Earnings Call Transcript - CUZ Q3 2022

Operator, Operator

Good morning, and welcome to the Cousins Properties Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Pam Roper, General Counsel. Please go ahead.

Pamela Roper, General Counsel

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

Colin Connolly, CEO

Thank you, Pam, and good morning, everyone. We had a very strong third quarter at Cousins. On the earnings front, the team delivered $0.69 per share in FFO and same property net operating income increased 1.5% on a cash basis. Importantly, we leased 431,000 square feet during the quarter, with a 4.8% cash rent roll-up, and 7.3% excluding our non-core asset in Houston. Additionally, we sold our 50% interest in Carolina Square, a mixed-use property in Chapel Hill, North Carolina for $105 million, recognizing a gain of $56.3 million. These are terrific results. Before providing an update on our strategy at Cousins, I will share a few observations on the macro environment. Despite the current inflationary environment, the Federal Reserve and other central banks around the world have rapidly raised interest rates to slow economic growth. Financial conditions have tightened, layoffs are growing, and the probability of a recession has increased. This unwinding process will likely take some time to play out. What are the implications for real estate? First, leasing demand is likely to soften and/or slow across all product types. Second, the availability of capital, both debt and equity has decreased, while also becoming more expensive. As a result, the bid-ask spread between buyers and sellers has widened, and the investment sales market has dramatically slowed. Amidst this challenging market, there are real long-term silver linings taking shape for Cousins. First, our customers are returning in greater force. Within our portfolio, we have properties with a physical occupancy well above 70%, effectively pre-COVID levels. Remote work became widely accepted during the pandemic, and understandably, many workers do not want to lose the convenience of a short commute. However, labor productivity has fallen to historic lows, attrition has increased, mentorship is down, and surprisingly, culture has refrained. Financially, profits are declining and many stock prices are back to 2019 levels or lower. Corporate leaders are now more clearly recognizing the shortcomings of a remote workforce. We anticipate increased directives for teams to work physically together at least most of the time. Second, the flight to quality continues. Since the onset of COVID-19, properties built since 2010 have recorded 84 million square feet of positive net absorption nationally. During the same period, properties built in the 1980s recorded 89 million square feet of negative net absorption. This is a staggering bifurcation. Effectively, a growing percentage of leasing demand is now exclusively focused on trophy properties. The outperformance of these premier workplaces, which represent the top of the market is becoming more pronounced. At the same time, the obsolescence of commodity office is accelerating. At Cousins, we have a unique and compelling strategy, to build the preeminent Sunbelt REIT. We have been executing on our plan for over 10 years. Most recently, we completed a transformational merger with the purchase of Cherry in 2019. During 2020 and 2021, we accelerated our asset recycling. We sold $1.2 billion of less relevant properties and reinvested the proceeds into the development and acquisition of the RailYard in Charlotte, 300 Colorado and Domain 9 in Austin, Neuhoff in Nashville, 725 Thompson Atlanta and Heights Union in Tampa. These are all highly differentiated properties in vibrant neighborhoods. Looking forward, market and financial conditions will likely become more challenging. 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 portfolio of premier workplaces in the best submarkets in Atlanta, Austin, Charlotte, Tampa, Phoenix, Dallas, and Nashville. With a third of our properties less than five years old or recently redeveloped, we believe that we will get more than our fair share of leasing demand, as we benefit from both Sunbelt migration and the flight to quality trends. Encouragingly, our existing customers are growing. Looking at our 2022 renewals through the third quarter, we have had more customers expand than contract. Importantly, our lease expirations through 2024 total just 12% of our annual contractual rent, among the lowest in the office sector, and this positions us favorably to grow occupancy over time. Next, our $569 million development pipeline, with the office component approximately 70% preleased, is appropriately sized and positioned for the current climate. We will benefit from incremental NOI during 2023 and 2024, while we have only modest speculative risk. Today, we have approached 2022 with caution. Importantly, we have wisely prioritized our best-in-class balance sheet over new investments thus far. Our net debt to EBITDA at the end of the third quarter was 4.75 times, this compares to the Green Street sector average of 7.9 times. After quarter end, we closed a $400 million term loan and had locked in a rate on a $221 million mortgage at our Terminus property in Atlanta. Upon closing of the Terminus mortgage, we will have no significant loan maturities into 2024 and less than $100 million outstanding on our $1 billion revolving credit facility. 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 workplaces will separate into their own asset class with improved sentiment. Cousins is uniquely well positioned. We are in the right Sunbelt markets, we own a trophy portfolio, we have a fortress balance sheet. Importantly, we have significant liquidity and capacity to pursue new investments at a time when many of our competitors do not. Our talented and creative team will be ready. Before turning the call over to Richard, I want to thank all of our employees at Cousins, who provide excellent service to our customers, as well as their skill and talent to their jobs every day. Their dedication, resilience, and hard work will continue to propel us ahead. Thank you. Richard?

