Earnings Call: Q3 2019

Oct 24, 2019

Quarterly report

Good day, and welcome to the Cousins Properties Q3 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 like to turn the conference over to Pam Roper, General Counsel. Please proceed. Thank you. Good morning, and welcome to Cousins Properties' 3rd 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 Greg Adzema, our Chief Financial Officer. The press release and supplemental package were distributed yesterday afternoon as well as furnished on Form 8 ks. 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 of these documents, they are available through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website. 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, uncertainties and other factors, including the risk factors set forth in our Annual Report on Form 10 ks and our other SEC filings. 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 productive Q3 at Cousins Properties. I am pleased to report that the integration of TIER REIT has gone smoothly. We remain extremely enthusiastic about the transaction and our enhanced growth profile. Strategically, the combination created an unmatched portfolio of trophy office assets balanced across the premier Sunbelt markets. Financially, we remain right on target. Last night, we released the 3rd quarter results and provided our initial 2020 FFO guidance. The numbers are terrific and highlight the embedded growth in our portfolio and the power of our development pipeline. Greg will provide more details in a moment. Looking forward, Cousins is exceptionally well positioned to deliver strong NAV and earnings growth. Let's look at the why. First, fundamentals in our core Sunbelt markets are among the healthiest in the United States. We have assembled a 22,000,000 square foot portfolio at the intersection of 2 powerful long term trends in the office sector, employment migration to the Sunbelt and a flight to quality. Boosted by these strong tailwinds, our target markets have posted rent growth and net absorption that is far outpaced gateway markets and the national average. Net absorption in our 6 core markets accounted for 31% of the net absorption nationwide year to date and year over year rent growth is nearly doubled the U. S. Average according to CoStar. 2nd, we own the premier Sunbelt portfolio in the office sector. The Cousins portfolio is 98% Sunbelt, 99% Office, 100 percent Class A, 78% near transit and a 2,002 average year built. In addition, we have dominant market share in some of the most highly amenitized submarkets, over 20% on average across our top 7 submarkets. The net result is a trophy portfolio that benefits from operational synergies, requires less capital to operate and commands premium rents. 3rd, Cousins continues to deliver superior operating performance. We have now reported 31 consecutive quarters of same property cash NOI growth with an average of 6.4% since the Q1 of 2012. In addition, we have produced 22 consecutive quarters of positive second generation cash net rent spreads with an average of 8.9% since the Q1 of 2016. 4th, Cousins has compelling growth opportunities. Driven by the strong market conditions I described earlier, the operating portfolio has embedded organic growth with in place rents that are 8% to 10% below market on average. Externally, our team has executed on attractive value add acquisitions, including our purchase of 1200 Peachtree in February and the purchase of our partners 50 percent interest in Terminus on October 1. On the development front, we continue to create value. The office component of our $428,000,000 pipeline is now 87% pre leased. 10,000 Avalon was 56% leased at the end of the quarter and currently has strong activity on the remainder of the space. In Austin, we announced a 104,000 square foot expansion with Amazon at Domain 10. The project is now 98% leased. Large corporate interest in the domain remains strong with little available space. We are excited to capitalize on this demand and have the potential to deliver an additional 3,800,000 square feet of office through redevelopment and new construction. Domain 9, which would total approximately 330,000 Square Feet is likely our next opportunity in the domain. As I mentioned in July, we are making great progress on our 100 Mill project in Tempe. Customer interest remains robust and we are optimistic that we will break ground soon with meaningful pre leasing. Finally, we have a rock solid balance sheet that drives our success. We finished the quarter with net debt to EBITDA of 4.05x, which is significantly below our peers. In addition, approximately 80% of our portfolio is unencumbered and we currently have approximately $932,000,000 of liquidity. Notwithstanding the likely sale of Hearst Tower in March of next year for $455,500,000 dollars in the small Woodcrest property in New Jersey that is on the market, asset sales or equity issuances are not required to fund our current development pipeline or to reduce leverage. Our balance sheet is a differentiator. It provides financial flexibility and allows the company to take advantage of opportunities when others cannot. During 2019, we have been exceptionally busy. We have announced a series of exciting transactions including the Norfolk Southern Headquarters project, the Gulch Air Right sale, the TIER merger, the BB and T lease at Hurst Tower and the Terminus acquisition. Collectively, these moves have advanced our strategy to build the preeminent Sunbelt office REIT. First, we enhanced our geographic mix, increasing exposure to Austin, balancing exposure in Atlanta and entering Dallas with scale. 2nd, we expanded our development pipeline adding Domain 12 and 10. 