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Cousins Properties Inc (NYSE:CUZ)
Q3 2019 Earnings Call
Oct 24, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Cousins Properties Q3 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would like to turn the conference over to Pam Roper, General Counsel. Please proceed.

Pamela Roper -- Executive Vice President, General Counsel and Corporate Secretary

Thank you. Good morning. Welcome to Cousins Properties third quarter earnings conference call. With me today are Colin Connolly, our President and Chief Executive Officer; Richard Hickson, our Executive Vice President of Operations; 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.

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-K and our other SEC filings. The Company does not undertake any duty to update any forward-looking statements, whether as a result of new information, future events or otherwise. The full declaration regarding forward-looking statements is available in the supplemental package posted yesterday, and the detailed discussions of potential risk is contained in our filings with the SEC.

With that, I'll turn the call over to Colin Connolly.

Colin Connolly -- President and Chief Executive Officer

Thank you, Pam, and good morning, everyone. We had a productive third quarter at Cousins Properties. I am pleased to report that the integration at 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 Sun Belt markets.

Financially, we remain right on target. Last night, we released the third 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. Gregg 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 Sun Belt markets are among the healthiest in the United States. We have assembled a 22 million square foot portfolio at the intersection of two powerful long-term trends in the office sector, employment migration to the Sun Belt and a flight to quality. Boosted by these strong tailwinds, our target markets have posted rent growth and net absorption that has far outpaced gateway markets and the national average. Net absorption in our six core markets accounted for 31% of the net absorption nationwide year-to-date, and year-over-year rent growth has nearly doubled the US average according to CoStar.

Second, we own the premier Sun Belt portfolio in the office sector. The Cousins portfolio is 98% Sun Belt, 99% office, 100% Class A, 78% near transit and a 2002 average year belt [Phonetic]. In addition, we have dominant market share in some of the most highly amenitized submarkets, over 20% on average across our top seven submarkets. The net result is a trophy portfolio that benefits from operational synergies, requires less capital to operate and commence premium rents.

Third, 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 first quarter 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 first quarter of 2016.

Fourth, 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 partner's 50% interest in Terminus on October 1.

On the development front, we continue to create value. The office component of our $428 million pipeline is now 87% pre-leased. 10000 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 3.8 million 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 4.05 times, which is significantly below our peers. In addition, approximately 80% of our portfolio is unencumbered and we currently have approximately $932 million of liquidity. Notwithstanding the likely sale of Hearst Tower in March of next year for $455.5 million and 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've announced a series of exciting transactions, including the Norfolk Southern headquarters project, the Gulch air rights sale, the TIER merger, the BB&T lease at Hearst Tower and the Terminus acquisition. Collectively, these moves have advanced our strategy to build a preeminent Sun Belt office REIT. First, we enhanced our geographic mix, increasing exposure to Austin, balancing exposure in Atlanta and entering Dallas with scale.

Second, we expanded our development pipeline adding Domain 12 and 10. Third, we grew our land bank, including strategic parcels in Austin, Atlanta and Dallas, which boost our long-term growth profile. And lastly, we increased scale which creates operational synergies and provides cost of capital advantageous.

In closing, Cousins has a simple and compelling path forward, capitalize on the ongoing migration of the Sun Belt, 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?

Richard Hickson -- Executive Vice President of Operations

Thanks, Colin. Pleased to report that our solid second quarter operational performance continued in the third quarter. 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 second-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 first quarter of 2018. With this strong activity, we ended the quarter at 93.8% 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 four of our six core markets as top 10 US 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 Sun Belt.

I will now provide some details about Atlanta and Austin, our two 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 six highest number of office-using jobs in the nation, even ahead of larger markets like Los Angeles and Washington, D.C. Also, of interest is that, venture capital investment in Atlanta reached a significant milestone this quarter, as Crunchbase reported Atlanta-based companies have received $1.1 billion 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 seen.