Richard Hickson, EVP of Operations

Thanks, Colin, and good morning, everyone. Similar to last quarter, our operations team produced solid results in the face of increasingly challenging macroeconomic conditions. Our team is intently focused during this complicated time and our portfolio continues to resonate with users of high-quality office space. For the third quarter, our total office portfolio end of period leased percentage and weighted average occupancy were 90.1% and 87.3%, respectively. Our lease percentage was unchanged, while our weighted average occupancy was virtually unchanged, down only 0.1%. It is encouraging to see stability in these important metrics. Leasing results this quarter were once again impressive. We executed 48 leases in the quarter, totaling 431,000 square feet. Our transaction count was only four fewer than our record count last quarter, and our square footage volume was largely in line with our quarterly run rate in the first half of the year. Our third quarter activity also produced a weighted average lease term of 8.3 years, clear evidence that companies continue to make long-term commitments for office space. New and expansion leases represented 49% of total leasing activity this quarter, and activity was again balanced in terms of industry representation, with customers in the legal, financial services, and general professional services sectors accounting for most of our volume. Leasing concessions, defined as the sum of free rent and tenant improvements, came in at $7.66 per square foot compared to our previous four-quarter average of $7.55. With the benefit of stable concessions, I'm pleased to note that net effective rents this quarter moved higher to $24.97, a $1.47 increase relative to the first half of this year. Net effective rents this quarter were also the second highest we have recorded since the beginning of 2021. Second-generation net rents increased 4.8% on a cash basis in the third quarter, representing lower growth than in recent quarters. You will recall that the past two quarters, I mentioned we might see increased activity in Houston. And if that completed, it would likely not screen well relative to our stronger core markets. That proved out this quarter. When excluding a 25,000 square foot renewal signed in Houston, our second-generation cash rent roll-up this quarter was a stronger 7.3%. Looking forward, we remain encouraged by healthy volume in our late-stage lease pipeline, as well as the level of inquiries and activity in our early-stage pipeline. I would note, once again, however, that our pipeline still includes sizable activity in Houston, and that activity is likely to have a dampening effect on our reported leasing metrics when completed. Despite our relative optimism about the leasing pipeline, we do continue to monitor the macroeconomic landscape and acknowledge that further weakening of the economy would likely have a negative impact on our leasing activity going forward. Regardless, we continue to see the positive impact of the flight to quality trend across our Sunbelt markets, as office users gravitate toward amenity-rich submarkets and properties. For instance, in Atlanta, we are seeing a number of requirements focused on Midtown, a dynamic submarket where we have two fantastic existing projects with transformational redevelopments either at or near completion. One of the projects is Prominent Central, where Visa will soon commence occupancy, representing important new-to-market absorption. Our Buckhead portfolio continues to perform nicely as well, with 53% of our 144,000 square feet of Atlanta leasing activity this quarter taking place in this in-town submarket. In Tampa, direct vacancy is now just under 12%, the lowest vacancy since pre-COVID according to JLL Research. We signed an impressive 98,000 square feet of leases in our high-quality Tampa portfolio this quarter, of which, 55% were new and expansion leases. Similarly, in Phoenix, many companies are choosing to move into higher-quality, amenitized space in order to attract new talent and entice existing employees back to the office. We've seen the Class A properties make up 67% of total leasing volume in Phoenix this quarter, also according to JLL. We signed 40,000 square feet of leases this quarter in Phoenix, with an average cash rent roll-up of 19.6%. Now I want to briefly highlight the strength of our portfolio in Austin, where we signed 79,000 square feet of leases this quarter, including two new leases for the last two floors of direct vacancy on our recently developed 300 Colorado building in the central business district. Our Austin portfolio produced 31.7% of our total net operating income in the third quarter, and it includes 4.6 million square feet in three distinct submarkets. The portfolio is very healthy at nearly 95% leased and enjoys an in-place weighted average lease term of over six years. Remarkably, the entirety of our 2.1 million square feet at the domain and domain point are currently 100% leased. Similar to the Austin market as a whole, we do have outsized exposure to the technology sector, which has clearly been an important driver of demand in Austin in the past. I would note that approximately 75% of our technology sector exposure in Austin is with high-quality, publicly traded large-cap technology companies. We are very pleased with the quality of our customer base in Austin, technology or otherwise. On top of all of that, only 8.9% of annual contractual rent in our Austin portfolio expires during 2023 and 2024. In short, our Austin portfolio sits in an enviable position of strength. Looking ahead, many of the compelling dynamics within our Austin portfolio are also present in our entire operating portfolio. Only 12.1% of our annual contractual rent expires through the end of 2024. We have only one customer greater than 100,000 square feet expiring during 2023, specifically a 135,000 square foot lease due in the fourth quarter, and we are very encouraged about the status of that renewal. Further, the average size of our expiring customers in 2023 is approximately 11,000 square feet and the weighted average expiration date is in the third quarter. Last, we currently have 890,000 square feet of new and expansion leases that are signed, but not yet commenced. These have a weighted average commencement in the second quarter of 2023. We recognize the economic climate to remain complex for the foreseeable future, yet we continue to see firsthand that companies are seeking high-quality office space in our markets. Cousins is incredibly well positioned for any opportunities ahead with a stable, high-quality portfolio in the best Sunbelt markets. Before handing it off to Gregg, I want to thank the entire Cousins team. Your skill and hard work continue to drive our success.

