Cousins Properties Inc

NYSE:CUZ

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, and welcome to the Cousins Properties Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instruction] Please note this event is being recorded.

I would now like to turn the conference over to Pamela Roper, General Counsel. Please go ahead.

[Pamela Roper, General Counsel]

Thank you. Good morning, and 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, 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. In particular, there are significant risks and uncertainties related to the severity and duration as a COVID-19 pandemic and the timing and strength of the recovery there from. 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 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, President and Chief Executive Officer]

Thank you, Pam, and good morning, everyone. We began the third quarter with the expectation that our customers will begin bringing their teams back to the office post Labor Day. Since then, the Delta variant hit the Sun Belt hard and created delays. However, as cases have now significantly declined, we're increasingly hearing from our customers that they plan to return toward the end of this year or early next year. We are encouraged.

Our team delivered strong financial results during the third quarter. Here are a few highlights. On the earnings front, the team delivered $0.69 per share in FFO. Same-property NOI on a cash basis increased 3.6%, and importantly, we leased over 597,000 square feet, including over 500,000 square feet of new and expansion leases with 7.7 years of weighted average lease term and a net effective rent of $24.06 per square foot, which is higher than our 2019 average. Second-generation cash rents increased 23.1%, our strongest rollout since 2015. And we ended the quarter with net debt to EBITDA of 4.54 times. While the macro narrative around office remains ambiguous, our leasing performance highlights three office sector trends that are becoming quite clear. First, innovative and growing companies recognize that they are stronger in person at least most of the time. In this persistent remote environment, employee attrition is at an all-time high. Contrary to many of the media headlines, forward-thinking business leaders are connecting the dots between the great resignation and eroding corporate cultures. Thus, companies are firming up plans for their return strategy and making long-term real estate decisions that they were not prepared to make just a few quarters ago.

Second, the migration of the Sun Belt has accelerated. Cisco, Visa, Arc and Bets and Tesla are just the latest examples. There are more in the pipeline. The rapid urbanization is places like Downtown Austin, Midtown Atlanta, in the south end of Charlotte, have changed the equation for companies previously located in more dense, larger cities in the Northeast and West Coast. Sun Belt cities now offer a dynamic urban experience in addition to an attractive climate and a lower cost of living and doing business. It's the best of both worlds.

Lastly, the flight to quality is intensified. Earlier this week, I've toured our recently completed Norfolk Southern headquarters project with a local business leader. His feedback, much better than working at home, he said. It was simple and spot on. The development includes innovative collaboration space, neighborhoods for private working, state-of-the-art technology and countless amenities, all in the heart of Midtown Atlanta. Our customers recognize that interesting and inspiring space will be a competitive advantage in retaining and recruiting talent as well as rebuilding culture and connectivity. At Cousins, we have a unique and compelling strategy that positions us at the intersection of these trends. As the market moves faster, we are responding. Most recently, we acquired Heights Union, a 294,000 square foot office property in Tampa for a gross price of $144.8 million. The Heights neighborhood has emerged as one of Tampa's signature gathering spots providing a unique live, work, play experience. The 2 6-story buildings, which were completed in 2020 are highly amenitized, authentic and efficient. Including Height Union, we have invested approximately $1.1 billion in new acquisitions and development since the start of the COVID-19 pandemic. We are excited about the railyard in Charlotte, 725 Ponce in Atlanta, Domain 9 in Austin and New Hawk in Nashville. They are representative of the office of the future in our all differentiated products in their respective markets.

During the same period, we have sold approximately $1 billion of noncore properties, including Hearst Tower and 1 South End, Charlotte, and Burnett Plaza in Fort Worth. The net result of these strategic transactions are value-add returns on a blended basis and a trophy portfolio positioned to capture outsized customer demand and a reduced CapEx profile.

As I mentioned earlier, we have completed the Norfolk Southern headquarters project. The development was a highly profitable development for Cousins and a great outcome for our customer, a true win-win. Nonetheless, we are excited to transition to the other side of this unconventional transaction. The declining development fee stream has created challenging year-over-year earnings comps and the 370,000 square foot lease expiration on December 31 at 1,200 Peachtree created uncertainty.

Looking forward to 2022 and beyond, our story simplified, and we are already making great early progress on our re-leasing efforts at 1200 Peachtree as we are approximately 40% committed including LOIs. Richard will touch on this more in a moment.