3rd, we grew our land bank including strategic partials in Austin, Atlanta and Dallas, which boosts our long term growth profile. And lastly, we increased scale, which creates operational synergies and provides cost of capital advantages. In closing, Cousins have a simple and compelling path forward. Capitalize on the ongoing migration of the Sunbelt, realize the embedded growth in our trophy portfolio, complete our well leased development pipeline, identify attractive new investment opportunities and maintain a sector leading balance sheet. Before turning the call over to Richard, I want to express my thanks and admiration to the Cousins team. I appreciate your tireless work and passion for the company. Richard? Thanks, Colin. Pleased to report that our solid second quarter operational performance continued in the Q3. The team completed over 741,000 square feet of leasing this quarter and it is worth noting that activity was broad based across all markets and no one transaction accounted for an outsized portion of our leasing. Rent growth also remained strong with 2nd generation net rents increasing 8.1% on a cash basis. When excluding activity at our non core Woodcrest property in New Jersey, cash net rent growth this quarter was 9.8%. Net effective rents, which include the impact of leasing costs, were just north of $27 per square foot this quarter, a level not seen at Cousins since the Q1 of 2018. With this strong activity, we ended the quarter at 93.8 percent leased with an in place gross rents at $37.26 per square foot. With leasing results like these, it is not a surprise that the ULI Emerging Trends 2020 report named 4 of our 6 core markets as top 10 U. S. Markets to watch. There is no doubt that we continue to benefit from strong demographic patterns that are driving strong population and economic growth throughout the Sunbelt. I will now provide some details about Atlanta and Austin, our 2 largest markets in terms of net operating income. Office demand in Atlanta continues to be healthy, fueled by sustained office employment growth and steady business activity, particularly in the technology sector. In fact, CoStar recently noted that since 2010 Atlanta added the 6th highest number of office using jobs in the nation, even ahead of larger markets like Los Angeles and Washington DC. Also of interest is that venture capital investment in Atlanta reached a significant milestone this quarter. As Crunchbase reported Atlanta based companies have received $1,100,000,000 in funding year to date. This is exciting news for Atlanta and a strong testament to the further development of Atlanta's technology and venture capital scene. This quarter, our Atlanta team executed 163,000 square feet of leases. Our over 7,000,000 square foot portfolio continues to be well positioned at 92.1 percent leased at quarter end. Our Buckhead properties accounted for over 80% of our Atlanta quarterly leasing, which we think is a strong indication of Buckhead's overall health. Businesses remain attracted to the central nature of Buckhead and its diversity of transit options and the submarket continues to enjoy success with a diverse set of industries including technology. Momentum has also continued at Terminus, where we recently purchased our partners 50 percent ownership interest. I'm excited to report that last week we signed a new 48,000 square foot lease with Qgenda, a growing software company, which will backfill of the floors recently vacated by CBRE this past summer. This new lease is expected to commence late in Q2 of 2020. Turning to Austin, this market continues to be a standout for us and is projected to have the highest population growth rate for the coming 5 years among the 80 markets analyzed in ULI's Emerging Trends 2020 report. Austin continues to see significant migration of companies from the West Coast, namely the San Francisco Bay Area, collectively taking 6,100,000 square feet of office space in Austin since 2010. And this is according to Cushman and Wakefield. According to CoStar, Class A vacancy sits at just 5.8% in the CBD where many of our existing customers have been experiencing solid organic growth. Vacancy is only 1.8% in the North Domain submarket. Our portfolio of over 4,000,000 square feet, which is located across the CBD domain and the Southwest submarkets ended the quarter at 96.1 percent leased. Our Austin team signed leases totaling 228,000 square feet during the quarter, including the sizable expansion lease with Amazon at our new Domain 10 development. I would also note that Austin posted the strongest lease economics of any of our markets this quarter with a 2nd generation cash net rent increase of 28%. I'd also like to touch on Phoenix, where we have a terrific 1,300,000 square foot portfolio concentrated in the dynamic Tempe submarket. Per CBRE, this quarter Metro Phoenix posted 1,400,000 square feet of net absorption, bringing the year to date total to 2,500,000 square feet. CBRE further noted that only 7 markets nationally have posted over 2,000,000 square feet of net absorption through the Q3 of which Phoenix is 1. This is an impressive statistic given the size of the market. Dallas, Austin and Charlotte are also in that group. Class A vacancy in Phoenix now stands at just 10% with the Tempe submarket below 5%. Leasing has been particularly strong in our properties there as well with the team executing 109,000 square feet of activity during the quarter. Subsequent to quarter end, the Phoenix team also completed an important strategic 126,000 Square Foot early renewal and 63,000 Square Foot expansion with Silicon Valley Bank at Hayden Ferry. This and other recent signed activity will bring our occupancy up to