Gregg Adzema, CFO

Thank you, Richard. Good morning, everyone. I will start by discussing our same-property performance in parking revenues, followed by transaction activity, capital markets activity, and our development pipeline. I'll also touch on our balance sheet before concluding with an update on our outlook for 2022. As Colin mentioned earlier, our third-quarter numbers are solid despite ongoing economic volatility and uncertainty. In terms of same-property performance, cash net operating income for the third quarter increased by 1.5% compared to last year. This marks an improvement from the first half of the year, which was relatively flat, largely driven by Amazon's lease commencing on July 1st for our entire Domain 2 property in Austin. For 2022, we are reaffirming our guidance that same-property cash NOI will remain positive compared to 2021. Colin also highlighted that fiscal occupancy at our properties continues to improve, and our parking revenues are increasing as well, with an expected rise of nearly 9% for 2022 compared to 2021. Regarding transaction activity, we sold our 50% interest in Carolina Square to our joint venture partner for $105 million, generating a gain of just over $56 million. We identified this opportunity through our longstanding relationship with the University of North Carolina and involved our joint venture partner to manage the project's heavy mixed-use nature. Office space constitutes only 34% of Carolina Square's total square footage. It was a non-core asset from the beginning, and we felt it was a good time to sell our interest, especially after refinancing the property with very favorable assumable debt for our partner. Overall, this sale was a great outcome for our shareholders. On the capital markets side, we have been busy and productive both during the third quarter and after. We began by amending an outstanding $350 million term loan, changing the base interest rate from LIBOR to SOFR. This adjustment allowed us to efficiently execute a swap from floating to fixed interest rates, locking the underlying SOFR rate at 4.23% until maturity. We also closed a new $400 million term loan with our existing bank syndicate, maturing in March 2025 with options for 4- to 6-month extensions. The pricing and covenants align with our existing credit facility and term loan. A portion of the proceeds was used to pay off our maturing Promina Tower and legacy Union mortgages. Additionally, we started the process of extending the current mortgages on our two terminus properties in Atlanta. The maturities will be extended from January 23 to January 31, with a combined principal rising to $221 million. The interest rate has been fixed at 6.34%, even as rates have increased since we locked it in. We expect this extension to close before year-end. The aim of these actions was threefold: first, to refinance the $331 million in mortgages maturing in the last quarter of this year and the first quarter of next year; second, to revert our floating rate exposure to historical levels; and third, to enhance liquidity to exploit potential investment opportunities arising from current disruptions in the commercial real estate debt markets. Overall, we accomplished our mission by managing the mortgages, restoring floating rate debt to about 20% of total debt, and maintaining nearly $1 billion in liquidity. When focusing on floating rate debt, we believe that limiting it to around 20% of total debt gives us valuable flexibility as we continue our property recycling efforts. Currently, we have three floating rate debts: our credit facility, our new term loan, and our new construction loan, consistent with our debt structure over the past decade. Looking ahead, only about 1% of our total debt is set to mature in 2023, specifically tied to a medical office building next to a hospital that is nearly fully