In closing, Cousins is well positioned for the future. We have assembled a trophy portfolio in fast-growing Sun Belt markets. We have organic growth opportunities within the portfolio as we drive occupancy gains and rental rate increases. We have external growth opportunities in our $663 million development pipeline. In addition, we have a well-located land bank that can support another $2.6 billion in development, including over 3 million square feet of trophy office and over 1,500 multifamily units. Importantly, we have a rock-solid balance sheet that provides financial flexibility and a highly capable team to execute on the strategy.

Before turning the call over to Richard, I want to thank our entire dedicated Cousins team who work hard every day to bring outstanding service to our customers and their talents to our company. They are the cornerstone of the company's success.

Thank you. I'll turn it over to Richard.

[Richard Hickson, Executive Vice President of Operations]

Thanks, Colin, and good morning. This quarter, we continue to see economic recovery in our core markets and along with it, an increase in leasing and transaction activity. In short, our third quarter operational performance was strong. While the pandemic still remains and the Delta variant delay the return to the office for some, we are encouraged by the demand for high-quality office space across our markets. Due to the Delta variant, portfolio level utilization, as we measure it, did not significantly increase this quarter. With that said, there is noticeably more activity and energy at most of our properties compared to last quarter. This is evidenced by a 27% increase in transient parking revenue quarter-over-quarter.

Turning to third quarter results. Our total office portfolio lease percentage and weighted average occupancy came in at 91.3% and 89.8%, respectively. Our lease percentage increased 30 basis points this quarter driven by new and expansion leasing activity at Terminus and 3350 Peachtree in Buckhead and at Domain Point in Austin. Conversely, weighted average occupancy declined 120 basis points with the impact of the previously disclosed move out of Anthem at 3350 Peachtree in Buckhead.

As for general leasing activity this quarter, our team and portfolio produced fantastic results. We executed 43 leases totaling 597,000 square feet in the quarter, and new and expansion leases were accounted for 84% of total activity. Net effective rents were $24.06 this quarter, an improvement over the second quarter and $0.24 higher than our reported net effective rents for the full year of 2019. The rent growth was outstanding this quarter as well with second-generation net rents increasing 23.1% on a cash basis.

Similar to this time last quarter, we are still seeing encouraging activity in our leasing pipeline, both for our existing portfolio and new development. Tour volume in our portfolio was on a clear upswing in the second quarter, and it has held at a consistent level since then. We are also optimistic about our Sun Belt markets continued recovery as compared to the U.S. economy in the aggregate. According to the Urban Land Institute, every market lost jobs during the pandemic, but the recovery has been much quicker in Sun Belt markets. ULI projects that by the end of the year, those markets will collectively regain nearly all of their lost jobs in comparison to the greater United States, which is expected to still be down almost 2%.

Now I'll speak to some specifics about current conditions and activity in our markets. I'll begin with Atlanta. According to JLL, Atlanta saw positive net absorption this past quarter for the first time since the pandemic began at 756,000 square feet. This is an encouraging milestone. In our nearly 8 million square foot Atlanta portfolio, we signed an impressive 299,000 square feet of leases in the third quarter. That includes the previously disclosed 123,000 square foot weeks with Visa at 1200 Peachtree in Midtown, serving as Visa's new Atlanta office hub. We also have a final LOI in hand with another potential customer at that property for 31,000 square feet. We view this activity at 1200 Peachtree as a strong validation of a truly irreplaceable location and quality of the 2b repositioned assets.

Another example of demand for high-quality and well-amenitized properties is our redeveloped Buckhead Plaza project, producing 121,000 square feet of leasing activity year-to-date at record rental rates. Our overall Buckhead portfolio also produced great activity this quarter, accounting for 43% of our Atlanta leasing activity. This includes 29,000 and 50,000 square feet of new and expansion leasing at 3350 Peachtree and Terminus, respectively. At one of our newest Atlanta assets located in Alpharetta, 10,000 Avalon, we signed a 51,000 square foot new lease after quarter end with that, a newly public financial technology company, taking the building to 99% leased.

In Austin, population growth continued to be strong as ever this quarter. Further, CoStar showed a 496,000 square foot decline this quarter and Class A total sublease space available for lease. The unemployment rate in Austin this quarter was at its lowest since March of 2020 with average asking rents and the market climbing. Our Austin portfolio is currently 95% leased, with our 1.9 million foot -- square-foot operating portfolio and the core of the domain at 100% leased. With regard to leasing activity in Austin, we signed 236,000 square feet of leases in the quarter, including a 73,000 square foot new lease with a growing technology company at Colorado Tower, which will entirely backfill the expiration of Atlassian at the end of January 2022.

