Cousins Properties Inc Q2 FY2022 Earnings Call

Thank you. Good morning, and welcome to Cousins Properties Second Quarter Earnings Conference Call. With me today are Colin Conley, our President and Chief Executive Officer; Richard Hickson, our Executive Vice President of Operations; and Gregg Adzema, our Chief Financial Officer. The press release and supplemental package were distributed yesterday afternoon as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information links on the Investor Relations page or website, cousins.com. Please be aware that certain matters discussed today may constitute forward-looking statements within the meaning of federal securities laws, and actual results may differ materially from these statements due to a variety of risks and uncertainties and other factors including the risk factors set forth in our annual report on Form 10-K and our other SEC filings. The company does not undertake any duty to update any forward-looking statements, whether as a result of new information, future events or otherwise. The full declaration regarding forward-looking statements is available in the supplemental package posted yesterday, and a detailed discussion of potential risks is contained in our filings with the SEC. With that, I'll turn the call over to Colin Connolly.

Thank you, Pam, and good morning, everyone. Before providing some observations on the macro environment and trends, I want to provide a quick overview of our second quarter financial highlights. On the earnings front, the team delivered $0.70 per share in FFO. Importantly, we leased 588,000 square feet during the quarter with an 11.6% cash rent roll-up. These are strong results, and we remain encouraged by the leasing pipeline in front of us. Looking at the macro environment, I'll highlight 3 important trends. First, as we all know, unprecedented fiscal and monetary stimulus, supply chain disruptions from COVID in Europe, and an extraordinarily tight labor market have created inflation levels not seen in decades. Accordingly, the Federal Reserve has begun tightening financial conditions. The result is higher interest rates and a slowing economy. Not surprisingly, many companies are announcing plans to slow hiring and in some cases, layoffs. Second, the return to office, particularly premier office, continues and is likely to accelerate. CEOs are growing frustrated with remote work. Culture, comradery, collaboration are deteriorating. Financial results and stock prices have weakened and attrition is at record levels. At the same time, younger workers and recent college graduates are increasingly looking for an in-person experience. They want to build relationships, they want to be trained, they want to be mentored. They are the future, and their employers are listening. Encouragement to return to the office is growing from the top of organizations to the bottom and now from both sides as the job market softens. Let me paraphrase a recent statement from Shopify as they laid off approximately 1,000 employees: we placed a bet that the channel mix, the share of dollars that travel through e-commerce rather than physical retail would permanently leap ahead by 5 or even 10 years. It's now clear that bet didn't pay off. What we see now is the mix reverting to roughly where pre-COVID data would have suggested it should be at this point. I see parallels in this statement to the current narrative regarding the office market. Many have made similar new normal declarations regarding remote work. Will they be right, or will the office market also eventually revert to the mean? While I can't speak for commodity or suburban office, we believe that premier office will remain critical for innovative companies to build culture, collaborate, solve problems and grow talent. Lastly, the flight to quality is becoming even more pronounced. Trophy assets continue to experience greater resiliency and outperformed the broader market. To illustrate, net absorption since 2020 for buildings built since 2015 is positive 181 million square feet. On the contrary, net absorption since 2020 for buildings built prior to 2015 is negative 