This quarter, our Atlanta team executed 163,000 square feet of leases. Our over 7 million square foot portfolio continues to be well positioned at 92.1% 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 trans adoptions. 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 partner's 50% 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 two of the floors recently vacated by CBRE this past summer. This new lease is expected to commence late in the second quarter 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 five 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 6.1 million square feet of office space in Austin since 2010, and this is according to Cushman & 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 million square feet, which is located across the CBD, Domain and the Southwest submarkets, ended the quarter at 96.1% 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 our markets this quarter with a second-generation cash net rent increase of 28%.

I'd also like to touch on Phoenix, where we have a terrific 1.3 million square foot portfolio concentrated in the dynamic Tempe submarket. Per CBRE, this quarter, metro Phoenix posted 1.4 million square feet of net absorption, bringing the year-to-date total to 2.5 million square feet. CBRE further noted that only seven markets nationally have posted over 2 million square feet of net absorption through the third quarter, of which Phoenix is one. 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 of Charlotte, Tampa and Dallas are also tracking very nicely. Our teams in these markets executed 153,000 square feet of leasing in 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 95.9% leased and we have made good progress on releasing the Dimensional Fund's vacancy at Fifth Third Center, recently signing a 25,000 square foot expansion with Fifth Third Bank. CoStar also recently cited Charlotte as leading the country in annual rent growth as of this month at 7.5%, 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% leased. And 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 four-floor availability in early 2020.

I'll now turn it over to Gregg.

Gregg Adzema -- Chief Financial Officer

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 and is our customary practice. We hope this early guide provides investors with helpful information as they analyze Cousins. With that, let's turn to the third quarter results.

The third quarter represents our first full reporting period after completing the TIER merger, and as you could tell from Colin and Richard's comments, the results were outstanding on many fronts. FFO was $0.72 per share, which includes $1 million in TIER 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, second-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 three items I'd like to highlight before providing some color on our same property performance. I'll start with termination fees. We recognized $3.6 million in termination fees during the third quarter. 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&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.

Second, our general and administrative expenses during the third quarter at just under $6 million were lower than the first 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 to the SNL Office index. The other components of G&A were generally in line with our expectations.

Finally, capitalized interest during the third quarter at approximately $4.2 million was higher than its previous run rate, driven by the addition of three TIER development assets that we acquired as part of the merger: Domain 10, Domain 11 and Domain 12. Per GAAP, we brought these assets on to 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 third quarter, driven by 3.2% revenue growth. This marks the third quarter 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 $18.5 million in expected synergies has been realized. Overall, our earnings outlook remains consistent with the original expectations we provided at the time that TIER deal was announced in March.

Turning to the balance sheet. Our third 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 six 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 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 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% and 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 the midpoint of 4.25%.

Moving on, we anticipated gain in land sale of $15.9 million, up from $14.5 million due to the expected redemption of the remainder of the Wildwood Office Park joint venture land during the fourth quarter. Next, we anticipate fee and other income of between $35 million and $37 million, up from the previous range of $32 million to $34 million, due to an increase in the lease termination fees.

We anticipate general and administrative expenses of $32 million to $34 million net of capitalized salaries. This is down from our previous guidance of $34 million to $36 million due to a reduction in long-term incentive compensation accrual.

Finally, we anticipate interest and other expenses, net of capitalized interest, of between $61 million and $63 million, down from the previous range of $66 million to $68 million due to an increase in capitalized interest on projects under development. And although we previously included the purchase of our joint venture partner's 50% interest in Terminus and the sale of Woodcrest, during the fourth quarter 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: First, we anticipate year-over-year same property NOI growth of between 4% and 6% on a cash basis with the 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 two years. The fundamentals in our urban Sun Belt office markets remain strong.

Moving on, we anticipate fee and other income of between $21 million and $23 million. We anticipate general and administrative expenses of between $33 million and $35 million net of capitalized salaries. We anticipate interest and other expenses of between $69 million and $71 million net of capitalized interest. And depreciation and amortization of non-real estate assets of between $1.5 million to $2.5 million. We anticipate GAAP straight-line rental revenues of between $38 million and $40 million. And above and below market rental revenues of between $9 million and $11 million.

Our 2020 guidance includes one 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 per appropriate.

With that, let me turn the call back over to the operator.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Guinee with Stifel. Please go ahead.