leased. We own 50% of this property in Midtown Atlanta through a joint venture with Emory and are confident it can be refinanced successfully, even in challenging times. In terms of our development pipeline, we have three projects underway: 100 Mill in Phoenix, Domain 9 in Austin, and our Neuhoff joint venture in Nashville. Our remaining funding commitment for these projects is just under $200 million, adequately covered by construction financing, the liquidity mentioned earlier, and future retained earnings. Regarding our balance sheet, we have been working to reduce leverage during the third quarter. As Colin pointed out, our net debt to EBITDA ratio is now at 4.75 times. Our financial position is sound as we navigate these challenging economic conditions. To wrap up, our 2022 guidance has been updated. We now expect full-year 2022 FFO to fall between $2.69 and $2.73 per share, with a midpoint of $2.71. This represents a $0.01 increase, attributable to stronger-than-expected property NOI, somewhat offset by rising interest rates. The increase in our property NOI is broadly spread across multiple properties and categories. As for interest rates, as discussed on prior calls, we use forward LIBOR and SOFR curves for short-term rates and the forward 10-year treasury curve along with current credit spreads for long-term rates. These curves indicate that rates have continued to rise. Moving forward, our debt schedule remains very manageable and straightforward, and we suggest you consider the forward curves and credit spreads when updating your earnings model for 2023. Now, I will hand the call back over to the operator for any questions.

Operator, Operator

We will now begin the question-and-answer session. Our first question is from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck, Analyst

Great. Thanks. Good morning. Colin, your comments suggest that you guys have been deleveraging and building up dry powder for investment opportunities that you expect to emerge. Can you just provide some more color around what you guys are looking for, kind of how you think the current stress on the market is going to play out and maybe where the best opportunities are likely to emerge?

Colin Connolly, CEO

Yes, good morning, Blaine, and you're right. And as I mentioned earlier, we have prioritized the balance sheet over new investments year-to-date in anticipation of more attractive opportunities and better pricing. As we do look forward, we do think that there will be some opportunities as we move into 2023. And for us, those opportunities and our approach are always going to be singularly focused on high-quality product, premier workplaces that we think are going to continue to attract the best and brightest and growing companies. In terms of how that plays out, the current liquidity environment and higher rates continue, I think that's going to continue to apply pressure to some folks that have more leverage than perhaps they should. And I think we'll likely focus on again, high-quality trophy product that perhaps has broken capital structures. I think you can see that play out in some of the existing construction and new development that's underway. And so, I think like in cycles past, we'll look at this environment, our low leverage, and our liquidity, and try to take advantage of opportunities that could range anything from asset-level opportunities to corporate opportunities like we've done with Parkway and Cure.

Blaine Heck, Analyst

Okay, great. That's helpful. Second question, obviously, the headlines would suggest that tech tenants are at best kind of stepping back from the leasing market and at worst giving back a lot of space, whether that be through subleases or terminations. Can you guys just talk about your exposure to tech and whether you have any concerns around space get-backs in your portfolio?