327 million square feet. That is a staggering difference. The market is speaking loudly. So what does this all mean for Cousins in our strategy? Market and financial conditions will likely become more challenging, we are not immune to the impact of rising interest rates or a weakening economy. However, we built Cousins to thrive during all phases of the economic cycle. We are exceptionally well positioned today. Let me highlight why: First, we own the leading Sunbelt trophy office portfolio in the best submarkets of Atlanta, Austin, Charlotte, Tampa, Phoenix, Dallas and Nashville. We believe that we will continue to get more than our fair share of leasing demand as we benefit from both Sunbelt migration and the flight to quality. Second, our $566 million development pipeline with our share of the office component approximately 70% pre-leased is appropriately positioned for the current climate. We will benefit from meaningful incremental NOI during 2023 and 2024 by only having a modest amount of speculative leasing risk. Next, the known move-outs by Norfolk Southern at Promenade and Anthem at 3350 Peachtree are behind us. While a recession, if it were to happen, could extend the timeline to complete the re-leasing of these attractive properties, our overall portfolio is on solid footing. Our lease expirations through 2024 totaled just 14.3%, among the lowest in the office sector. Lastly, our balance sheet is best-in-class. Our net debt-to-EBITDA at the end of the second quarter was 4.9x. This compares to the office sector average of approximately 7.3x. We have evaluated many deals over the course of 2022. In anticipation of a changing market, we have remained disciplined and kept our powder dry, notwithstanding the potential accretion to short-term earnings. Many recently announced deals in our markets, which were priced in the spring and have had cash cap rates in the high 4 percentage range on our underwriting. Today, just a few months later, the pricing looks much more attractive. We believe compelling opportunities are on the way, and we will be ready. At Cousins, we have a unique and compelling strategy. We'll be the preeminent Sunbelt office company. The key ingredients of this strategy include a pure-play portfolio of premier, highly amenitized properties in dynamic Sunbelt markets, a leading development platform that creates value through the development of innovative office, residential and mixed-use properties, a strong balance sheet with low leverage and ample liquidity and local operating teams with a creative and entrepreneurial approach. We have been executing this strategy for over a decade, and we remain committed to it. Looking forward, we will continue to prioritize selling less relevant properties, which at this point is a modest percentage of our portfolio, and reinvest the capital into strategic acquisitions, unique developments and our own stock, if that is the most compelling use to accomplish our long-term goals. In the near term, the bar for new development will be higher. While demand is quite strong for new product, material escalations in construction costs have compressed development yields, so they look less attractive today compared to acquisition cap rates and the implied yield on our own stock. We expect construction costs will moderate. So we will be back to the development team soon enough with some exciting projects as development yields rebalance. In closing, we are mindful of the potential impact of higher interest rates and a slowing economy on short-term results. However, over the long term, we are optimistic that premier office will separate into its own asset class with improved investor sentiment. Cousins is in a very strong position. We are in the right Sunbelt markets. We own a trophy portfolio, and we have a dedicated and talented team, and our balance sheet is primed for opportunities. Before turning the call over to Richard, I want to thank our entire Cousins team who provide excellent service to our customers as well as their skill and talent to their jobs every day. Their creativity, resilience and hard work will continue to propel us ahead.

