adminCousins Properties Incorporated (NYSE:CUZ) Q2 2024 Earnings Conference Call July 26, 2024 10:00 AM ET
Company Participants
Pamela Roper – General Counsel
Colin Connolly – President & Chief Executive Officer
Richard Hickson – EVP of Operations
Kennedy Hicks – EVP & Chief Investment Officer
Gregg Adzema – Chief Financial Officer.
Conference Call Participants
Blaine Heck – Wells Fargo
Steve Sakwa – Evercore
Nick Thillman – Baird
John Kim – BMO Capital Markets
Dylan Burzinski – Green Street
Camille Bonnel – Bank of America
Upal Rana – KeyBanc
Brendan Lynch – Barclays
Operator
Good morning, ladies and gentlemen, and welcome to the Cousins Properties Second Quarter Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for a question. [Operator Instructions]
I would now like to turn the conference over to Pamela Roper, General Counsel. Please go ahead.
Pamela Roper
Thank you. 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 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. A full declaration regarding forward-looking statements is available in the supplemental package posted yesterday and a detailed discussion of potential risks is contained in our filings with the SEC.
With that, I’ll turn the call over to Colin Connolly.
Colin Connolly
Thank you, Pam, and good morning, everyone. Cousins’ second-quarter results were strong. To summarize, we delivered $0.68 a share in FFO, which compares favorably to street consensus. We reported same-property net operating income growth of 5%. We leased 391,000 square feet with a positive cash rent rollup of 18.2%. Our percentage leased and occupied both increased. We reduced leverage with our net debt to EBITDA of 5.12 times at quarter end and we acquired two newly created mezzanine loans, which are secured by interests in lifestyle office properties in Nashville and Charlotte. Cousins’ initial commitment is $27.2 million with a potential total commitment of $37 million.
These achievements are fantastic and continue to highlight the strength and resiliency of our leading Sun Belt lifestyle office portfolio and our best-in-class balance sheet. Before discussing our priorities at Cousins, I will start with a few observations on the market. While the commodity office sector continues to struggle, fundamentals for our lifestyle office in the Sun Belt have begun to improve. With the physical utilization continues to grow, leasing activity has meaningfully accelerated, sublease availability has come down, and at the same time existing inventory is shrinking and new construction starts are at historical lows.
In simple terms, demand is increasing while supply is decreasing. This will lead to a rebalanced market. It is Economics 101. The process is underway and a shortage of lifestyle office in certain markets is not that far off. The flight to quality and the flight to capital continue to differentiate the market and Cousins is well positioned at the intersection of these trends.
We own the premier lifestyle office properties in leading markets across the Sun Belt. In fact, Bank of America recently ranked our portfolio as the highest quality across their entire office coverage universe. In addition, our balance sheet is undoubtedly best-in-class with the lowest leverage across the sector and a solid investment grade rating.
With these powerful tailwinds, our team remains strategically focused on driving earnings growth while enhancing our geographic diversification and maintaining our strong balance sheet. To do so, we are prioritizing both internal and external growth opportunities. Our portfolio is 88.5% occupied today, up from 87.6% at the start of the year.
Given the quality of our real estate and the strength of the balance sheet, we intend to grow our leasing market share and drive occupancy back to more stabilized levels. Bank of America’s exploration in Charlotte next year is a modest speed bump in that process. Richard will touch more on this. However, over the immediate term, there is meaningful upside in our existing portfolio as leasing accelerates in our trophy lifestyle portfolio.
Externally, we are beginning to see compelling investment opportunities. As I mentioned earlier, we have recently closed on two mezzanine loan purchases with highly attractive risk-adjusted returns. Kennedy Hicks, our Chief Investment Officer, will provide more specifics. At this point in the cycle, we are open to a wide variety of opportunities, including debt, structured transactions, joint ventures, and property acquisitions. However, our core strategy remains the same, invest in properties that already are or can be positioned into lifestyle office in our target Sun Belt markets. Near-term accretion is also a priority. Overall, the property capital markets remain challenging. Asset-level debt and equity for office remains limited and expensive.
Many private equity investors have legacy issues in their existing portfolios and remain on the sideline. Conversely, the public markets show signs of improvement. Liquidity has grown in the unsecured debt market and spreads have stabilized. Office REIT share prices have begun to rebound. This creates a compelling investment environment for Cousins.
While some economic headwinds exist, we are encouraged by the improving fundamentals in the lifestyle office sector. We built Cousins to thrive during all economic cycles and today we are in a highly advantageous position. We are in growing Sun Belt markets. We own the highest quality lifestyle portfolio and we have a fortress balance sheet with the lowest leverage among office REITs and great access to capital. I’m excited about the opportunities ahead.
Before turning the call over to Richard, I want to thank our entire Cousins team. Our employees and teammates provide excellent customer service and hard work each and every day. Their dedication, talent, and resilience continue to propel the company forward, and I thank you. Richard?