a level consistent with where it was at the beginning of 2019. Our remaining core markets, Charlotte, Tampa and Dallas are also tracking very nicely. Our teams in these markets executed 153,000 square feet of leasing this quarter. Like last quarter, our existing pipeline of leasing activity across all of our markets continues to be encouraging. Our primarily Uptown Charlotte portfolio is 95 point 9% leased and we have made good progress on re leasing the Dimensional Funds vacancy at 5th Third Center, recently signing a 25,000 square foot expansion with 5th Third Bank. CoStar also recently cited Charlotte is leading the country in annual rent growth as of this month at 7.5 percent ahead of even Austin. Our Dallas portfolio acquired through the TIER merger and consisting of Legacy Union and 5950 Sherry Lane stands at 97.4 percent leased. In Tampa, where we are now 95.9% leased, we had another strong quarter, including a new 29,000 square foot lease at Harborview Plaza that will backfill our only remaining full floor availability in early 2020. I'll now turn it over to Greg. Thanks, Richard, and good morning, everyone. I'll begin my remarks by providing an overview of our financial results, including same property performance. Then I'll move on to an update on our recent TIER merger, followed by a discussion of our balance sheet before closing my remarks with revised 2019 earnings guidance and an introduction of initial 2020 guidance. As Colin discussed earlier, we've completed a series of transactions during 2019 that create significant value for our shareholders. In total, however, these transactions have reduced the simplicity of our story here at Cousins. To address this, we are introducing 2020 guidance earlier than is our customary practice. We hope this early guidance provides investors with helpful information as they analyze Cousins. With that, let's turn to the Q3 results. The Q3 represents our first full reporting period after completing the TIER merger. And as you can tell from Colin and Richard's comments, the results were outstanding on many fronts. FFO was $0.72 per share, which includes $1,000,000 in tiered transaction costs, and this represents a 14% increase over last year. Beyond FFO, the important operating metrics that both you and we focus on were also strong. Leasing velocity was solid, 2nd generation leasing spreads were positive and same property year over year cash NOI increased for the 31st consecutive quarter. Included in this quarter's results are 3 items I'd like to highlight before providing some color on our same property performance. I'll start with termination fees. We recognized $3,600,000 in termination fees during the Q3. The largest portion of this total was driven by the early move outs at Hearst Tower that we initiated to begin to make room for the phased move in of BB and T and Truist. As a quick reminder, termination fees are not included in our property level NOI. We include them in the other income line item in our financial supplement. 2nd, our general and administrative expenses during the Q3 at just under $6,000,000 were lower than the 1st two quarters of 2019, driven by a reduction in our long term incentive compensation accrual. As has been the case for many years, in order to ensure management's interests are aligned with shareholders, the majority of our performance based long term incentive compensation here at Cousins is determined by our total return performance relative the S and L Office Index. The other components of G and A were generally in line with our expectations. Finally, capitalized interest during the 3rd quarter at approximately $4,200,000 was higher than its previous run rate, driven by the addition of 3 tier development assets that we acquired as part of the merger, Domain 10, Domain 11 and Domain 12. Per GAAP, we brought these assets onto our balance sheet at fair value and are capitalizing interest against this basis. Moving on to our same property portfolio. Year over year cash NOI was up 2.9% during the Q3, driven by 3.2% revenue growth. This marks the Q3 in a row that NOI growth has exceeded our expectations. As a result, we are raising the midpoint of our full year 2019 same property cash NOI assumption yet again. In total, we have now raised the midpoint of our same property growth 150 basis points since the beginning of the year. I'll provide more specifics on this later in the call. Focusing on the TIER merger, as Colin said earlier, the integration has gone smoothly, property performance has matched our expectations and the full $18,500,000 in expected synergies has been realized. Overall, our earnings outlook remains consistent with the original expectations we provided at the time the TIER deal was announced in March. Turning to the balance sheet. Our 3rd quarter net debt to EBITDA ratio was 4.05 times and our net debt to undepreciated assets is 25%. The weighted average interest rate on our debt is 3.8% and our weighted average maturity is 6 years. In addition, our debt maturity schedule is well laddered with no more than 15% of our total debt maturing in any single year. Overall, our balance sheet remains among the very best among our office peers. Before I wrap up my comments, I just wanted to point out a new schedule that we've added to our financial supplement. In response to several questions we've received recently around the buyout of our joint venture partner Terminus, we thought it might be helpful to provide some basic information on our remaining joint ventures. You'll find this schedule on Page 32 of our supplement. With that, I'll close by updating our 2019 FFO guidance and introducing our 2020 guidance. Please note, our 2019 guidance