COUSINS PROPERTIES INC Q3 FY2026 earnings call

• Market Trends: Demand is improving with net absorption positive for five consecutive quarters. AI demand is broadening beyond traditional hubs into Sunbelt markets like Austin and Nashville. The 'flight to quality' continues, favoring newer buildings (post-2010) and creating a bifurcated market where lifestyle offices are undersupplied while commodity offices are oversupplied. New construction starts are at historic lows, limiting new supply until 2030.
• Leasing Activity: Total leasing in Q3 was 546,000 square feet, bringing H1 2026 total to 1.9 million sq ft. Second-generation cash rent roll-ups reached 19.8%, the strongest in five years, marking 50 consecutive quarters of positive roll-ups. Average net effective rent grew 21% year-to-date compared to full-year 2025.
• Portfolio Quality & Expirations: The near-term expiration profile is exceptionally strong, with only 853,000 sq ft expiring through end-2027 (4.6% of base). There are no expirations over 100,000 sq ft through 2027. The company is on track to achieve its 90% occupancy target by year-end.
• Strategic Transactions: Sold 111 Congress in Austin for $208 million to recycle capital into higher-quality assets. Acquired a 97.5% interest in a development site at 2401 McKinney in Dallas via a joint venture with Trammell Crow Company for approximately $50 million. Committed to a preferred equity position in Fifth & Walsh in Austin.
• Balance Sheet & Capital: Total consolidated debt is 94% unsecured. Repaid two mortgages ($100M and $116M) using proceeds from a $500M unsecured bond deal. Issued 917,000 shares via ATM program; total unsettled forward sales stand at 3.9 million shares (~$120 million). Maintaining a best-in-class balance sheet with investment-grade ratings.

The company operates as a single segment: Sunbelt Lifestyle Office. For the third quarter of 2026, same-property cash NOI increased by 7.4% year-over-year (8.6% excluding the redeveloping 201 North Tryon). Revenue grew 5.5%, while expenses rose 2%. The total office portfolio achieved an end-of-period lease percentage of 93% and a weighted average occupancy of 89.5%. Specific market performance highlights include Austin (97.1% leased), Dallas (97.6% leased), Charlotte (tight supply, >35% cash rent roll-up), and Atlanta (92.4% leased, 86.3% occupied).

• Full Year 2026 Funds From Operations (FFO) guidance increased by two cents per share to a range of $2.95 to $2.99 per share, with a midpoint of $2.97 (representing 4.6% growth over 2025).
• The upward revision is primarily driven by better-than-forecast leasing activity and fee income.
• Guidance assumes that none of the 3.9 million forward-sold ATM shares settle in 2026.
• Guidance includes the sale of the 303 Tremont land parcel in Q4 but excludes any additional acquisitions, dispositions, or development starts for the remainder of the year.

• Development Execution Risk: The 2401 McKinney project is still finalizing building plans and costs; delays in pre-leasing or construction commencement could impact timelines.
• Interest Rate Volatility: Elevated and volatile interest rates increase the cost of capital and raise the hurdle rate for new developments, potentially constraining transaction volume.
• Occupancy vs. Rent Trade-off: Management acknowledges a 'healthy tension' between prioritizing high occupancy targets (90%+) and maximizing rental rates, which may require balancing short-term occupancy gains against long-term yield optimization.
• Concentration Risk: While diversified, significant activity and demand drivers are concentrated in specific Sunbelt submarkets (Austin, Dallas, Charlotte, Atlanta), exposing the portfolio to local economic shifts.
• Forward Equity Settlement: Although currently extended, the 3.9 million unsettled forward shares represent potential future dilution if not settled via other means or extended further.

Q: Blaine Heck asked about the economics, timeline, and pre-leasing status of the 2401 McKinney development, noting media speculation. / A: Colin Connolly stated that building plans and costs are still being finalized, preventing immediate lease signings. He emphasized that when details are released, the pre-leasing metrics and return profile will be compelling for investors, even in the current high-rate environment. The joint venture structure gives Trammell Crow operational control while Cousins retains major decision rights.

Q: Manis Abeke inquired about the funding sources for new developments, specifically asking how much spending might hit 2027 and how the balance sheet would handle it. / A: CFO Gregg Adzema explained that funding will be creative and leverage-neutral upon stabilization. With ~$120 million in unsettled ATM shares, the company has flexibility to fund projects like McKinney without immediate settlement pressure. They may also use non-core asset sales or JVs. Early-stage development costs have minimal earnings impact until stabilization, at which point accretion will be significant.

Q: Jana Gallen asked about the next occupancy goal post-90% target and whether management is adjusting tenant improvement (TI) and free rent concessions to support higher rents. / A: CEO Colin Connolly indicated confidence in pushing occupancy toward pre-pandemic levels of 92-93%, though he declined to set a specific timeline due to the desire to prioritize both occupancy and rent growth. EVP Richard Hickson noted that free rent and TI concessions came down meaningfully this quarter, and the company expects to continue mitigating these items as headline rents rise, focusing first on eliminating free rent before addressing TIs.

Q: Anthony Paolone asked about cap rates for premium assets and the nature of AI-driven demand, specifically regarding hyperscalers vs. AI-native companies. / A: Kennedy Hicks noted that core office assets trade around 7% cap rates, with development spreads targeted at 150-200 basis points above spot. Richard Hickson and Colin Connolly clarified that while AI-native firms were previously concentrated in coastal hubs, hyperscalers are distributing workforce broadly to Sunbelt markets like Austin and Nashville. This trend is expected to continue, with AI-native companies eventually following suit, providing long-term demand tailwinds.

Q: John Kim asked about the lack of announcement regarding the tenant for 2401 McKinney and whether media speculation was accurate. / A: Colin Connolly attributed the silence to the fact that leases cannot be signed until building plans and costs are finalized, which is the current focus. He suggested that public statements and incentives received by certain companies indicate significant commitment, but formal announcements must wait for internal finalization. He reiterated that the opportunity is extraordinary and partnership with Trammell Crow provides a strong foundation for securing top-tier tenants.