Richard Hickson
Thanks, Colin. Good morning, everyone. Our operations team closed out the first half of the year with another great quarter. Before going over results, I want to close the loop on WeWork. All of our WeWork restructuring was completed prior to the end of the second quarter and our outcomes at each of the four locations were materially in line with expectations. The only notable difference is that WeWork remained in occupancy at 725 Ponce longer than expected. We are glad to have this effort behind us and look forward to our continued partnership with WeWork at our three remaining locations in Atlanta and Charlotte.
Now on to operating results. In the second quarter, our total office portfolio end-of-period leased and weighted average occupancy percentages were 91.2% and 88.5%, respectively, both an increase over last quarter. Occupancy was higher than our expectations this quarter, largely due to WeWork’s delay in vacating 725 Ponce. I also want to walk you through some drivers of our anticipated occupancy for the balance of this year. Recall that as of last quarter, our largest remaining 2024 exploration was Accruent. A 104,000-square-foot customer at Domain 4 in Austin, expiring at the end of August. We disclosed last year that Accruent was an expected move-out. However, this quarter we reached an agreement to relocate and renew Accruent in our adjacent Domain 3 building with a reduced footprint. Accruent will remain in its current space beyond its previous August expiration at a reduced rate until the relocation space is ready.
This is clearly a win relative to our expectations, but Domain 4 will still be effectively 42% occupied after August. As we have said in the past, Domain 4 is a single-story former light manufacturing building where we intend to limit leasing to short-term as is deals to preserve optionality for future development on this exceptional land in the core of the Domain.
Given this strategy, we plan to remove the building from our operating portfolio after Accruent’s effective expiration in August. The combination of this portfolio change, our continued extremely low remaining 2024 lease expirations, and about 480,000 square feet assigned new and expansion leases set to commence through year-end should result in stable and possibly modestly higher reported occupancy by year-end.
During the second quarter, our team completed a solid 40 office leases totaling 391,000 square feet with a weighted average lease term of 8.6 years. Further, 240,000 of our completed leases this quarter were new and expansion leases, representing a favorable 61% of our activity on a square-foot basis. With regard to lease economics, second-generation cash rents increased yet again in the second quarter by a notably strong 18.2%.
All of our markets with second-generation activity saw roll-ups in rent and Atlanta was the largest contributor. In particular, we had a significant roll-up in rents on the renewal of a major customer at Promenade Tower in Midtown. This lease was one of the first new leases signed after we purchased the property in 2011, and the rent roll-up this quarter is a testament to the strong rate growth we have seen in Midtown Atlanta Lifestyle Office
Our average net rent this quarter came in at $37.64, an increase over last quarter and the third-highest quarterly level in our company’s history. This quarter average leasing concessions, defined as the sum of free rent and tenant improvements, were $9.88, also an increase over last quarter. Despite that, our average net effective rent this quarter came in at $24.85, above our full year 2023 results and our trailing eight-quarter average.
Our net effective rents continue to be resilient even with continued upward pressure in concessions. Looking across the country, national office leasing activity increased 15% quarter-over-quarter per JLL, hitting the highest level since the first quarter of 2020. According to initial data from CBRE, for 26 major US markets, second-quarter net absorption was positive for the first time since late 2022. A broader office recovery certainly appears underway but especially in the lifestyle office segment.
At the market level, our Neuhoff mixed-use development in Nashville continues to see leasing momentum. This quarter, the team completed a 29,000-square-foot office lease with a professional services firm, taking the commercial portion of the project to 37% leased. We are also now in lease negotiations with three more office users, all strong names in the professional and financial services sectors, totaling another 45,000 square feet. Those leases and negotiation would take the commercial portion of this project to 50% leased.
Last, leasing of the multifamily units of the project began in June and we are pleased with the initial momentum as well. In Atlanta, JLL noted this quarter saw an emergence of larger transactions as the average deal size increased 31% quarter-over-quarter and eight deals signed to the market were greater than 90,000 square feet. Our Atlanta team signed 142,000 square feet of leases this quarter, including nine new and expansion leases and a notable 40,000 square-foot renewal of Colliers at Promenade Tower in Midtown.
Of the new leases we signed in Atlanta, 33,000 square feet were at our newly redeveloped 3350 Peachtree building in Buckhead, bringing that project to 84% waste. According to JLL, leasing activity in Austin has remained steady with tenant demand showing encouraging signs of growth, seeing over 600,000 square feet of net new requirements added to the market quarter-over-quarter for the first time since the end of 2021.
In our Austin portfolio, we saw a material increase in signed leasing activity this quarter, coming in at the highest level since the second quarter of 2023. Our team signed 10 leases for a total of 76,000 square feet with a strong average net effective rent of $29.20. We have also seen a material increase in our leasing pipeline in Austin. We could not be more encouraged by the demand we are beginning to see once again in Austin, both within our portfolio and across the market. It is broad-based from an industry perspective, including interesting demand from the technology sector.