continues to exclude the costs associated with closing the TIER transaction and we don't anticipate any material additional transaction costs to be incurred during 2020. Starting with 2019, as we outlined in our earnings release, we are raising and tightening our FFO guidance to a range of 2.92 dollars to $3 per share. All of the assumptions behind this guidance are unchanged from the guidance we provided in July, except for the following. First, we anticipate year over year same property NOI growth of between 4% 5% on a cash basis with a midpoint of 4.5%. This is up from the previous guidance range of 3.25% to 5.25% with a midpoint of 4.25 percent. Moving on, we anticipate a gain on land sale of $15,900,000 up from $14,500,000 due to the expected redemption of the remainder of the Wildwood Office Park joint venture land during the Q4. Next, we anticipate fee and other income of between $35,000,000 $37,000,000 up from the previous range of $32,000,000 to $34,000,000 due to an increase in lease termination fees. We anticipate general and administrative expenses of $32,000,000 to $34,000,000 net of capitalized salaries. This is down from our previous guidance of $34,000,000 to $36,000,000 due to a reduction in long term incentive compensation accrual. Finally, we anticipate interest and other expenses net of capitalized interest of between $61,000,000 $63,000,000 down from the previous range of $66,000,000 to $68,000,000 due to an increase in capitalized interest on projects under development. And although we previously included the purchase of our joint venture partners' 50 percent interest in Terminus and the sale of Woodcrest during the Q4 in our 2019 guidance, I just wanted to follow-up on what Colin said earlier and remind everyone to include these transactions in your forecasts. Now let's move on to 2020 guidance. As we outlined in our earnings release, we expect 2020 FFO in the range of $2.71 to $2.85 per share. This guidance range is driven by the following assumptions. 1st, we anticipate year over year same property NOI growth of between 4% 6% on a cash basis with a midpoint of 5%. This assumption includes a 9.2% increase in property taxes. Despite the negative impact of property tax pressure, which is driven by appreciating asset values and is a high class problem to have, the midpoint of our 2020 same property NOI guidance is higher than both our actual and projected results over the last 2 years. The fundamentals in our urban Sunbelt office markets remain strong. Moving on, we anticipate fee and other income of between $21,000,000 $23,000,000 We anticipate general and administrative expenses between $33,000,000 $35,000,000 net of capitalized salaries. We anticipate interest and other expenses of between 69 $71,000,000 net of capitalized interest and depreciation and amortization of non real estate assets of between $1,500,000 $2,500,000 We anticipate GAAP straight line rental revenues of between $38,000,000 $40,000,000 and above and below market rental revenues of between $9,000,000 $11,000,000 Our 2020 guidance includes 1 disposition, the Hearst Tower that Colin discussed earlier. Our 2020 guidance does not include any speculative developments or acquisitions. In his earlier remarks, Colin mentioned our strong shadow development pipeline. And if any of these projects commence, we will disclose it to you and update our guidance as appropriate. With that, let me turn the call back over to the operator. We will now begin the question and answer session. The first question comes from John Guinee with Stifel. Please go ahead. Great. Thank you very much. A couple of little minor questions. I guess, Colin, if I look at your development page, you've got domain 10 and 12 costing about $370,000,000 a foot, which I think includes the fair market adjustment. What that seems like a low number. Are you missing anything? Does that have structured parking included, etcetera? John, the page that you're referring to in our supplement is not a fair market adjustment. That is at cost, which we think is more helpful and instructive to investors just to understand the profile of the project. Those buildings do have structured parking and they were started several years ago. And so obviously the cost basis of those looks to be is less than what we would look at going forward, which would be over $400 a square foot for the next likely project out at The Domain. So if you added in your fair market adjustment, actually what you paid for the assets, what would be the actual total development cost? If I'm getting if I understand. Sure. John, it's Greg. So when we provide our Schedule 3 within our 10 ks at year end, that Schedule 3 will have not just the development assets at fair value, it will have all the assets that we acquired from TIER at fair value. It will be hard to solve for it exactly because that Schedule 3 does not break out intangible liabilities and assets, but that will get you close. Okay. And then if I look at Page 20, your net rents are stunningly high with the exception of the new rents, dollars 25.61 for a net rent is really big in the Southeast, dollars 39 for an expansion, net rent is stunningly high. Can you talk about which buildings are receiving or achieving those sort of rents? Yes. John, it's Collin. And that's primarily being driven by Austin and the growth and the rent growth in that market both downtown and out in the domain have been exceptionally strong. And we're excited to see it. And ultimately customer demand in those markets continues to be very, very robust. And I'd say supply has stayed relatively in check and that's created an environment to really push rents. Okay. And then the last comment is, you probably