[Michael Knott:]

Okay. And then just last one from me just to touch back on the Austin CBD development, is you’re your progress so far consistent with what you had underwritten or where do you stand on that versus what you thought?

[Lawrence Gellerstedt III:]

Yes, like I said in our -- I know I said in an earlier call, we underwrote it to be 50% leased at the time that we open which is the end of this year and we feel very good about where we stand relative to that. And then we always underwrite to have a couple of years to lease up until we get to full stabilization. So, we're very, very pleased with where we are with Colorado Tower and continue to be confident about it.

[Michael Knott:]

Okay, guys. Thanks a lot.

[Lawrence Gellerstedt III:]

Thanks Michael.

[Operator:]

We have no further questions at this time. Mr. Gellerstedt, I’ll turn the call back to you.

[Lawrence Gellerstedt III:]

We appreciate everybody’s continued interest in Cousins. We look forward to seeing lot of you all in Houston next week. And we’ll wrap it up with that. Thanks.

[Operator:]

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.