John Guinee -- Stifel, Nicolaus & Co., Inc -- Analyst

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 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, et cetera?

Colin Connolly -- President and Chief Executive Officer

John, the page that you're referring to at our supplement is not at 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 -- is less than what we would look at going forward, which would be over $400 a square foot for the next likely project out of The Domain.

John Guinee -- Stifel, Nicolaus & Co., Inc -- Analyst

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...

Gregg Adzema -- Chief Financial Officer

John, it's a Gregg. So when we provide our Schedule III within our 10-K year-end, that Schedule III 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'll be hard to solve for it exactly because that Schedule III does not break out intangible liabilities and assets. But that'll get you close.

John Guinee -- Stifel, Nicolaus & Co., Inc -- Analyst

Okay. And then if I look at Page 20, your net rents are stunningly high with the exception of the new rents, $25.61 for a net rent is really big in the southeast. $39 for an expansion net rent is stunningly high. Can you talk about which buildings are receiving or achieving those sort of rents?

Colin Connolly -- President and Chief Executive Officer

Yeah. John, it's Colin, 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.

John Guinee -- Stifel, Nicolaus & Co., Inc -- Analyst

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 expiration 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?

Colin Connolly -- President and Chief Executive Officer

Sure, John. It -- 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's got almost seven 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 press 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'll just tell you in terms of -- a little bit of the visibility in the Cousins' mindset as it relates to 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 expiration. So I think that's kind of one.

Second, I think these are all opportunities for the Company to create significant value. And as you touched on, there is very meaningful mark-to-market opportunities on all those, ranging anywhere from, call it, 10%, upwards of 30%, in case of the Bank of America space in Charlotte. And these buildings are all located at Main & 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 expiration there.

Richard touched on, 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.

John Guinee -- Stifel, Nicolaus & Co., Inc -- Analyst

Great. Thank you very much.

Operator

The next question is from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

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 '20 expiration?

Colin Connolly -- President and Chief Executive Officer

Yeah. 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.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you. And then, I guess, just bigger picture, as you look across your market, can you just talk about supply? And if you are seeing any submarkets that you're in that 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?

Colin Connolly -- President and Chief Executive Officer

Sure, Jamie. It -- as a -- on the whole, supply has been, I'd say, very much imbalanced throughout the Sun Belt this cycle and it's created a terrific market for us. Again, continue to push rents, 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 and say the -- we're -- 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 2.5 million square feet of what we would characterize as multi-tenant office buildings in the core of Midtown. That'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 600,000 to 700,000 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.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

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 that either the '19 or '20 guidance about backfilling some of the spaces you've left?

Richard Hickson -- Executive Vice President of Operations

Sure, Jamie. This is Richard. We -- I'd say, I characterize the assumptions we've made for 2020, in particular, very consistent with prior year assumptions and 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 fourth quarter 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.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. I mean, are there any specific large spaces that you think will get backfilled? Like if you look at your largest empty spaces now?

Richard Hickson -- Executive Vice President of Operations

Yes. We have talked about backfilling about half of the CBRE space, Terminus, and we do feel good about some continued progress in 2020 there, as well as obviously we've taken on BofA [Phonetic] 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.

Colin Connolly -- President and Chief Executive Officer

Yeah. Jamie, I'd just add as a whole, right, as you look at the portfolio, we've got a fabulous trophy office portfolio and some of the best submarkets throughout the Sun Belt. So, in particular, buildings where we've got some vacancy, would be Terminus, we've got a little bit of vacancy at Buckhead Plaza. We've still got 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.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

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 in 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 '20?

Colin Connolly -- President and Chief Executive Officer

Sure, Jamie. Again, I alluded to in my remarks that we feel -- we're very constructive on the opportunity at both 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 -- well, 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 in the Company, we'll try to move those forward. So, I think we're really well positioned to continue to make progress in 2020 just like we have in '19.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. All right. Thank you.

Operator

The next question is from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck -- Wells Fargo Securities, LLC -- Analyst

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?

Colin Connolly -- President and Chief Executive Officer

Yeah. That's a great question, Blaine. And I'd say as we look at our positioning today, I'd say, the one in 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 shortly 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 our presence in that market.