have if I look at the top 20 office tenants, you probably have the a lot of lease exploration in the near term sooner than most of your peers. Can you discuss the ones that are of interest to people and any mark to market up or down with these big tenants? Sure, John. As a whole, the portfolio that we've got has got really strong weighted average lease term throughout it. I think in total, the portfolio has got almost 7 years of weighted average lease term. But as you know, we do have several customers that have got some near term expirations. I think the ones that have been of note that have gotten some presses is potential likely move outs would be again, all things that we've discussed in the past with you. So really no new news, but the Bank of America space in Charlotte at the Bank of America Plaza, it's about 300,000 square feet in December of 2020. Blue Cross Blue Shield Anthem is a June 2021 expiration. And then the Norfolk Southern expiration in the end of 2021. But I just tell you in terms of a little bit of the visibility and the Cousins mindset as it relates to the some of those, I'd say some of those expirations, which is we still think we've got a terrific opportunity in front of us in the sense that we're focused and mindful on any kind of earnings pressure that could create. But I think what's important to note is that the power of our development pipeline kicking in, in 2021, I think more than offsets the risk associated with those expirations. So I think that's kind of one. 2nd, I think these are all opportunities for the company to create significant value. And as you touched on, there's very meaningful mark to market opportunities on all those ranging anywhere from call it 10% upwards of 30%, case of the Bank of America space in Charlotte. And these buildings are all located at main and main locations and great access to mass transportation. So we're excited about the opportunity to create value. In some cases, we actually created these opportunities in our acquisition of 1200 Peachtree and then ultimately our acquisition of Bank of America Plaza. So we were able to account for this risk going in. And we've got a fabulous team here that's got a great record of success backfilling these exact type of opportunities and I'd point to the Bank of America space at Hearst, which our team did a masterful job backfilling a large exploration there. Richard touched on it, we just backfilled half of the CBRE space. We backfilled most of the T. Rowe price space and having similar success on the DFA space in Charlotte. So this is right in our wheelhouse. And again, great opportunity for us to mark those to market, create value. And we've got a terrific development pipeline that, as I said, will more than offset, we think any pressure for some short term downtime with these expirations. Great. Thank you very much. The next question is from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead. Great. Thank you. Looking at Page 21, I don't think you guys mentioned the Time Warner lease in Austin. What's the story there, the September 2020 expiration? Yes, Jay, it's still a little bit preliminary, but we are in discussions with them and we're I think we've got a good dialogue. They like their location in the domain and so we're hopeful we can get something positive done with them. Okay. Thank you. And I guess just bigger picture as you look across your markets, can you just talk about supply and if you are seeing any submarkets that you're in kind of a cause for concern or maybe weighing on your ability to push rents and what you think about the pipelines over the next year or so? Sure, Jamie. It is a on the whole supply has been, I'd say very much in balance throughout the Sunbelt this cycle and it's created a terrific market for us again to continue to push rent, push occupancy and I think we're still very constructive on our markets. I think when you drill into the numbers, kind of market by market, I'd say the where some of the submarkets that might stand out from a supply perspective on the surface would be Midtown Atlanta and perhaps Downtown Austin. But I think when you kind of get below the surface, I think we're we continue to be very encouraged by the amount of demand that's in the market to take to fill up that supply. I'd point to Midtown where there's probably 2,500,000 square feet of what we would characterize is multi tenant office buildings in the core of Midtown. It's about 30% pre leased. But being here local in the market, what we see is very, very strong demand. We could point to call it over 600000 to 700000 square feet today that is active in discussions in leases to fill up big chunks of that space with very large well known companies with net positive absorption. And I'd characterize it again as very similar to this migration where we're seeing folks move north to south and west to east. And so we think there'll be some pretty big announcements in the relatively near term future that will certainly, I think, give people a lot of comfort as to the supply demand balance in a market like Midtown. Okay, thanks. And then I guess other than the expirations you mentioned, but just some of the larger vacancies in the portfolio, can you walk us through some of your assumptions in the either the 2019 or 2020 guidance about backfilling some of the spaces you've left? Sure, Jamie. This is Richard. We I'd say I characterize the assumptions that we've made for 2020 in particular are very consistent with prior year assumptions how we budget speculative leasing. So we feel good about them. And I'd say given where we are at the sitting here in the Q4 of 2019 with the lead times that come with new leasing, I would