Thanks, Colin, and good morning. Despite the current macroeconomic backdrop, our operations team was able to once again produce solid quarterly results. In particular, our leasing activity this quarter is a clear indication that the quality of our portfolio is resonating well with office users in our Sunbelt markets. Diving right into results. Our total office portfolio lease percentage and weighted average occupancy were 90.1% and 87.5% respectively. Our weighted average occupancy was virtually unchanged quarter-over-quarter, increasing 10 basis points. We also saw physical utilization move incrementally higher during the quarter. With regard to leasing, the quarter was outstanding. We executed 52 leases for a total of 588,000 square feet with a weighted average term of 7.9 years. Our volume in square foot terms was up 82% over the first quarter and up 12% relative to our run rate in 2021. The signed lease count this quarter is especially notable and represents our highest quarterly transaction count ever tied with the third quarter of 2016. New and expansion leases represented 45% of total leasing activity this quarter, and our activity was diverse in terms of industry mix with traditional professional services leading the way. Only 18% of our activity this quarter was with customers in the technology sector. Rent growth in the quarter was strong, with second-generation net rents increasing 11.6% on a cash basis. Our portfolio's in-place gross rents also increased yet again to $44.40. In addition to strong rent growth, leasing concessions defined as the sum of free rent and tenant improvements were $6.32 per square foot per year, more than $2 lower than what we posted last quarter and $0.60 lower than in 2021. Despite lower concessions, our net effective rents came in modestly lower compared to last quarter at $23.37, more in line with levels seen in the first half of 2021. This decrease relative to recent quarters was primarily due to our geographic leasing mix. Looking forward, I'm also pleased to say that we continue to have a healthy late-stage lease pipeline that to date has shown no signs of disruption. It's well balanced among our markets and is anchored by a diverse group of traditional professional services companies. With oil prices remaining at an elevated level, we are seeing interesting market activity in Houston. A quick reminder that our 835,000 square foot Brier Lake project in Houston remains a noncore holding. While lease economics in Houston going forward will almost certainly not screen well relative to our stronger core markets, new activity in Houston would be a welcome net positive to our holding there and to our overall portfolio. Despite our strong recent activity and healthy pipeline, we are closely monitoring macroeconomic conditions and acknowledge that any further deterioration would almost certainly have some negative impact on leasing activity in the back half of this year. We simply are not seeing that in our portfolio yet. As Colin highlighted in his remarks, we do continue to see the impact of the flight to quality trend. There's probably no better market to look for an example of this trend in Tampa. According to JLL research, the overall market has posted negative net absorption of 532,000 square feet year-to-date. However, the Class A segment and the highest quality CBD and Westshore submarkets, where our properties are located, has posted positive net absorption of 278,000 square feet. Our same property portfolio in Tampa is currently 92.5% leased, and our lease pipeline has filled nicely during the past quarter. The migration and flight quality trends are also clear in Atlanta, where we completed an impressive 323,000 square feet of leasing this quarter, including over 48,000 square feet of new and expansion leases at Prominent Central in Midtown with a blended cash rent roll-up of 38%. According to JLL, Atlanta's office market leasing activity has surpassed the 2016 to '19, 3-year average leasing activity in 3 of the last 4 quarters. In the first part of '22, great companies like Visa, Walmart, McKenzie and Nike have all committed to creating new hubs in Atlanta. Broader rent growth has also resumed in Atlanta after remaining relatively stable since 2020, with 8 out of Atlanta's 10 submarkets showing average asking rents above pre-pandemic peaks. Austin has also benefited greatly from these trends. Austin led the nation in return to office occupancy levels this quarter according to Castle Systems data as the market continued to realize net occupancy gains with over 472,000 square feet of positive absorption. Average rental rates in Austin were at a record high last quarter according to CBRE, and they remained at those levels this quarter. Like Atlanta, our Austin leasing activity was strong this quarter, including a 94,000 square foot early renewal and expansion of Cadence Design Systems at our Research Park Plaza property in the Northwest submarket. This was a fantastic transaction that rolled up rents and stabilized that property's occupancy for many years to come. There's no doubt that rising interest rates and high inflation could put pressure on the economy and health of the office market. Nevertheless, we believe leading companies will continue to seek out high-quality office space in our core markets over the long term. It also bears repeating what Colin said earlier. We are incredibly encouraged that only 14.3% of our annual contractual rent expires through the end of 2024. The larger expirations of the past couple of years are behind us, and we are in an enviable position of stability as economic headwinds threaten. Before handing off to Gregg, I want to thank the entire Cousins team. As always, your hard work is the foundation of our success.