In Phoenix, while the overall market experienced negative net absorption year-to-date, in Tempe, where our portfolio is concentrated, the first half of the year saw positive net absorption. We have seen firsthand an uptick in leasing activity, which we noted late last year. Our Phoenix team completed 56,000 square feet of leases this quarter, of which over half were new. I’m also thrilled to report that we are in lease negotiations with a 52,000-square-foot new customer that will occupy the first two floors of Hayden Ferry One.
Overall interest in Hayden Ferry, which is approaching the end of its major redevelopment, continues to be robust. In Tampa, that absorption is screening at its highest level since 2019. Like all of our markets, customers would want high-quality office product, of which there are beginning to be signs of less availability. We expect this to benefit our high-quality portfolio in West Shore in the Heights District. Our Tampa team completed an impressive 69,000 square feet of leases this quarter, of which 77% were new leases.
In Charlotte, our team is intently focused on finalizing plans for the material redevelopment of Fifth Third Center, and Uptown, where, as you know, Bank of America is set to move out of 317,000 square feet at the end of July next year. We’re excited about the plans we have to re-energize this property, but more importantly, so are the existing customers and new prospects who had seen our plans thus far. Charlotte is arguably seeing one of the largest increases in new requirements in the market over the last few quarters of any of our Sun Belt markets, which bodes well for our repositioning initiative.
Moving on to our overall leasing pipeline, I would note that subsequent to second quarter end, we saw our late-stage pipeline transition from healthy to exceptionally strong. In fact, our late-stage pipeline is now at a level not seen since late 2021, and prior to COVID. The early-stage leasing pipeline remains very encouraging as well. We are optimistic about what lies ahead of us for the balance of this year and beyond.
As always, I want to thank our incredible operations team whose continued hard work have us positioned for a great second half of the year. We look forward to continuing this momentum together. Kennedy?
Kennedy Hicks
Thanks, Richard, and good morning, everyone. As Colin mentioned, we are excited to announce our acquisition of two mezzanine loans this quarter. Both mezzanine loans were newly created, cut from two separate senior loans originated within the past several years. The loans are secured by interest in two high-quality, well-amenitized office buildings within our Sun Belt footprint, one in Charlotte and one in Nashville.
The first is an interest in the borrower of 110 East, an approximately 400,000 square foot new construction office and retail building that just delivered in the heart of South End Charlotte, right down the road from our Railyard project. At the time of our MEZ loan acquisition, the asset was 0% leased. Our initial investment was $14.7 million with a total commitment of up to $22 million. The bulk of the additional funding and the timing of it will be tied to future leasing capital needs. Cousins receives a 900 basis point spread over SOFR on its loan balance.
This MEZ loan matures in February of 2026 with a one-year extension rate by the borrower subject to certain criteria. Including the restructured senior loan, the initial outstanding balance totals $91.8 million, or $234 per square foot. The second loan is secured by an interest in the borrower of radius, a 2017 vintage office asset in Nashville’s vibrant urban core.
The 266,000-square-foot building was 76% leased at the time of the mezzanine loan acquisition. The initial loan balance was $12.5 million, with a potential for future funding tied to leasing capital to bring it up to $15 million. Cousins receives an 825 basis point spread over SOFR on its invested capital. This loan matures June of 2025, also with a one-year extension option. Combining the mezzanine loan balance with the restructured senior mortgage loan, the outstanding balance in Nashville is currently $77.9 million, or $293 per square foot.
These structured investments are consistent with our core strategy to thoughtfully and accretively invest in Sun Belt lifestyle office environments. While this represents a modest investment in dollar size, it was a creative opportunity to allocate capital and earn an attractive risk-adjusted double-digit return in a time period in which the office sector has continued to reprice with price discovery still underway in many instances. We also view this as the beginning of an interesting transaction cycle that will lead to compelling opportunities for Cousins.
We are encouraged by our growing pipeline of actionable transactions that will allow us to leverage our differentiated platform. I will now turn the call over to Gregg.
Gregg Adzema
Thanks, Kennedy. Good morning, everyone. I’ll begin my remarks by providing a brief overview of our results, spending a few minutes providing some detail on our same property performance. Then I’ll move on to our capital markets and development activity before closing my remarks with an update to our 2024 earnings guidance.
Overall, as Colin stated upfront, our second-quarter earnings were outstanding. Second-generation cash leasing spreads were positive for the 41st straight quarter. Leasing velocity was excellent with Atlanta leading the way. Same-property year-over-year cash NOI increased significantly. It was also a very clean quarter. There were no significant unusual, or non-recurring items of note. Focusing on same-property performance for a moment. GAAP NOI grew 4.2% and cash NOI grew 5.1% during the second quarter compared to last year. This continues a string of positive same-property numbers that began in early 2022, with the most recent quarterly gains largely driven by occupancy gains at our Briarlake property in Houston as Apache continued its move in, and our San Jacinto and 300 Colorado properties in Austin.