Colin Connolly, CEO

Yes. Blaine, it's Colin. And you're right, the technology customers have stepped back. If you look back over the last couple of years, many of those companies staffed up and leased space in anticipation of a remote world forever. Obviously, we're now starting to see things normalize, which is having an impact on demand for product in the tech space. At the same time, the change in the interest rate environment and the lack of capital to fund this business are causing some of them to step back, driven by the capital markets. As it relates to us in terms of exposure, as Richard laid out in his remarks, over 75% of our technology exposure is with large, well-capitalized publicly traded companies, and ultimately, with pretty good lease terms. If they were to give back space, we view that as an opportunity in sublease space. That's an opportunity for us to multi-tenant some of those buildings, effectively covering lease-up as we did in 300 Colorado with the partially subleased space. But at the moment, there's nothing significant that we're aware of within our portfolio.

Blaine Heck, Analyst

Okay, that's helpful. Last one for me. Colin, last quarter, you talked about potential share repurchases given where your share price was. I didn't hear you mention that this quarter. So I'm wondering where that option ranks at this point and your preference for capital deployment and whether your thoughts have changed since last quarter?

Colin Connolly, CEO

Absolutely, Blaine. We always evaluate our share price and repurchases and talk with our Board about that regularly. Certainly, at current prices, it's something for us to consider. I think at the moment, we've continued to prioritize liquidity, low leverage, and the optionality that we have until we've got greater clarity on what the other potential investment opportunities might be. But we certainly have repurchased shares in the past and will always be open to it as we evaluate all the opportunities to invest capital.

Operator, Operator

The next question is from Dave Rodgers with Baird. Please go ahead.

Dave Rodgers, Analyst

Good morning. I have a question for Richard. I want to understand the difference in perspectives between Colin and Richard regarding current market conditions. Richard, can you discuss the status of tours, negotiations, and the lease pipeline? Colin seems to take a more macro view of the situation, but are you noticing any decrease in activity within the pipeline that could affect us in the next quarter or two, or are those tours and negotiations maintaining a steady pace?

Richard Hickson, EVP of Operations

Yes, that's a great question. I'd say that from a late-stage pipeline perspective, it's more of the same. We haven't seen significant changes. If anything, on the early-stage activity on tours and just trading early-stage proposals, there's probably a little bit of incremental softness there. So we're seeing some impact. But again, it's still at healthy levels. I wouldn't call it a large drop-off at this point.

Dave Rodgers, Analyst

That's helpful. Colin, regarding your question, I’m not sure if this will connect to Gregg as well. You all have created a strong balance sheet, and part of earning recognition for that involves utilizing it. Could you discuss your willingness to leverage your balance sheet to seize opportunities? This might include increasing leverage or purchasing debt. Please elaborate on where you feel comfortable using your assets to capitalize on these opportunities.

Colin Connolly, CEO

Certainly, Dave. You characterized that appropriately that our balance sheet is a tremendous asset, but only if we use it. If you look at our history, certainly over the last 10 years, we have maintained a fortress balance sheet effectively in the good times by not pursuing investments when a lot of our competitors had capital, but being patient and really deploying a lot of capital and using additional leverage in periods when others don't have a lot of capital. We believe we're embarking on one of those periods. If we're able to identify attractive opportunities to create value for shareholders by adding high-quality premier properties to the portfolio, we're ready, willing, and able to seize those opportunities. As in the past, if the opportunity is there, we might take our leverage up a bit, as we've demonstrated our ability to do, and then bring leverage back down. I think we could be facing one of those periods.

Dave Rodgers, Analyst

As we look at some of your high-quality peers pushing 6 times, 7 times, 8 times debt to EBITDA, do you have a comfort zone in the near term? But it sounds like you want to get back to maybe a mid-4 sub 5% number. But I mean, in the near term, do you have a stress level you're willing to push?

Colin Connolly, CEO

I'd say as we look forward over the next year, the investment opportunity plays out like we think it might. The probability of our leverage going up is higher than it going down, and that would be to take advantage of good investment opportunities using the capital and balance sheet we have. But that will depend on the quality of the opportunity. I wouldn't say we have a specific hard line in the sand as to how far we would take leverage; that will be driven by the quality of the opportunity in front of us.

Dave Rodgers, Analyst

Thanks, Colin. Last one, Gregg for you. Just in this up, I think it was the Terminus. FFO was up, I think, 20% sequentially, 500 basis point occupancy decline. Just curious if there was some move in there or something unusual in those numbers?