Thanks, Richard, and good morning, everyone. I'll begin my remarks by providing some detail on our same-property performance in our parking revenues. Then I'll move on to our transaction activity, our capital markets activity and our development pipeline, followed by a quick discussion of our balance sheet before closing my remarks with updated information on our outlook for the balance of 2022. Overall, as Colin stated upfront, second quarter numbers were solid despite the economic volatility and uncertainty. Focusing on same-property performance, cash net operating income decreased 0.2% compared to last year, driven by a 1.6% decrease in revenues and a 4.1% decrease in expenses. These numbers include 2 properties here in Atlanta, 3350 Peachtree and Buckhead and Promina Tower in Midtown that have each had large recent move-outs and are undergoing significant redevelopments as we take advantage of their locations to update both properties. Despite this work, we've kept these buildings in our same property pool. Excluding these 2 buildings, same-property cash NOI would have increased 1.9% during the second quarter, a better reflection of the current underlying fundamentals within our portfolio. For the first 6 months of 2022, same-property cash NOI, including 3350 Peachtree and Promina Tower is flat compared to last year. We expect this to improve over the final 6 months of '22, and we anticipate positive same-property cash NOI growth for the full year. A large driver of this improvement is Amazon's lease commencement on July 1 for our entire Domain 2 property. As a quick reminder, this building has been empty and generating no revenues since the beginning of 2022 as Expedia moved out to consolidate their operations at our newly developed Domain 11 building. Prior to this move out, we signed a lease with Amazon that rolled up the rent and extended the term from Expedia's prior lease. However, we have had 6 months of downtime as the transition to Amazon takes place. As Richard mentioned earlier, fiscal occupancy at our properties has increased, and our parking revenues have grown along with it. They're up 9% compared to the first quarter. For context, parking revenues comprise about 6% of our total property revenues. And despite the recent improvement, they remain about 11% below a stabilized run rate. Turning to transaction activity. Early in the second quarter, we acquired our partner's 10% interest in the 2 Avalon properties we developed that are located here in Atlanta for $43.4 million. This price included the payment of a promote to our partner who controlled the development sites originally and represented a negotiated value of $301.5 million. Later in the quarter, one of our joint ventures with Heinz sold its interest in a parcel of land located in the victory submarket of Uptown Dallas for $23.1 million. This was a terrific piece of land in a Dallas submarket we had identified for growth. We bought it early and we bought it well. However, since our purchase, this location has emerged as more of a residential and retail area rather than office, and the highest and best use of the site is now high-rise multifamily. We initiated a sales process and we generated a great outcome. Our share of the gain from the sale was $4.5 million. On the capital markets front, we closed on a new unsecured credit facility during the first week of May. The maximum capacity remains $1 billion with improved pricing and similar financial covenants. It's a 5-year commitment, and the new maturity date is April 30, 2027. It's a really terrific execution at this point in time. Near the end of the quarter, we settled 2.6 million shares of our common stock sold on a forward basis during the third and fourth quarters of '21 at a gross price of $39.32 per share. It's another terrific execution for our shareholders. The proceeds of this issuance funded our prior acquisition of HEIGHTS Union in Tampa on a leverage-neutral basis. Turning to our development efforts, all 3 projects, 100 Mill in Phoenix, Domain 9 in Austin and New Hakan Nashville remain on budget. Our remaining funding commitment for this pipeline is approximately $240 million, which is more than covered by our construction financing, our existing liquidity and future retained earnings. We entered this period of uncertainty with a relatively small, highly derisked development pipeline. Looking at our balance sheet, we purposefully reduced leverage during the second quarter. As Colin stated earlier, net debt to EBITDA is now just 4.9x. Our financial position is rock solid as we navigate these challenging economic times. I'll close by updating our 2022 earnings guidance. We currently anticipate full year '22 FFO between $2.67 and $2.73 per share with a midpoint of $2.70. This is down $0.04 or 1.5% from the prior midpoint of $2.74 per share. This $0.04 adjustment is driven by a negative variance of $0.08 due to higher interest rates, partially offset by $0.03 from the Victory land I discussed earlier, as well as $0.01 of improved property NOI. Focusing on interest rates, we use the forward LIBOR and SOFR curves to forecast short-term rates and the forward 10-year Treasury curve plus credit spreads to forecast long-term rates. As I stated on our first quarter conference call, the guidance we provided at that time already reflected increases in rates that had taken place earlier in the year. Since March, both short- and long-term actual and forecast rates have moved even higher. For example, the forward curve for 30-day LIBOR at year-end '22 has moved from 1.5% to 3.5%, an increase of 200 basis points. The coupon and fixed rate tenure issuance has moved from the high 3s to the low to mid-5s, an increase of about 175 basis points. Applying these increases generates about $12 million more in interest expense during 2022 or $0.08 per share. Beyond '22, I'd encourage you to look at the forward curves and credit spreads as you update your 2023 earnings models for us.