Taking a little longer view, among our markets, Phoenix and Austin are generating the strongest internal growth over the past year, with same-property cash NOI growing 17.3% and 7.7% on average, respectively, over the past four quarters. As Colin mentioned earlier, physical utilization at our properties has continued to increase and our parking revenues have grown along with it. Parking revenues during the second quarter increased 5% compared to the prior year and were the highest they’ve been since the first quarter of 2020, just prior to the COVID pandemic.
As many of you know, we received our inaugural investment grade credit ratings of BAA2 and BBB for Moody’s and S&P early in the second quarter. These ratings provide us with another important option to access the capital markets as we execute our strategic plan. We have purposefully built significant optionality into our debt maturity schedule, which allows us to be very opportunistic around when we use these credit ratings.
Looking at our development activity, the current pipeline is comprised of a 50% interest in Neuhoff, Nashville, and a 100% interest of Domain 9 in Austin. Our share of the remaining estimated development costs is $59 million, which will be funded by a combination of our Neuhoff construction loan and our operating cash flow. We’ve accelerated the estimated stabilization date at Domain 9 by two quarters to March 2025 from September.
Amazon leases almost the entirety of this property, and their original intent was to complete the outfit in three phases, and we budgeted revenue recognition accordingly. They subsequently decided to complete all the up-fits at once. We began recognizing revenue on the first phase, about 189,000 square feet, in March of this year. Based on Amazon’s revised plans, we’ll still recognize revenue in the second phase, about 71,000 square feet, in March 25, but we’ve accelerated revenue recognition on the third phase, about 70,000 square feet also to March 25 from the original September.
There’s no impact to our 2024 guidance from this change. I’ll close by updating our 2024 earnings guidance. We currently anticipate full-year 2024 FFO between $2.63 and $2.68 per share with a midpoint of $2.655 per share. This is up $0.02 from the prior guidance we provided in April and up $3.5 from our original guidance. The most recent increase is primarily driven by improved leasing activity, higher parking revenues, and the acquisition of the two mezzanine loans Kennedy just discussed.
Our earnings guidance remains clean. There are no significant one-time non-recurring items and no speculative property acquisitions, property dispositions, development starts, or capital markets transactions. If any of these do take place, we will update our earnings guidance accordingly.
Our guidance also continues to exclude any payment of our $9.6 million unsecured claim in the SVB bankruptcy case. The exact timing and amounts of recovery against this claim is not yet known, but unsecured SVB bonds are currently trading around $0.60 on the dollar, so we do anticipate there will eventually be significant value in this claim.
Bottom line, our second quarter results are excellent and we’re increasing earnings guidance for the second straight quarter. I believe we were one of the very few office REITs to forecast positive FFO growth in 2024. Our best-in-class leverage and liquidity position remains intact. Office fundamentals are improving with our leasing pipeline returning to pre-Covid levels and we’re beginning to deploy capital into compelling and accretive investment opportunities.
Pieces are coming together and we enter the second half of 2024 in a terrific position to create meaningful value for our shareholders over the coming quarters.
With that, let me turn the call back over to the operator.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from Blaine Heck from Wells Fargo. Please ask your question.
Blaine Heck
Great, thanks. Good morning. Just wanted to start on the mezzanine transactions. Can you just talk about how those opportunities came to you? Were they marketed it at all, and then whether you’re continuing to look for additional Mez opportunities and if so, how much in total you guys would be willing to do of that specific type of investment?
Colin Connolly
Good morning, Blaine. The transactions that we announced today were both off-market transactions that we identified through relationships that we have here at Cousins and think we ultimately structured a really attractive win-win opportunity for both sides. And I’m hopeful, we’ll see more situations and opportunities like this.
Kennedy Hicks and her team are out now having conversations about similar transactions, but also looking at a broad array of transactions, including traditional property acquisitions, joint ventures, and other opportunities. I think as it relates to the Mez investments, our bias is towards equity-like investments. But I think at this point in the cycle, oftentimes the best entry point into an investment in a lifestyle office property can be through the debt and at very attractive returns. I think ultimately we’ll size those in our appetite for those.
Two, we wouldn’t want to take it to such a large degree that down the road, upon pay-off, we’re in a position where we create kind of self-inflicted earnings headwinds, not being able to replace such high coupons. But I do think we’ll see more of those opportunities in this environment. We’ll absolutely pursue them, but we’re looking at all types of different transactions, and I’m confident we’ll see some of those as well.
Blaine Heck
Great. That’s helpful. Helpful color. And then just one question on leasing. And sorry if I missed this, but were there any large kind of short-term leases in the 244,000 square feet of lease exclusions on Page 21 in the sup? And if so, can you give us any background on that and your thoughts on whether you’ll kind of get that space back at some point in the near future?