characterize the new leasing assumptions in 2020 as being largely weighted toward the back half of the year. Okay. I mean, are there specific large spaces that you think will get backfilled? Like if you look at your largest empty space We have we talked about backfilling about half of the CBRE space at Terminus and we do feel good about some continued progress in 2020 there as well as obviously we've taken on Vive Plaza. That won't be a 2020 during the year expiration, it's toward the end of the year, but feel good about the timing on that. And Jamie, I'd just add as a whole, again, as you look at the portfolio, we've got a fabulous trophy office portfolio in some of the best submarkets throughout the Sunbelt. So in particular, buildings where we've got some vacancy, the terminus, we've got a little bit of vacancy at Buckhead Plaza. We still have a little bit of vacancy left at Harborview to backfill. I think we feel again very encouraged by the activity in the market and our goal over the course of next year is to continue to move those up. Okay. And then last question for me. Just I know you guys it sounds like you could get started in Phoenix, maybe in Austin. Can you just give a little bit more color on your thoughts of like what's realistic in terms of development starts and what the cost would be? Like what kind of spend you'd see through the end of 2020? Sure, Jamie. Again, I alluded to in my remarks that we feel we're very constructive on the opportunity at both the 100 mill and Domain 9 and that would be based on ultimately the underlying activity and demand that we're seeing in those markets. And so, don't have a specific date for an announcement yet. We're working through finalizing the building design and construction agreements and trying to finalize some of the activity with these potential customers. And so, I think we're again, I think we're very hopeful and optimistic that those could be starts in 2020. But I while I'm pointing to specifically to those, we do have a terrific land bank across the company and in all of our markets. We've got a terrific site in Midtown, Atlanta. We've got the opportunity to do Corporate Center 5 in Tampa, a couple of terrific sites in Dallas, both in Uptown and Legacy. And we're in the market and in discussions with potential customers on all those opportunities. And I think in any given time, we find the right opportunity with the right customer and feel good about the overall competitive dynamics in the market and the overall risk profile of the development pipeline of the company, we'll try to move those forward. So I think we're very well positioned to continue to make progress in 2020 just like we have in 2019. Okay. All right. Thank you. The next question is from Blaine Heck with Wells Fargo. Please go ahead. Thanks. Good morning. Just a follow-up on that shadow pipeline. Are there any markets you guys would like to be more active in on the development side, but don't have land in? I guess, what's the potential for land purchases coming up? Or are you guys pretty happy with the land bank as is? Yes, that's a great question Blaine. And I'd say as we look at our positioning today, I'd say the one area of potential hole would be in Charlotte and we just delivered our dimensional place project, which was terrific, actually just won the office deal of the year by the Charlotte Business Journal. But now that we've delivered that, we're certainly on the hunt for the next piece of land to create the next great development project. So we're working hard on that and hopeful we'll make progress as we roll into 2020. But that's a market that is a very core market to us and we want to continue to grow to grow our presence in that market. Outside of that, we do have a very strong attractive site in just about all of our other markets. Downtown Austin actually would be one that we would look at. We've got a great position obviously out at the domain. But downtown Austin could potentially be an opportunity. But holistic as we look at the company and the scale that we have in our approach to land, it's been to have a good site or 2 in each of our markets. And with the added scale of the company, we're able to do that and still keep our overall land exposure really no more than a percent or 2 percent of the company, which certainly minimizes and mitigates any earnings drag from non income producing assets. Great. That's helpful. Greg, you guys have lower leverage than most of your office peers and you likely have additional proceeds coming in with the sale of Hearst and potentially others. I guess, how should we think about your appetite for increasing leverage going forward and maybe sacrificing some of the safety and dry powder that comes with such low leverage for maybe the prospect of additional earnings and FFO growth with a bit of a higher leverage profile? Duane, it's a terrific question. And as you could see from our Q3 results, we're right above 4 times net debt to EBITDA right now. We've stated many times over the years that our targeted range is between 4 and 4.5 times net debt to EBITDA. And we've essentially been operating the business within that range since 2014. So it's not aspirational and it's not a recent development. It's been a long term targeted range and we've stuck to it pretty faithfully. And I think that some people might look at it as you just proposed as kind of defensive. But we view it and it is defensive to some degree because we do develop as Colin and Richard have been talking about for the last little bit. We have a really attractive development pipeline, but that introduces a little bit of risk. And so we keep a conservative balance sheet in order to balance that