Gregg Adzema, CFO

Yes. Hi Dave, good morning. We had some tenant improvements that were completed during the quarter, and we recognize revenue once the tenant improvements are completed. It was just a timing issue on tenant improvements completion.

Operator, Operator

The next question is from Brian Spahn with Evercore ISI. Please go ahead.

Brian Spahn, Analyst

Hi. Thank you. Good to be on the call. I guess, just building on your comments already, Colin, external growth and potential distressed opportunities. Can you just talk about how you're thinking about underwriting today, how you're adjusting your return thresholds as you search for these new deals? And maybe just how you're evaluating development versus acquisitions? Do you think you favor acquisitions today just to the extent you can find some dislocated chance?

Colin Connolly, CEO

Hi, good morning. Clearly, with the rise in interest rates, that drives the bar higher regarding our funnel rates for new investments, whether for acquisition or development. Perhaps there will be some investment opportunities of high-quality assets that have compromised capital structures in this environment, and we'll be on the lookout for those opportunities. The current reality of higher construction costs, yields, and potentially higher cap rates does mean that the bar for new development is higher. But as I said on the last quarter call, I think you'll see some of that normalizing over the coming year, and I do believe development in the not-too-distant future will again be a viable opportunity. It will be driven by high-quality customers wanting exceptional space and workplaces paying for exactly what they want. That's going to create interesting opportunities for our fantastic development sites in the south end of Charlotte, Midtown Atlanta, or out in the Domain in Austin. We'll be patient, diligent, and thoughtful in how we allocate capital between development, acquisitions, or perhaps our own stock. We'll look at all opportunities and deploy it when we think it's the right risk-adjusted return for shareholders.

Gregg Adzema, CFO

Yes, sure. I think what you're alluding to is, if you take the midpoint of our full year '22 guidance and subtract the first nine months' actual performance, it resolves to a number in the fourth quarter that's below what we just reported in the third quarter. That's accurate. There are two items really moving that. First, we recognized the last of our $50-plus million in development fees from Norfolk Southern here in Atlanta during the third quarter. We recognized about $1 million of fees during the third quarter, recognized about $3 million, $3.5 million in fees for all of '22 in the first nine months, that's done now. So there are no fees for Norfolk Southern in the fourth quarter and beyond. The second piece of that would be interest rates; the average SOFR rate during the third quarter was just over 2%. Using the current forward curve, the average SOFR rate during the fourth quarter will be just over 4%. That difference greatly impacts our P&L, just like many of our peers. As we push that through, just like everyone in the industry, it has a negative impact on the fourth quarter interest expense versus the third quarter and also beyond into '23. If you look at the fourth quarter and say, is that a good run rate going into '23, it's premature for us to provide guidance. We typically provide that like most of our peers on the next earnings call. That said, the fourth quarter will be a much better indicator of future run rate than the third quarter was due to the two items I just described.

Operator, Operator

The next question is from Camille Bonnel with Bank of America. Please go ahead.

Camille Bonnel, Analyst

Hi. Following up on your prepared remarks, can you speak to what you're seeing for customer expansion in your portfolio by industry and size that they're taking?

Richard Hickson, EVP of Operations

Yes, this is Richard. The industry mix has certainly moved away from technology. We're observing significant growth, as Colin mentioned, in our portfolio with customers that have renewed recently, and it's quite diverse. I wouldn't say any one industry is leading that trend more than others. Overall, as we've noted, legal, financial services, and professional services are effectively meeting the substantial demand we experienced from the technology sector previously.

Colin Connolly, CEO

Camille, it's Colin, and good afternoon. As I mentioned in my prepared remarks, the investment sales market has dramatically slowed due to a widening gap in the bid-ask spread between buyers and sellers. Currently, that market is relatively slow. I anticipate that as we move into next year and gain more clarity, it will likely accelerate. Fortunately for Cousins, we have an exceptionally strong balance sheet and with the sale of Carolina Square, we have no need to pursue additional dispositions until we feel like there's appropriate pricing. We'll continue to evaluate it, more in the sense of us as a buyer versus a seller.