Richard Hickson
Yes, Blaine, this is Richard. That’s a good question. I told you about Accruent and how we are relocating them to the Domain 3 building. So what’s showing up is the short-term extension while they’re waiting on their replacement space. That’s the biggest driver of the exclusions.
Blaine Heck
Okay, great. Thanks, guys.
Operator
Thank you. Your next question is from Steve Sakwa from Evercore ISI. Please ask your question.
Steve Sakwa
Thanks. Good morning. Richard, could you maybe just expound a bit more on the leasing activity that you’re talking about? It obviously sounds very positive. I guess I’m just trying to understand how much of this is really growth of the overall market and how much of this is tenants in a flight to quality are coming to Cousins? Just trying to understand the separation there.
Richard Hickson
Sure. A large part of the activity that we’ve seen in our portfolio obviously over the last 12-plus months has been both flight to quality and frankly, arguably just as much flight to capital-driven as the pipeline that I alluded to has grown materially just in the last few weeks really. We’re seeing activity in both renewal and new customers within our portfolio.
So we’re seeing both inbound into our portfolio, but also activity starting to perk up of frankly, customers that have not been willing to make long-term decisions to date but are now definitely ready to and moving aggressively to lock in their long-term real estate decisions.
Colin Connolly
Steve, it’s Colin. I’d just add. We’re also seeing a resurgence in migration and companies that are looking to move from the West Coast or Midwest, even Northeast, and not all complete relocations, but certainly a lot of large hub activity. And so I think as we’re looking at new investment opportunities, our growing conviction in the leasing market, and again seeing that resurgence of in-migration is really constructive. And that had been a bit of a hibernation over the last 12 to 18 months.
Steve Sakwa
And maybe just as a quick follow-up there, I guess. Richard, on the things that are coming into the portfolio, do most of those have kind of expansion needs? Meaning if a new tenant is coming from the market, but coming the Cousins, does that often come with growth, or is that more of just a musical chairs situation where they’re leaving one landlord and coming to you?
Richard Hickson
I view it as generally situation-specific. You’ve got a little bit of both happening. Certainly, a dynamic in the market has been with large users to the extent they are relocating. There is some consolidation and approach of being more efficient. But generally speaking, I think it’s a mixed bag depending on the specific situation of each user.
Steve Sakwa
Okay. And then maybe just on Neuhoff, real quick on the apartments. I realize it’s very early in the leasing, but you have leased about 7% of the units. I’m just curious, there is a lot of supply in the Nashville market, but how has that lease up gone? How sort of pro forma rents trended? Are the concessions greater than what you had maybe expected?
Kennedy Hicks
Hey Steve, it’s Kennedy. So as we — as Richard mentioned, we started leasing the apartments in June and are really encouraged by the momentum and sort of the initial feedback we’re getting from our potential renters. The space rents, I’d say, are right where we’ve projected. We are offering maybe a month of additional concessions initially, but feel like we’re hitting a steady pace in terms of lease up there and also starting to see the retail picture come into view as well, which really is building on the momentum.
Steve Sakwa
Sorry, Kenny. So you’re offering one month free rent, or you’re having to kind of give two months free rent in order to do lease ups?
Kennedy Hicks
We underwrote a month, and I’d say we’re giving two now on a little bit longer term.
Steve Sakwa
Got you. Okay. Thanks.
Operator
Thank you. Your next question is from Nick Thillman from Baird. Please ask your question.
Nick Thillman
Hey, good morning. Maybe touching a little bit on the investments, maybe Gregg or Colin, just like, how much capacity on the balance sheet are you willing to take up leverage here for additional investments today?
Gregg Adzema
Hey, Nick, good morning. It’s Gregg. So we’ve been running the balance sheet kind of at this 5 times net debt to EBITDA for well over a decade. There’s only been a couple times that we’ve varied from it materially. You can argue it’s not even material. In both instances, when we completed mergers with other public companies, tier and — I just went blank, Parkway. Thank you. I’m sorry. And in both instances, it went up to the mid-5s. And we told you at the time we’d bring it back down to 5 times or below, and we did.
So, historically, if you look at our track record, the highest we’ve gone has been kind of 5.5 times. And 5.5 times gives us several hundred million dollars of capacity depending upon what we invest in. So we’ve got significant capacity just to go there. And even at 5.5 times net debt to EBITDA, we’d have the best balance sheet in the office space. If you were willing to take it up to 6 times, I’m not signaling anything here on this call, but if you were willing to take it there, I mean, that capacity almost triples. So we’ve got significant capacity if we choose to use it just on the leverage side.
Nick Thillman
That’s really helpful. Then Richard, you touched on the increase in the late stage pipeline. Can you quantify what that levels were in 2021 on an absolute basis, and then just the mix between renewal and new leasing in that pipeline?