Our first question will come from Anthony Powell with Barclays.

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

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

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

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

As I mentioned, the standards for new development have increased. With rising costs, the yields from development compared to our other options have become less appealing. This includes Domain Point in that assessment. Over time, we need to see either a reduction in costs or an increase in rents to make it financially viable for us to proceed. I'm optimistic that these changes will occur sooner than many expect. Additionally, there is a strong demand for high-quality new products, which suggests there is an opportunity to achieve a balance, even if the economic environment becomes more challenging. However, it will take some time for conditions to reach levels that are attractive.

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

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

Yes, Blaine, that's a great question. Our balance sheet currently shows about 4.9 times debt to EBITDA, which gives us significant capacity to leverage potential opportunities. From our viewpoint, as we move from spring into late summer, we anticipate that the tightening availability of debt and its repricing could present valuable chances to acquire quality assets in our key submarkets at potentially favorable prices. We will remain vigilant and actively seek out these opportunities as they are likely to arise.

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

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

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

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

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

I was hoping to get more insight into your approach to floating rate debt. Can you explain whether you plan to reduce the amount in the future to prevent fluctuations in earnings due to interest rates? Additionally, could you break down your debt balance in terms of developments currently in progress versus long-term balance sheet debt? How do you view that?

Currently, we have about 30% of our total debt as floating rate debt, which is slightly higher than our usual range of around 20%. We made a conscious decision to increase this percentage to give us more flexibility. As mentioned earlier, we have approximately $300 million in debt maturing at the end of this year and in early 2023. One option we considered for refinancing was to launch our first unsecured bond deal, but we realized we would need more than $300 million to do it properly. To prepare for this, we increased our credit facility balance over the past couple of quarters to fully utilize the proceeds if we opted for this route. However, due to changing macroeconomic conditions, it seems we will not proceed with the unsecured bond deal and will explore other refinancing options instead. There are still opportunities in the market for various types of debt such as bank term loans and private placements, and we aim to refinance in the next quarter while also reducing our floating rate debt back to historical levels.

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

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

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

Certainly, as we speak today, there is a substantial amount of liquidity in the investment sales market. This situation could change over time. If it does, and we find the opportunity to sell assets that we view as less relevant and not central to our core operations, we will seize those opportunities. Ideally, since our balance sheet is in a strong position, if we were to proceed with such a sale, I hope we would have a beneficial use for the proceeds. While we cannot always anticipate market movements perfectly, our overall approach is to align our sources and uses as effectively as possible.

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

Yes. As I mentioned, we believe that interesting acquisition opportunities will arise. Additionally, we have the option to consider our own stock if we feel we have capital available from a noncore sale.

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

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

Our next question will come from Dave Rodgers with Baird.

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

Our caution regarding development is not driven by leasing or demand. Instead, it stems from construction costs that have significantly increased in the last couple of quarters, beyond our previous expectations. This cautious approach reflects our disciplined allocation of capital as we evaluate the compressed development yields resulting from these higher costs, while also considering other potential opportunities. We anticipate that these costs will stabilize in the latter half of the year and into next year, which may make development yields more appealing. However, we are cautious about committing to a guaranteed maximum price that does not provide a favorable financial return. We expect this situation to evolve, and we will be prepared to proceed when the conditions improve.

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

Yes. Currently, we're not observing any significant changes in our existing leasing pipeline or receiving any feedback from our customers. Typically, summer tour activity slows down a bit during this season, but we are noticing positive signs from various sectors of the economy that may have been stagnant in recent years. Our outlook on the market is cautiously optimistic, but we remain realistic, considering the headlines and GDP figures. If the market shifts, we want to ensure we're well-prepared. As I've mentioned before, Cousins is positioned to succeed during all stages of the economic cycle. There hasn't been anything concerning reported yet, but we stay informed by following the same news as everyone else, monitoring broader economic indicators.

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

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

Our next question will come from Vikram Malhotra with Mizuho.

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

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

That’s helpful. Can you share your thoughts on the tech slowdown and the increasing interest in financials and professional services? What impact does that have on your top markets in terms of market rent growth and incentives? Specifically for Cousins, how should we approach the mark-to-market and tenant improvement trajectory?

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

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

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

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

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

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

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

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

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

I wouldn't say that any have been tenant-driven. But I think you've seen some instances for whatever reason, different funds perhaps have cues, trying to find liquidity, and with less debt available, they're smaller buyer pools. I think that could create some interesting opportunities for us given we could be a cash buyer. I think we'll continue to focus our efforts on opportunities that are trophy quality, premier office that we think over the long term will generate outsized demand. I think that will be our focus on that quality of properties.

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

Yes, we are noticing increased life science activity in Austin, and we're also seeing some growth in Atlanta. We are open to a variety of uses. We have been engaged in the residential sector and plan to continue our involvement in urban mixed-use projects. We will assess the life science market and acknowledge that we currently lack the necessary expertise, but we plan to learn more over time. There may be opportunities for partnerships where we can leverage our local market knowledge. However, given our inexperience in life science, we consider it a lower priority for now.

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

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

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

Yes. Blaine, I don't have much to add to Gregg's comments. If we can generate sources of capital, our board and I will evaluate the strategic and financial merits of acquisitions, development, and/or share repurchases, as we have done in the past. We have proceeded with all three options, and considering our current share price, it will certainly be part of the discussion. The decision will depend on the source of capital at that time and the opportunities available to us. We will strive to be rational, unbiased investors and focus on the best opportunities to create value for shareholders.

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

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

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