Cousins Properties Inc. 2026 Q3 Earnings Call

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, Kennedy Hicks, our Executive Vice President and Chief Investment Officer, and Gregg Adzema, our Executive Vice President and 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 some 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. We had a very strong third quarter at Cousins. We increased our earnings guidance, completed strategic transactions that will increase the quality of our portfolio, and had robust leasing and operational metrics. I would like to start by highlighting several important trends that continue to shape the office landscape. First, demand is improving. According to JLL, leasing activity during 2026 is on pace for a post-pandemic high. Net absorption has also been positive for five straight quarters. Together, stronger leasing and sustained positive absorption point to a tightening market, with available space declining at one of the fastest paces in office market history. Second, to date, AI is proving to be more of a friend than a foe to the office sector. On the ground, we are seeing AI-related office demand broaden across the country, including into many of our markets.

We have not seen any evidence in the employment data of material negative trends attributable to AI, and these observations are very encouraging, and we will continue to monitor them going forward. Third, the flight to quality is unrelenting. Customers are prioritizing high-quality, well-located buildings that promote engagement and collaboration. The preference for newer buildings is particularly clear. Again, according to JLL, nearly all positive net absorption in the office sector since the onset of COVID has occurred in buildings delivered from 2010 to the present. Fourth, we are seeing renewed momentum in Sunbelt migration. Alongside full corporate relocations, we see an uptick in companies opening new Sunbelt corporate hubs from high-cost, less business-friendly cities in the Northeast and on the West Coast. We believe the trend remains in its early stages and expect these announcements to continue. Lastly, new construction starts are at historic lows.

Given the three, in some cases four-year lead time to deliver a new project, any meaningful uptick in new supply is unlikely until 2030 at the very earliest. What are the implications of these trends? Simply stated, the office market has bifurcated. The commodity office sector has minimal demand and is significantly oversupplied, or said differently, it is under-demolished. At the same time, the lifestyle office sector is increasingly undersupplied. The net result for Cousins is an emerging shortage of premier lifestyle office space in the best submarkets of the Sunbelt, a shortage that will become increasingly acute over the next several years and favor landlords. We are uniquely positioned to benefit from these trends. At Cousins, our strategy remains unchanged. We are sharply focused on driving sustainable earnings growth while maintaining our best-in-class balance sheet and continuously enhancing the quality of our Sunbelt lifestyle office portfolio.

Importantly, we advanced the strategy during the third quarter. I will share some highlights. First, we are growing earnings. We increased FFO guidance by $0.02 a share to $2.97 per share for the full year in 2026, which represents 4.6% growth over 2025. This will be our third consecutive year of FFO growth and represents a 4.3% compounded annual growth rate since 2023. Cousins' track record of delivering earnings growth during this three-year timeframe is simply unmatched among traditional office REITs, and frankly, I believe underappreciated by investors. Second, we leased 546,000 sq ft during the quarter, including 220,000 sq ft of new and expansion leases. In addition, we have an exceptionally strong leasing pipeline. As a result, we are on track to hit our 90% occupancy target by year-end.

Third, our cash rent roll-up on second-generation leasing was 19.8%, our strongest performance in five years. This marks 50 consecutive quarters of positive rent roll-ups and reflects our continued emphasis on aggressively increasing rental rates. Lastly, we closed on a series of new investments and dispositions, which upgraded the quality of our portfolio, enhanced our geographic diversification, and positions Cousins for long-term earnings growth. I would like to highlight one transaction. Through a newly formed joint venture, we acquired a 97.5% equity interest in a 2.3-acre land parcel at 2401 McKinney in Uptown Dallas. Uptown continues to attract significant out-of-market demand and has a shortage of large blocks of space in premier properties. We believe 2401 McKinney is simply the best site in the city and an extraordinary opportunity for Cousins. As I have previously said, new development is becoming more compelling.

Thus, our current plan is to commence construction in 2027 on a trophy office tower with a planned size of approximately 700,000 square feet. While I recognize there has been much media speculation regarding 2401 McKinney, I obviously cannot comment on that today. But rest assured, in any future development announcements that we make, we are confident that investors will find the pre-leasing metrics and return profile very compelling, even in today's higher interest rate environment. We are excited about what lies ahead for Cousins. Despite ongoing macro volatility, we continue to outperform, supported by a strong operating platform, a trophy Sunbelt portfolio, a highly efficient G&A structure, and one of the strongest balance sheets in the office sector. These strengths position us for a market that is rebalancing. New construction is virtually nonexistent, high-quality lifestyle office space is becoming increasingly scarce, and overall fundamentals in the Sunbelt are tightening.

We expect the positive momentum to continue. Before turning the call over to Richard, I want to thank our talented Cousins employees. Their commitment to excellence and to serving our customers is the foundation of our success.

Richard? Thanks, Colin. Good morning, everyone.

Coming off a record-breaking 1.9 million square feet of total leasing in the first half of the year, our team added another 546,000 square feet of total leasing in the third quarter, which is on par with our quarterly run rate since the beginning of 2023. The technology and financial services sectors were the largest contributors to our overall activity at about 49% combined, with the balance being well-diversified by industry. On a square foot basis, 40% of our completed leases this quarter were new and expansion leases at 220,000 square feet, taking our year-to-date new and expansion leasing to approximately 1.1 million square feet. The team also completed an impressive 326,000 square feet of renewals during the quarter, with renewal square foot volume 25% higher than our three-year run rate.

This included six renewals of a full floor or greater, four of which expanded their footprint. With our solid year-to-date renewal leasing, we now only have 853,000 square feet expiring through the end of 2027, representing 4.6% of total portfolio lease space. For context, that is roughly half of what we have had expiring on average at the same point the last two years. Not only that, but there are also no expirations over 100,000 square feet through the end of next year. In fact, looking at 2027, our largest expiration that is either not backfilled or in leases to be backfilled is only 26,000 square feet. I am hard-pressed to think of a time when we have enjoyed such a phenomenal near-term expiration setup. Beyond our healthy completed activity and expirations profile, our overall leasing pipeline remains strong.

As far as our late-stage pipeline is concerned, in our September investor presentation, we shared that 1 million sq ft of activity was either signed, quarter-to-date, or in lease negotiations. Nearly 1 month into the fourth quarter, that number is now at approximately 1.4 million sq ft, which is roughly evenly split between the operating portfolio and prospective new development activity. Turning to lease economics, quarterly average net rent was $42.41. Both free rent and tenant improvements were lower this quarter, resulting in average leasing concessions of $8.25, all leading to average net effective rent coming in 11.4% higher sequentially at $31.24. Third quarter and year-to-date 2026 average net effective rent both grew nicely relative to the full year 2025, at 21% and 18% respectively.