In Charlotte, our now 1.4 million square-foot uptown and South End operating portfolio is well positioned at a solid 96.1% leased with very little existing space available. Like in Austin, CoStar showed that Charlotte had a meaningful 139,000 square foot decline this quarter and Class A total sublease space available for lease. According to JLL, third quarter activity was robust in Tampa, where we recently acquired Heights Union in the downtown submarket. According to CBRE's 2021 Tech Talent report, Tampa ranks tenth among the 50 largest tech talent markets with its millennial population increasing by 14.5% since 2014. While average direct asking rents are down 2.5% year-over-year overall, many Class A buildings in the Westshore submarket, where the bulk of our portfolio is located have increased asking rates to at or above pre-pandemic levels. We signed 41,000 square feet of leases in Tampa this past quarter.

The Greater Phoenix area is one of the few places in the country that now has more jobs than before the pandemic, recovering 102.6% of jobs since April of 2020. When comparing year-to-date data versus 2019, Phoenix is also the second fastest growing metro in the country behind Austin, according to the Greater Phoenix Chambers annual economic outlook. While our completed activity in Phoenix was light this quarter, the recovery is reflected in our pipeline as we are currently in lease negotiations for 95,000 square feet of new and extension leases at our $100 million new development.

Before handing off to Gregg, I want to thank the committed and hard-working Cousins team. They continue to produce great results and deliver excellent customer service. I am grateful for all that you do. Gregg?

[Gregg Adzema, Chief Financial Officer]

Thanks, Richard. Good morning, everyone. I'll begin my remarks by providing a brief overview of our quarterly financial results, including some detail on our same-property performance, our development pipeline and our transaction activity followed by a quick discussion of our leverage position, before closing my remarks with updated information on our outlook for the balance of 2021.

As you can tell from Colin's remarks, we've been extremely busy. However, we don't want all that positive transaction activity to take attention away from our very solid operating performance during the quarter. Leasing velocity in particular, was outstanding, while second-generation cash leasing spreads were up the most since the fourth quarter of 2015. Over the past two quarters, we've signed almost 1.1 million square feet of leases. -- with almost two-thirds of that total representing new leases. The ability to attract so many new customers to our properties is a powerful indication of our Class A Sun Belt strategy. However, it's a big decision for a company to open a new office, especially if they're coming from out of market. It's not easy from space planning to construction management, to the endless logistical details surrounding moving existing employees, hiring new employees and establishing a new address it all takes a lot of time, which means the typical period between lease signing and revenue recognition is extended compared to a simple renewal. A significant portion of the new leases we have signed over the last 6 months do not begin revenue recognition until late '22 or early '23. Attracting new customers, the Sunbelt is our competitive advantage. It often just takes time for this to turn into revenue.

Turning back to the third quarter results. Our same-property performance continued to generate a significant and constructive change in trend. NOI on a cash basis increased a very healthy 3.6% over the last year, and excluding the single large move-out that Richard talked about. Anthem's departure from our 3350 Peachtree property in Buckhead to a new consolidated campus in Midtown Atlanta. NOI on a cash basis would have increased 5.3%. The largest variable in our same-property performance remains parking revenues. After bottoming during the fourth quarter of 2020, a same-property parking revenues are up over 20% in the last three quarters, but still remain 20% below pre-COVID levels.

Focusing on our development efforts, one asset, Domain 10 an office property primarily leased to Amazon in the Domain submarket of Austin was moved off our development pipeline schedule and into our portfolio statistics, while another asset, Neuhoff, a mixed-use property in the Germantown submarket of Nashville was added to our schedule. Total development costs for Neuhoff are estimated to be $563 million with our joint venture interest representing 50% of that amount. The current development pipeline represents a total Cousins investment of $663 million across 1.9 million square feet in four assets.

On the transaction front, as Colin laid out at the top of the call, we've been very active. As this series of transactions has unfolded, we've maintained our net debt-to-EBITDA around 4.5 times, as we've done with very few exceptions since 2014. We believe this leverage profile provides both defensive support during challenging times as well as offensive firepower to execute compelling transactions when the opportunity presents itself. If and when we commence additional developments and/or acquire additional properties, you should expect us to continue to fund these investments on a leverage-neutral basis over time.

On the Capital Markets front, we closed a $312 million construction loan for our Neuhoff development joint venture during the third quarter. This new loan matures in September 2025 and includes a potential 1-year extension option.