Richard Hickson
The levels we saw then and what we’re seeing now are approximately 1 million square feet in the pipeline on the late stage and in the mix right now is very consistent with what we’ve seen in the past in terms of new and renewal.
Nick Thillman
That’s it for me. Thank you.
Operator
Thank you. Your next question is from John Kim from BMO Capital Markets. Please ask your question.
John Kim
Thank you. On the mez investments, it’s attractive yield for you, it’s expensive debt for the borrower. Can you talk about your confidence in their ability to service and repay the debt and where you are as far as loan to value at your part of the capital stack?
Colin Connolly
So, John, ultimately, just to clarify here, we purchased a newly created mezzanine position from the existing senior lender. So obviously we have a very attractive coupon. But ultimately to the existing borrower, there is no change to their current interest rate. So I don’t want to speculate longer term. Obviously, as those maturities happen, we’ll evaluate those and those borrowers will make the best decision for them.
We do think going in as an investment, again, the returns are highly attractive and accretive and ultimately collateralized by high-quality lifestyle office. And we’re very comfortable with that debt investment. As a debt investor, you ultimately do need to be comfortable with your collateral in the event that takes a different path. And in this situation, at the basis of our debt balance, we’re highly comfortable with where we are and however it plays out.
John Kim
And where do you see the loan to value today?
Colin Connolly
I don’t know that I’m going to comment specifically on what value is, but I’d say they’re highly levered. But I don’t want to comment specifically as to the number on value.
John Kim
Okay. Kennedy, you mentioned in your prepared remarks that 110 East was 0% leased, Radius, 76% leased at the time of the investment. I don’t know if I’m reading too much into that, but have they gone up since then?
Kennedy Hicks
Not materially, but obviously, both loans have the ability for future funding as they continue their lease up.
Colin Connolly
Both of these buildings are well located in great submarkets and we think over time in submarkets that will have kind of a declining availability of lifestyle office. So again, we’re highly comfortable in the underlying real estate here.
John Kim
And then final question on Charlotte. I think you guys mentioned, it’s the market with the largest amount of new requirements in the markets and the ability to backfill some of the giveaway space at Fifth Third Center. But I was wondering if you could just expand on your comments?
Richard Hickson
Sure, I can take that. What I said was that we’ve seen the largest increase in new requirements. And I say that Colin mentioned this earlier, but it’s very encouraging in that activity increase is made up of not just in-market, existing users within Charlotte, but we’re seeing, frankly, both actual primary headquarters relocation potential starting to percolate, but also regional headquarters that are both inbound and also in-market relocation. So we’re seeing a broad-based selection of the types of demand within Charlotte.
Again, a testament to the fact that users are now willing to clearly make decisions for the long term. We feel good about, one, the redevelopment plans at Fifth Third Center, but also the condition of the space that we do have for BoA about half of it has recently been improved by the bank. And so it represents a great opportunity for users to come in and have ready-to-go space that’s essentially plug-and-play. So we have some good offerings both at the building specifically and also have an ability to meet different types of demand.
John Kim
Appreciate it. Thank you.
Operator
Thank you. Your next question is from Dylan Burzinski from Green Street. Please ask your questions.
Dylan Burzinski
Hi, guys. Just sort of wanting to go back on your comments regarding a pickup-in touring activity. I guess can you kind of comment on what is sort of driving that? Is it more or better outlook for the macroeconomic economy? Is it stronger return-to-office trend? Just sort of curious if you can give any broad strokes on what is sort of driving the improving leasing activity that you’ve seen.
Colin Connolly
Yes, I think it’s — I characterize it a bit as a return to normalcy. And I think we’re going to hear a little bit less about return to office. I think that is kind of largely underway. And I think most companies are kind of looking forward and kind of putting aside whether their folks are going to be in four days a week or five days a week or three-and-a-half days a week and saying we generally need the same amount of office space.
And we haven’t made decisions. And so they’re back out in the market and I’d say a more normalized way, looking for space. And so going forward, I think the trends that will kind of continue to drive the market are the same ones that have driven over the last 10 years, which is certainly the flight to quality that we’ve discussed. But the migration to the Sun Belt will continue to be a very powerful tailwind. And I think in time we’ll hear a little bit less about return to office and flight to capital and kind of these other, I’d say, transitory trends.
Dylan Burzinski
That’s helpful. And then maybe if you can just comment on sort of net effective rents on new leases, are you guys starting to see an ability to be able to push base rents or maybe sort of reduce the amount of free rent or TIs that you’re offering to tenants?
Colin Connolly
Generally speaking, we’ve been able to push base rents to help, as you can tell from our net effective rents to help offset the higher concessions. But yes, it’s been face rent and then obviously term is another lever we can pull to help offset higher concessions.
Dylan Burzinski
Thanks.
Operator
Thank you. Your next question is from Camille Bonnel from Bank of America. Please ask your question.
