Cousins Properties 2026 Q2 Earnings Call

Good morning and welcome to Cousins Properties second 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 Regulation 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.

Thank you, Pam, and good morning everyone. We had an excellent second quarter at Cousins. On the earnings front, the team delivered $0.75 a share in FFO. In addition, we increased the midpoint of our FFO guidance by $0.01 per share to $2.95 per share for the full year in 2026, which represents 3.9% growth over 2025. This will be our third consecutive year of FFO growth and represents a 4% compounded annual growth rate since 2023. Cousins' earnings growth during this three-year timeframe is unmatched among traditional office REITs. Leasing remained robust. For the second consecutive quarter, we delivered one of our highest leasing volumes in the history of the company. We completed 924,000 square feet of leases, bringing occupancy to 98.8% leased, the highest level since the first quarter of 2020.

Our cash rent roll-up on second generation leasing was 9.2%, which marks 49 consecutive quarters of positive rent roll-ups. These results underscore the strength of our portfolio and the depth of customer demand for high-quality lifestyle office space. Let me highlight several important trends that continue to shape the office landscape. First, demand is improving. According to JLL, leasing activity hit a post-pandemic high during the second quarter. In addition, net absorption has been positive for four straight quarters and as a result, again, according to JLL, available space is 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. Employment data has shown no material negative trends due to AI. On the ground, we are seeing AI-related office demand broaden across the country into all of our markets.

As an example, according to BTS, there is approximately 1.2 million sq ft of AI office demand in Austin. Third, the flight to quality is unrelenting. Customers are prioritizing high quality and well-located buildings to promote engagement and collaboration. Again, according to JLL, nearly all of the positive net absorption in the office sector since the onset of COVID has occurred in buildings that were delivered from 2010 to the present. Fourth, the Sun Belt migration continues to re-accelerate. In addition to full corporate relocations, we see an uptick in companies from high cost, less business-friendly cities in the Northeast and West Coast open new Sun Belt corporate hubs. We believe that we are still in the early innings of this migration trend and expect these announcements to continue. Lastly, new construction starts are at historic lows.

Given the three to four-year lead time to deliver a new project, supply is unlikely to grow until 2030 at the 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, 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 Sun Belt, a shortage that will become increasingly acute over the next several years and favor landlords. Cousins is uniquely positioned to benefit from these trends. Turning to our strategy, as we outlined on prior earnings calls, our focus remains unchanged.

We are sharply focused on driving sustainable earnings growth while maintaining our best-in-class balance sheet and continuing to enhance the quality of our Sun Belt lifestyle office portfolio. During the second quarter, we advanced this strategy. First, we increased occupancy by 50 basis points to 89.4% across the portfolio as a result of the robust leasing activity. Second, we closed on a series of new investments and dispositions, which upgraded the quality of our portfolio and enhanced our geographic diversification. Third, we closed on a new five-year, $1.2 billion unsecured credit facility and improved the borrowing spread by 15 basis points. Looking ahead, our team's ability to drive both internal and external growth will be key to increasing FFO. We are in a great position to do both. Looking at internal growth opportunities, we remain confident that the portfolio will reach 90% occupancy at year-end.

We have modest near-term lease expirations and a robust late-stage leasing pipeline that will support this effort. Shifting to external growth opportunities, the strength of our balance sheet provides us flexibility to selectively pursue compelling new investments, including both acquisitions and new developments. As I said previously, the lack of large blocks of available space in many of our markets is likely to be the catalyst for new development opportunities. While nothing is done yet, we are hopeful to have news to share in coming quarters. We are excited about what lies ahead for Cousins. The office market is rebalancing, new construction is virtually non-existent, and high-quality lifestyle office space is becoming increasingly scarce. The office fundamentals in the Sunbelt are without a doubt tightening, and we expect the positive momentum to continue.

Despite ongoing macro volatility, Cousins continues to outperform, supported by a strong operating platform, a highly efficient G&A structure, and one of the strongest balance sheets in the office REIT sector. Before turning the call over to Richard, I want to thank our talented Cousins employees. Their commitment to excellence and to serving our customers and each other is the foundation of our success.

Richard? Thanks, Colin. Good morning, everyone.

Our operations team delivered another exceptional performance in the second quarter. Our 924,000 sq ft of quarterly leasing activity matched our strong first quarter, resulting in 1.9 million sq ft of total volume for the first half of the year. For context, if you look to the past decade, our average annual leasing volume was roughly equal to what we have posted in the first six months of this year. Our second quarter square footage volume was also the second highest quarterly level since mid-2019, with the technology and legal sectors each accounting for about 30% of our activity. On a square foot basis, 43% of our completed leases this quarter were new and expansion leases, totaling 395,000 sq ft, well above our three-year run rate.

The team also completed 19 renewals during the second quarter, with renewal square foot volume at its highest level in well over a decade. This included five renewals greater than 50,000 sq ft, spanning four different markets. Importantly, all five of those renewals either retained or expanded their footprint. Beyond our fantastic completed activity, our overall leasing pipeline remains strong and at a level consistent with last quarter. As far as our late-stage pipeline is concerned, in our June investor presentation, we shared that 1 million sq ft of activity was either signed second quarter to date or in lease negotiations. As of today, one month into the third quarter, we have approximately 820,000 sq ft of leases signed or in lease negotiations. Given the strength of our early-stage pipeline, we are confident that number should again surpass the 1 million sq ft mark soon. Turning to lease economics. Quarterly average net rent came in at $41.35.

Average leasing concessions were $10.17, and average net effective rent was $28.05. Second quarter and first half of 2026 average net effective rent both grew nicely relative to the full year 2025, at 8.5% and 16.8%, respectively. Second generation cash rents increased again this quarter by 9.2%, with the increases broad-based across nearly all of our markets. For the quarter, our total office portfolio end of period leased and weighted average occupancy percentages were 92.8% and 89.4%, respectively. Both went up meaningfully sequentially as well as for the third consecutive quarter. Our portfolio lease percentage increased in all but two markets, with Atlanta as the largest positive contributor by a wide margin. The largest market contributors to organic growth in our weighted average occupancy were Atlanta and Charlotte.