risk. And that's worked out really well for us over the years. But we also see it in a very offensive light. Without the balance sheet that we have, we would not have been able to complete Parkway nor the TIER transactions. We did both of those deals without issuing any new equity to the capital markets. That's a great place to be in and it really puts us in a position I think to create significant shareholder value at scale that others would struggle with, especially in our Sunbelt markets. And so, we're comfortable where it is. Would we take it above for something strategic like another Parkway, another tier? We have and we might. But overall, this is a very comfortable targeted leverage range for us. Yes. And Blayne, I'd just I'd like to again add on to that, that from a risk profile of the company, this is something as we put together our strategy back in 2011 was a one of our four core principles is to maintain that best in class balance sheet. And so that's something that we're certainly going to continue and focus on. It does allow us to take advantage of opportunities, as I mentioned. And so we're comfortable where it is. We don't see any kind of near term strategic type transactions where we want to put that to work. But it also it does help us as we pursue these one off transactions, development transactions, whether that be a Domain 9 or 100 Mill. And it's a competitive advantage where we can move when we see the opportunity quickly. We don't need or rely on any outside capital either debt or equity to move forward with those type of projects. And so again, I think as we look at the near term opportunity, which really is development oriented, Perhaps we might identify a strategic property acquisition along the way to bolster our portfolio in a Dallas or a Charlotte. We've got the balance sheet to go do that. Very helpful. Last one for me. You guys have talked about putting the Woodcrest asset in Cherry Hill on the market, but I think Greg mentioned only Hearst is in guidance. So can you talk about the timeline for Woodcrest? Are you guys marketing it now or maybe trying to get a renewal or backfill for condiments signed first? Just I guess any color on that sale would be helpful. Sure, Blaine. The asset is on the market and we've received 1st round bids and so we're working through that process. And our goal would be a potential year end closing, although we don't want to limit our options and are open to that if the buyer and the best buyer needed to slide in there early next year, I think we're agnostic on that. We're just looking for the best execution. You mentioned there is a large exploration next year. We are we plan to move forward with the disposition at this time and we just view that is a non core asset on several fronts. 1, it being located in New Jersey and from a profile perspective and if you step back, that really is not consistent with our the asset quality that the company focuses on. It truly is a converted industrial style building and with rents, gross rents in around $20 a foot. So I think as you think about that sale and evaluate again just really not core for us. And so we're going to go ahead move that when we identify the right buyer. And Blaine, it's Craig. The Woodcrest sale is included in our guidance. It's in 2019, Gunnar? Yes. It assumes year end 2019. Got it. Thanks, guys. The next question comes from Dave Rodgers with Baird. Please go ahead. Gabe, we can't hear you. There you are. I think you might have been on mute. Yes. I Learn how to use my phone soon. I guess, 2 housekeeping items for Greg to start with and I apologize for that. 1, on the same store NOI pool and guidance for 2020, will you roll TIER in during the second half or will that not roll in until 2021? Dave, TIER will roll in 2021. We have to re straight line all those properties. So we've got to kind of get a full year under our belt before we can put it in the same property pool, similar and consistent with other acquisitions we've done in the past. Okay. So also I just wanted to verify that will be core for next year. And then you had made a point to mention the difference in the fair value versus cost basis, interest capitalization for the tier development assets. Does that have a meaningful impact on the numbers? Can you kind of walk us through the numbers quickly? When you say meaningful impact on the numbers, which numbers? I guess on earnings. No. I mean, you can see the change that we made in the capitalized interest expense assumption in which capitalized interest is included. So you know the exact impact that we're talking about. It's not wildly material. Okay. Didn't anticipate. And then maybe just lastly, Tom, I wanted to go back to something you mentioned earlier and was asked earlier on the call as well. You talked about the 8% to 10% below market rents in the portfolio. But I guess you've said that for a while and I guess one of the things I was thinking about is that you've got new construction in your market $550 to $600 a foot in some of the higher end markets like Charlotte, Atlanta and Austin pushing rents of $50 to $70 growth in some of these markets depending. And so that 8 to 10 that you've quoted for a while with some pretty good increases in market rent seems like maybe it's getting a little conservative. And I guess I wanted to just kind of ask you a little bit about do you feel like that's a conservative number? Or is there something that kind of holds you back as these market rent growth really starts to kind of accelerate with the set of new completions for the market? Yes, Dave, I think it's a good question, but I think we feel good about the 8% to 10% number. And again, if you look over the last