Camille Bonnel
Good morning. I just wanted to follow up on that last question. Really wanted to get a sense by market, if you could talk to which areas you’re seeing the strongest areas to push rent growth or is it pretty consistent across all?
Colin Connolly
It’s — Camille, it’s fairly consistent. Again, all of our — the entirety of our portfolio, lifestyle buildings, and strong Sun Belt markets. And so we’re benefiting from kind of this activity both within the market and also attracting new customers into those markets. In terms of where we’re able to ultimately drive net effective rents is it will be a function of the supply and demand within those markets.
And so a market today like Atlanta or Tampa, again, which in the lifestyle segment are fairly tight, we’re having a good degree of success, say a market like Austin, which has a bit of higher supply, that is — it’s a little, I’d say more stable and — but I think in time with the in-migration that is now percolating once again in Austin, I think that will prove to be kind of a short term phenomenon. And again, longer term, we think the Sun Belt migration and the flight to quality are going to be really powerful. And Cousins is sitting right at the intersection of those trends.
Camille Bonnel
Got it. So can you talk to what the mark-to-market opportunity is for the leases that are expiring in the back half of the year?
Colin Connolly
Well, I’m not going to provide any specifics just yet. We want to see ultimately which leases we sign in which quarter, and that mix is always determinative of where that mark-to-market is. But as Gregg mentioned earlier, we’ve had 41 straight quarters of a positive mark-to-market, and we’re optimistic about the second half of the year.
Camille Bonnel
Okay. Great. And the Cousins team continues to deliver strong operating results and emphasizes how driving cash flow is a key priority. So when you consider we’ve probably passed the floor on the portfolio’s vacancy levels coming out of COVID, at what point does the Board start to consider raising the dividend again?
Gregg Adzema
Hey, Camille, it’s Gregg. We’ve been pretty consistent in public about our dividend policy. We look at FAD and target our dividend as a percentage of FAD. And it has run for many, many years, right around 70% to 75% of FAD. If anything, it’s been a little bit below that as we’ve taken a conservative approach over the last few years, just considering the volatility in the markets. And so again, the Board will make their own decisions surrounding our dividend policy, but it’ll be driven around FAD and paying out an appropriate percentage of FAD going forward. So it’ll be as simple as that.
Camille Bonnel
Okay. Thank you.
Operator
Thank you. Your next question is from Upal Rana from KeyBanc Capital Markets. Please ask your question.
Upal Rana
Great. Thanks for taking my question. Richard, you mentioned interesting demand from tech in Austin. What did you mean by that? And any additional color you can add there in terms of what type of tech or size or term?
Richard Hickson
All right. On its face value, we just are seeing interesting and compelling demand from technology companies. I’d say there some that you might consider kind of old line technology and some that you might consider more modern and current day technology users. But it’s definitely a noticeable trend that we’re seeing that it has increased relative to the last few quarters or year.
Upal Rana
All right. Great. That was helpful. And then, Gregg, could you talk about your floating debt strategy here? You currently have about 16% floating. And how are you thinking about that today, given where rates are and the potential rate cut in September?
Gregg Adzema
Sure. We’ve run our floating rate debt exposure very consistently over the last decade. It’s been give or take 20%. We haven’t really adjusted it based upon what we think the Fed may or may not do. We want to have a little floating rate debt available on our balance sheet so that if we sell something, we have a use of proceeds that make sense for our shareholders. So we’re right about where we need to be, and I think that we’ll stay there.
Upal Rana
Great. That was helpful. Thank you.
Operator
Thank you. Your next question is from Peter Abramowitz from Jefferies. Please ask your questions.
Peter Abramowitz
Yes, thank you. So there were some positive trends on net new requirements in Austin this quarter, just according to some of the broker reports and VTS data, but still a lot of supply coming online, some of which is in the downtown market that’s competitive with your assets. Just wondering if you could give a general update on how things feel on the ground there from a supply-demand perspective, whether you’re sort of seeing any inflection in demand and starting to take up some of that new supply?
Colin Connolly
Yes, good question, Peter. It is, as I mentioned earlier, Austin does have a bit of supply that I would say was pulled forward through some of the exuberance of 2020 and 2021, and it was largely driven by anticipatory job growth in the tech sector, which then moderated over the last 12 to 18 months. But I think importantly, Austin is still a highly desirable market for inbound growth. And — but that had gone into hibernation. We’re now starting to see that activity pick back up. And so what I see in Austin is really just a short-term supply issue that will, we think, quickly rebalance itself as that demand fills up the new supply. And there really is going to be nothing new started for the foreseeable future in Austin. So we view it as kind of a short-term transitory trend and are encouraged to see the demand reemerge and ultimately get Austin to the stabilized levels that it’s been in the past.