Outside of that, we do have a very strong and attractive site in just about all of our other markets. Downtown Austin, it would be one that we would look at, we've got a great position, obviously, out of The Domain. But Downtown Austin could potentially be an opportunity. But holistically, as we look at the Company and the scale that we have and our approach to land, it's been to have a good site or two 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 1% or 2% of the Company, which certainly minimizes and mitigates any earnings drag from non-income producing assets.

Blaine Heck -- Wells Fargo Securities, LLC -- Analyst

Okay. That's helpful. Gregg, 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?

Gregg Adzema -- Chief Financial Officer

Blaine, it's a terrific question. And as you could see from our third quarter 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 Sun Belt 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.

Colin Connolly -- President and Chief Executive Officer

Yeah. And Blaine, I 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, and 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, it -- we've got the balance sheet to go do that.

Blaine Heck -- Wells Fargo Securities, LLC -- Analyst

Very helpful. Last one for me. You guys have talked about putting the Woodcrest asset in Cherry Hill on the market. But I think Gregg mentioned only Hearst is in guidance. So, can you talk about the timeline for Woodcrest? Are you guys marketing it now? Or are maybe trying to get a renewal or backfill for trying to assign first? Just, I guess, any color on that sale would be helpful.

Colin Connolly -- President and Chief Executive Officer

Sure, Blaine. It -- the asset is on the market and we've received first round bibs [Phonetic] 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 -- if the buyer and best buyer needed to fly into early next year, I think we're agnostic on that. We're just looking for the best execution.

You mentioned there is a large expiration next year. We are -- we plan to move forward with the disposition at this time and we just view that as a non-core asset on several fronts. One, it being located in New Jersey. And from a profile perspective, 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 and around $20 a foot. So I think as you think about that sale and evaluate, again just really not core for us, so we're going to go ahead and move that when we identify the right buyer.

Gregg Adzema -- Chief Financial Officer

And Blaine, it's Gregg. The Woodcrest sale is included in our guidance.

Blaine Heck -- Wells Fargo Securities, LLC -- Analyst

It's in 2019 guidance?

Gregg Adzema -- Chief Financial Officer

Yes, it assumes year-end 2019 sale.

Blaine Heck -- Wells Fargo Securities, LLC -- Analyst

Got it. Thanks guys.

Operator

The next question comes from Dave Rodgers with Baird. Please go ahead.

Colin Connolly -- President and Chief Executive Officer

Dave, we can't hear you.

Operator

Mr. Rodgers [Speech Overlap]

Dave Rodgers -- Robert W. Baird -- Analyst

Can you hear me now?

Colin Connolly -- President and Chief Executive Officer

There you are. I think you might have been on mute.

Dave Rodgers -- Robert W. Baird -- Analyst

Yeah. We're not going to let you so soon. I guess, just two housekeeping items for Gregg, to start with, and I apologize for that. One, on a same-store NOI pool and guidance for 2020, will you roll TIER in during the second half or will that not roll in until '21?

Gregg Adzema -- Chief Financial Officer

Dave, TIER will roll in, in 2021. We got to straight line all those properties, so we've got to kind of get a full year under our belt before we could put it in the same property pool, similar and consistent with other acquisitions we've done in the past.

Dave Rodgers -- Robert W. Baird -- Analyst

Okay. I thought so, I just wanted to verify, so that will be core for Cousins 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. Is that a meaningful impact on the numbers? And again, walk us through the numbers quickly?

Gregg Adzema -- Chief Financial Officer

When you say meaningful impact on the numbers, which numbers?

Dave Rodgers -- Robert W. Baird -- Analyst

I guess, on earnings.

Gregg Adzema -- Chief Financial Officer

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.