kind of 2, 3 years, we've averaged right around 9%. And that rent roll up is always a function of when the prior lease commenced and we've had really strong rent growth over the last call it 5 to 10 years throughout the Sunbelt. So I think you're seeing that reflection of the starting point as rents had moved as we got there and they've continued to move. But I think we as we look forward to the expirations over the next kind of couple of 2, 3 years, I think we still feel very good that that 8% to 10% is a good range. All right. Thanks everyone. Thanks, Dave. The next question is from Michael Urie with SunTrust. Please go ahead. Great. Thank you. So you talked about Hurst Tower and Woodcrest dispositions. How about other assets you might sell, things in this other bucket like maybe Houston or Fort Worth or something? And would you maybe time those up with development spend? Sure. Michael, I think as we look at the balance sheet, it's rock solid. And so we don't feel any pressure to sell anything necessarily in the near term. You touched on Fort Worth and Houston. Those aren't markets where we have a goal to grow. But as we look at the specific assets, there are opportunities to continue to create value in those assets. And so our team is hard at work trying to take advantage of those. But as we identify new investment opportunities, whether that be development or an attractive acquisition, we'll always look to potential asset sales as a source of capital fund those. And so we'll make those decisions when we get to those kind of next new opportunities. Thanks. And then, lastly for me, you had low transaction costs in 3Q or maybe I thought there was a little bit more there. Are you could you share what are you expecting for remaining transaction costs to be recorded in 4Q if anyway? Hi, it's Craig again. We're not quite done, but we're close. So I anticipate we'll have less than well less than $1,000,000 left and the vast majority, if not all, that will flow through in the Q4. Okay, great. Thank you. Thanks, Michael. Next question is a follow-up from John Guinee with Stifel. Please go ahead. Great. Yes, thank you. If I take Hurst Tower, you're expecting looking at the cap rate, I guess, would be the best way to do it and maybe looking at the 3Q numbers. You look at Hearst Tower on the sales side and you look at Woodcrest on the sales side and then you look at Terminus on the buy side, are these neutral in terms of cash NOI, cap rates or dilutive or accretive when you match the acquisitions and the dispositions? Well, John, the Woodcrest transaction is ultimately we think it will be a relatively small transaction given the size of the project. And as I mentioned, it's actually being converted industrial. So I think if you kind of put that aside, it's not hugely material and look at the Hurst and Terminus transaction. The cap rate on Hearst is kind of a call it 5 mid 5, 5, 7 ish type cap rate on a look forward basis. Our cap rate on Terminus, remember, is a value add acquisition. And so it's in the low fives on a going in basis, but we project that to stabilize well north of the 6. And so we look at that as a very attractive proposition to sell at a lower cap rate and create value and deliver a more compelling stabilized yield at Terminus. Great. Thank you. Thank you, John. The next question is from Jenny Hysmall with Green Street Advisors. Please go ahead. Great. Thank you. Just a quick one for me. Any updated thoughts on co working post WeWork's failed IPO and sort of comfort with doing full building leases or major leases with any flex office providers? I thought we were going to escape that question, only 4 minutes to spare. But obviously, Danny, very relevant question. And just to maybe specifically for a moment in terms of our WeWork exposure, it is very minimal. We've got in our operating portfolio one lease at Terminus that is doing very well and is full and then actually have a small lease in our development pipeline out at 120 West Trinity project. It's only 30,000 feet and we own just 20% of that project. So fairly immaterial. But as we look at co working going forward, obviously, the WeWork news has been probably a bit of a step back. But I think as we look at that, we continue to have had a good experience with co working when we've sized it appropriately in certain situations and unique situations in building where it's been a very good use for us to aggregate smaller users and customers that wouldn't otherwise be able to occupy space with us in a building like Terminus. So we could we view it as an attractive opportunity there. But I think the industry as a whole as we look at it, perhaps the growth got a little bit out in front of itself. And so we think it's something that's going to continue, but at a much more moderate pace. And as we go forward, we'll continue to do those when they make sense. But we're always mindful, not just of the kind of the co working label, it's more an evaluation of credit and how much kind of non investment credit do we want to add to the portfolio and we're fortunate to have great trophy assets where we often have terrific interest from very strong large corporate customers and oftentimes that'll be our preference. Appreciate it. Thanks for the question. Thanks for the answer. All right. Thank you, Danny. 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 for everybody's time and interest this morning. We always appreciate spending time with the investment community and we'll look forward to seeing hopefully many of you out in Los Angeles at NAREIT in early November. Thank you. The conference call is now concluded. Thank you for attending today's presentation. You may now disconnect.