Camille Bonnel, Analyst

And finally from me on North Park. It looks like 107,000 square feet was given back this quarter. Given the elevated availability rates in the central perimeter of Atlanta with these assets being not too far away from where Home Depot is subleasing 600,000 square feet, can you just update us on how the lease-up is going on the remaining vacancy?

Colin Connolly, CEO

We did have a large move out at North Park. It is a more suburban asset and the overwhelming majority of our portfolio. I think it will take us a bit more time to backfill and release that compared to some of our availabilities down in Midtown Atlanta as an example. It's a terrific property with transportation on site, and it has been a really attractive destination for large Fortune 500 companies. You mentioned Home Depot, which is in the Northwest submarket, a little further away from the North Park project. I'd highlight a recent example of normalization in the market; a large Fortune 500 company in Atlanta recently put significant space on the sublease market, but last week, that space was quietly pulled back off the market as that customer reevaluated its approach to work. It will be interesting to watch those trends to see if other companies make similar decisions as the world continues to normalize.

Camille Bonnel, Analyst

Very interesting. Thank you for taking my questions.

Operator, Operator

The next question is from Vikram Malhotra with Mizuho. Please go ahead.

Vikram Malhotra, Analyst

Thanks for taking the question. So just on your comments around the interest rate, the forward curve, just where fundamentals are shaking out. I was just trying to quickly run through some of those higher assumptions on rates, et cetera, through the model. And I know you're going to give guidance next quarter, but is it safe to say that the interest expense uptick could sort of, on a run rate basis, almost wipe out any gains or just limit the gains from the core portfolio on occupancy or rent spreads such that you probably see a flattish trajectory on FFO in '23?

Gregg Adzema, CFO

Well, again, I don't want to provide any guidance early here. The time will come for us to do that, as we have in years past. But interest rates remain a headwind for not just us, but for all office owners and all real estate owners. As we enter '23, it's something that everybody is dealing with, and it will certainly reduce pretty much everyone's earnings growth. Even if they don't have floating rate debt, if they've got any fixed rate debt maturing, they have to roll over fixed-rate debt that has gone up as well. It's going to prove to be a headwind for everyone in the industry, including us.

Vikram Malhotra, Analyst

I think what surprised people and a few other peers have pointed to '23 guidance or at least alluded to it, like new development opportunities being financed with floating rate debt or other debt all add to the occupancy remaining flattish, all adds to it. I think that seems to be the case as I quickly ran through the curve and the higher expense. I will wait for you to provide those numbers. Just to guide around the trajectory of rent spreads, given what we've seen in the last several quarters where rent spreads and the lease rate have gone. Is it fair to bake in lower renewal rates such that there's pressure on lease rates and mark-to-market near-term from here on?

Colin Connolly, CEO

Vikram, it's Colin. Again, I think that within our markets and buildings representing premier workplaces, we continue to see demand. Thus far, we've seen rents continue to hold. Looking forward to coming quarters, we are hopeful we can continue to drive positive cash rent roll-ups. The only caveat is that, as Richard mentioned, we're seeing increased activity from energy companies in Houston, and that market dynamic is much different than our other markets, which could weigh on those statistics. That being said, large leases in Houston within our portfolio yield terrific outcomes, and we're going to pursue those opportunities. But regarding our core markets, even as the market retrenches and recessionary forces emerge, it's essential to remind everyone there are silver linings within the office space. As technology companies become less active, we see other segments like banks, financial services, law firms, etc., continue to seek more space. These organizations have grown throughout the last couple of COVID years and did not lease much space previously. We see some pent-up demand that could provide a buffer to macro headwinds the entire sector will face.

Vikram Malhotra, Analyst

That's fair. As you provide guidance, it would be helpful to provide more guardrails around the lease rate, occupancy, same-store NOI, given all this uncertainty in the rate environment. It would be helpful if you could consider providing some of that. Just last question, I guess, you referenced the balance sheet a lot, utilizing that as opportunities may arise. But I'm wondering, at the bottom of the cycle, the basis will matter in terms of where you invest on a per foot basis. Can you give us your thoughts on the bid-ask for assets? Where are cap rates trending to, for you to get aggressive?