Peter Abramowitz
All right, that’s helpful. And then a similar question. But just overall, in your markets, what’s sort of the tenor, the behavior you’re seeing from the big tech tenants today, and how has that sort of shifted this year?
Colin Connolly
Yes, again, I think the largest tech tenants are going through a process of becoming more efficient, and I think in certain instances that has meant fewer people, but at the same time, we are starting to see their trends as it relates to being back in the office. And then I’d say, importantly, starting to see their earnings grow once again. And I think as that earnings growth becomes tangible, I think the hiring will follow. And so we’re optimistic in the not-too-distant future that you’ll see kind of large, big tech back in the game. But I’d say to date, it’s still relatively moderate.
Peter Abramowitz
That’s all for me. Thanks, Colin.
Colin Connolly
All right, thank you.
Operator
Thank you. Your next question is from Brendan Lynch from Barclays. Please ask your questions.
Brendan Lynch
Great. Thank you for taking my question. You’ve talked about scaling in Nashville in the past. Maybe you couldn’t kind of rank order where Mez financing would place relative to more JVs or direct ownership or maybe even investing in distressed debt?
Colin Connolly
And you’re asking specifically in Nashville?
Brendan Lynch
Correct.
Colin Connolly
Yes. Again, Nashville is, without question a priority for us to grow and scale our business and ultimately justify an operating platform on the ground. We’ve got a great start with our Neuhoff development project, but in time, we’d certainly like to add more square footage in the market. And I think ultimately, our strategy in Nashville will be consistent with our strategy as a company as a whole, which is to invest in trophy lifestyle office properties or those that can be repositioned into that quality.
And Kennedy and her team will be creative as it relates to a property — traditional property acquisition available and makes sense, but we’d absolutely consider joint ventures and additional debt investments as well. Again, as long as the underlying asset is consistent with our lifestyle strategy.
Brendan Lynch
And I’m sure that transition would be market dependent. But can you give any sense of the timeline which you’d be looking to increase exposure?
Colin Connolly
Yes. Again, we’re very constructive on Nashville today, and we have a kind of insiders look at what’s happening in the leasing market through our work at Neuhoff. And so I think it’ll be more driven by the opportunities that emerge. And are those, we think, as those opportunities emerge, are they at pricing that we’re comfortable with? And so it’ll be opportunistically driven.
Brendan Lynch
Great. Thanks, Colin.
Colin Connolly
Thank you.
Operator
Thank you. Your next question is from Blaine Heck from Wells Fargo. Please ask your question.
Blaine Heck
Great. Thanks. Just a couple of follow-ups here. First, on the Mez investments, can you tell us when the senior debt matures on both of those? And then anything you can tell us about the profile of the borrower in these situations would be helpful.
Kennedy Hicks
Hey, Blaine, it’s Kennedy. The senior loans have the same maturity as the mezzanine loans. Again, since our loans were cut from within that, don’t really want to get into specifics on borrowers or anything like that, but again, we like our investment and like the assets and the submarkets that they’re in.
Blaine Heck
Great. Thanks, Kennedy. And then second, you guys had a strong start to the year from the same store NOI perspective, with 6.66% the first quarter, 5.1% this quarter. When I look at the same-store occupancies from last year that you’ll be comping against in the third and fourth quarters, it seems like they remain relatively steady around the 87.5% range, roughly 100 basis points below where you guys are today. So, is there any reason to think we should see same-store that’s materially different in the back half of the year?
Gregg Adzema
Hey, Blaine, it’s Gregg. A similar question was asked on the last quarterly call. Because of that large 6% plus number that was associated with a negative expense number in our same property portfolio. This quarter, the expense number was slightly positive. In the second half of 2023, a couple things happened that affected our same property expense numbers, and they were surrounding tax issues. One, we had some successful appeals throughout the portfolio. We accrue taxes throughout the year, and if we have a successful appeal, we usually find out about it in the second half of the year, and then we adjust the accrual for the full year. So some of that happened last year. Very positive outcome.
And the second thing, even the larger thing, was that there was a successful vote in the State of Texas to lower the property tax rate. And again, we didn’t find out about that until the second half of the year, so we adjusted the accrual. So that year-over-year comp is what drove the kind of below-trend expense number in our same-property portfolio in the first quarter. That began to correct in the second quarter. It’ll correct fully in the third and the fourth quarter.
So, for the balance of this year, we anticipate positive same-property results. But you’ll see a stabilization or a return to normalcy for same-property expense numbers as we move past the impact of that second half 2023 accrual adjustments.
Blaine Heck
Very helpful. Thanks, guys.
Colin Connolly
Thanks, Blaine.
Operator
Thank you. There are no further questions at this time. I will now hand the call back to Colin Connolly for the closing remarks.
Colin Connolly
Thank you all for joining us today on our Second Quarter Earnings Call. We appreciate your interest in Cousins. Please feel free to follow up with the team if you have any additional questions. Have a great day.
Operator
Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.
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