Dave Rodgers -- Robert W. Baird -- Analyst

Okay. Didn't anticipate. And then maybe just lastly, I wanted to go back to something you mentioned early and it was after on the call as well, you talked about the 8% to 10% below market rents in the portfolio. But, I guess, you quoted that for a while and, I guess, one of the things I was thinking about is that you got new construction in your market $550 to $600 [Phonetic] a foot in some of the higher end markets Charlotte Atlanta and Austin, pushing rents of $50 to $70 gross in some of these markets depending. And so, that 8% to 10% that you 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 hold you back as these market rent growth really starts to kind of accelerate with the set of new completions for the market?

Colin Connolly -- President and Chief Executive Officer

Yeah. 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 two, three years, we've averaged right around 9%. And that rent roll-up, it's always a function of when the prior lease commenced. And we've had really strong rent growth over the last, call it, five to 10 years throughout the Sun Belt. So I think you're seeing that reflection of the starting point as rents have moved as we got there and it continued to move. But I think we -- as we look forward to the expirations over the next kind of couple three, three years, I think we still feel very good that that 8% to 10% is a good range.

Dave Rodgers -- Robert W. Baird -- Analyst

All right. Thanks, everyone.

Colin Connolly -- President and Chief Executive Officer

Thanks, Dave.

Operator

The next question is from Michael Lewis with SunTrust. Please go ahead.

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

Great. Thank you. So you talked about Hearst Tower and Woodcrest dispositions. How about other assets you might sell? Things in the southern bucket like maybe Houston or Fort Worth or something? And would you maybe time those up with development spend?

Colin Connolly -- President and Chief Executive Officer

Sure. It -- Mike, 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 we are -- where we have a goal to grow. But as we look at 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 to fund those. And so, we'll make those decisions when we get to those kind of next new opportunities.

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

Thanks. And then, lastly for me. You had low transaction costs in 3Q or maybe I thought there was a little bit more left there. Are you -- can you share, what are you expecting for remaining transaction cost to be recorded in 4Q, if anything?

Gregg Adzema -- Chief Financial Officer

Hi, it's Gregg again. We're not quite done, but we're close. So I anticipate we will have less than -- well less than $1 million left. And the vast majority, if not all that, will flow through in the fourth quarter.

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

Okay, great. Thank you.

Colin Connolly -- President and Chief Executive Officer

Thanks, Michael.

Operator

[Operator Instructions] The next question is a follow-up from John Guinee with Stifel. Please go ahead.

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

Great. Yeah. Thank you. If I take Hearst Tower, your expect to -- 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 sale side and you look at Woodcrest on the sale 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?

Colin Connolly -- President and Chief Executive Officer

Well, it -- John, the Woodcrest transaction is, ultimately, we think will be a relatively small transaction given the size of the project. And as I mentioned, it's actually been converted industrial. So I think if you kind of put that design, it's not hugely material, and look at the Hearst and Terminus transaction, the cap rate on Hearst is kind of a, call it, 5 -- mid-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-5%s 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.

John Guinee -- Stifel, Nicolaus & Co., Inc -- Analyst

Great. Thank you.

Colin Connolly -- President and Chief Executive Officer

Thank you, John.

Operator

The next question is from Danny Ismail with Green Street Advisors. Please go ahead.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. Thank you. Just a quick one for me. Any updated thoughts on co-working post-WeWork scale IPO? And sort of comfort with doing full building leases or major leases with any flex [Phonetic] office providers?

Colin Connolly -- President and Chief Executive Officer

I thought we were going to escape that question only four minutes to spare. But, obviously, Danny, a 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 the 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 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 co-working label, it's more of a valuation 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, often times, that will be our preference.

Daniel Ismail -- Green Street Advisors -- Analyst

Appreciate it. Thanks for the question -- thanks for the answer.

Colin Connolly -- President and Chief Executive Officer

All right. Thank you, Danny.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Colin Connolly for any closing remarks.

Colin Connolly -- President and Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Pamela Roper -- Executive Vice President, General Counsel and Corporate Secretary

Colin Connolly -- President and Chief Executive Officer

Richard Hickson -- Executive Vice President of Operations

Gregg Adzema -- Chief Financial Officer

John Guinee -- Stifel, Nicolaus & Co., Inc -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Blaine Heck -- Wells Fargo Securities, LLC -- Analyst

Dave Rodgers -- Robert W. Baird -- Analyst

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

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