Colin Connolly, CEO

Yes. Vikram, for us, specifically, it will begin when we start to see higher-quality properties become available. Those typically come a little later; the lower quality are the first to roll over. We are starting to hear pressure on some of those types of assets. We will continue to be patient, thoughtful, and wait for high-quality opportunities. However, we get there, whether that's an asset-level transaction or corporate transaction, we will be patient, and thoughtful about deploying capital. You may see some trades, perhaps in the lower quality space; that will start to create a market again, and establish a level at which other high-quality assets can trade off. When exactly this happens is anyone's guess, but I do think some looming loan expirations will spark transactions. You'll likely see the market resume sometime next year.

Operator, Operator

The next question is from Anthony Powell with Barclays. Please go ahead.

Anthony Powell, Analyst

Hi, good morning. A question on acquisitions and joint ventures. Some of your other peers are basically doing exclusive joint ventures when they do acquisitions or are doing more asset management. Is that something you would consider? Or could you actually do some deals that are wholly owned and consolidated, given your balance sheet strength?

Colin Connolly, CEO

Yes, great question, Anthony. We would certainly consider joint ventures if there were some strategic merit, perhaps a route into a specific asset. There could be some opportunities to come into existing joint ventures. If the deal size were too large, we would absolutely consider a joint venture. Unlike some peers, our leverage is at 4.75 times, giving us substantial capability to incrementally raise leverage for the right opportunity and asset.

Anthony Powell, Analyst

Got it. Thanks. One more quick question. Regarding the South Florida market, obviously, there's a gap compared to your mapping in Miami. It seems like there are more financial and other firms moving. Is that a market you're considering for acquisitions?

Colin Connolly, CEO

Yes, absolutely. We evaluate and monitor South Florida like a handful of other markets that seem interesting and have positive dynamics. In recent years, more interest from financial services and asset management firms is trending toward South Florida as many industries, including technology, distribute their workforces nationwide. This dynamic continues to play out as the market matures; it could support a larger average customer base in South Florida. That said, we don't feel capacity constrained or opportunity constrained in our existing markets. Therefore, it seems more likely that we will deploy capital within current markets rather than pursue expansions in this environment. However, we'll keep an eye on South Florida and possibly new opportunities in the future. Yes. We consider non-core assets as opportunities to sell at the right time. The capital markets from our end have not been pricing at a level we thought made sense in the past. Incremental leasing opportunities will add value while we wait for Houston to normalize. We believe the energy sector will improve and create a better exit point in the future. There's no specific deadline for selling, just when we think it's a fair price, and when conditions are favorable.

Operator, Operator

The next question is from Daniel Ismail with Green Street. Please go ahead.

Daniel Ismail, Analyst

Great, thank you. Maybe just going back to Carolina Square; was that a negotiated put price? Or was that done at market? It seemed like the latter, but I wanted to confirm.

Colin Connolly, CEO

Danny, it was a combination of both. We had that asset on the market with clear visibility into a market price. Ultimately, for the reasons that Gregg mentioned regarding the debt, we elected to sell to our joint venture partner.

Daniel Ismail, Analyst

Got it. And then maybe, Richard, can you describe where you're seeing the best prospects for net effective rental rate gains across your markets? Any specific submarkets seeming to outperform with higher demand than others?

Richard Hickson, EVP of Operations

Sure. The ones that come to mind where we see consistent rent growth over the last year include Phoenix, with a roll-up on leasing activity at 19.6%. Tampa also stands out where most of our assets in the Westshore are and Heights Union near the CBD. Heights Union was acquired fully leased, yet we've successfully increased rents more than expected. Good rent growth continues in our properties where we've invested, like Buckhead Plaza here in Atlanta and also in Midtown. I must also mention Austin; it's been a strong market for consistent rent growth for a long time. It's somewhat a little bit everywhere, and it's certainly submarket specific, but we've felt really good about our ability to push rents across the board.

Daniel Ismail, Analyst

Great, thanks everyone.

Operator, Operator

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

Colin Connolly, CEO

Thank you for your time today and your continued interest in Cousins Properties. We look forward to seeing many of you at NAREIT out in San Francisco in just a few weeks. Hope everybody has a great weekend.

Operator, Operator

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