I'll close by updating our 2021 earnings guidance. We currently anticipate full year 2021 FFO between $2.73 and $2.77 per share. This is up a penny at the midpoint from our previous guidance. This guidance includes all the transactions that have been discussed on this call. There are no other dispositions, acquisitions or development starts included in our guidance. The most significant variable behind our guidance remains parking revenue. Our customers continue returning to the office during the third quarter, and we anticipate maintaining this trend into year-end. Our current parking revenue assumptions reflect this outlook.

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

[Operator]

[Operator Instructions] The first question comes from Dave Rodgers of Baird. Please go ahead.

[Dave Rodgers, Baird]

Wanted to start with Colin and Richard, maybe a big picture question. I guess you guys are making a number of trades within the portfolio upgrading, also changing some locations, changing building quality as you guys have done this research during COVID and have decided to kind of make some of these changes, what are the factors that drove that? And I guess I wanted to understand a lot of the acquisitions that you've made or the potential developments seem like, I would call them boutique-y type office. But what drove you to those decisions is that historically wasn't the direction that most companies went in and kind of do you continue to expect to go that direction?

[Colin Connolly, President and Chief Executive Officer]

Dave, it's Colin, and I appreciate your question. I -- for us at Cousins, our investment strategy, I'd say, is firmly driven by feedback from our customers and the decisions that they make around their real estate and what's important to them as they think about the right product and the right environment to go recruit and retain talent. And so as you mentioned, we have been very active throughout the pandemic. But candidly, we were very active prior to the pandemic, executing the same strategy, which has been to, again, meet our customers kind of where they are and the type of product that they want. And today, we continue to see a shift from our customers into -- they generally newer, but the more interesting inspiring experiential and I'd say, amenitized-type product in kind of unique mixed-use settings whether that be in an urban area like downtown or out at a place like the domain. And so we have with our investment strategy, it really has been, I'd say, a balance between strategic acquisitions of existing properties and some pretty compelling new development that, from our perspective, blends to really attractive value-add returns. And I'd say we have largely funded that with the sale of older vintage assets. And so that has positioned us at the end of the day, delivering those value-add returns, but with a trophy portfolio that, as I mentioned in my remarks, is positioned to generate outsized demand and certainly with a lower CapEx profile. I don't think just kind of generally speaking, the type of properties that we've been buying and developing on average, have been kind of 300-plus square feet. So I don't know that I'd characterize them as boutique. I would characterize them is exceptionally well located with a lot of really attractive amenities and really interesting, and as I said, inspiring environments.

[Operator]

Next question comes from Anthony Powell of Barclays. Please go ahead.

[Anthony Powell, Barclays]

So the second generation pricing was very strong. And we look at other markets, coastal markets where we see vacancies and sublease space impacting pricing like in New York. Could you go over, I guess, the subleasing of vacancy that most of your major markets and describe how that's maybe impacting some of the pricing you're seeing in those markets?

[Colin Connolly, President and Chief Executive Officer]

Well, it's Colin. As Richard mentioned in his remarks, we have seen sublease activity decline in a lot of our major markets, think for example, Austin, where the sublease activity or the sublease inventory, I should say, declined by almost 500,000 square feet in the last quarter alone. And I'd characterize that reduction -- the vast majority of it has been customers that have just decided to take a space off the market as they kind of rethink and revisit their return to the office. And some component of it was just leased by other new customers. But I think what's been a differentiator for the Sun Belt and particularly our dynamic urban submarkets within our footprint has been the in-migration of new companies into our markets that are, again, looking for an alternative to the West Coast or Northeast. And in many cases, our markets are not as reliant on mass transit or kind of long commute times driven by lack of affordable housing. And so that makes it easier for our customers as they migrate into Austin or into Atlanta to adopt a more robust and in-office strategy.

[Anthony Powell, Barclays]

And how do you look at development versus acquisitions at this point given the supply chain issues, you had some development activity, obviously, in Austin and Nashville -- Are you more likely new acquisitions in the near future given it's harder to get step started and completed or the development still attractive we grow the company right now?

[Colin Connolly, President and Chief Executive Officer]

Yes, we continue to look at both. And again, looking at our recent activity, it has been a blend of both acquisitions and development. You are right that there are supply chain issues kind of throughout the country and candidly throughout the world that are impacting a lot of businesses. And it's certainly something that we keep a very close eye on. But I want to congratulate our team, who's done a fantastic job throughout the pandemic and the supply chain issues continuing to deliver products on time and on budget. And we're doing that by being more intentional in our work, coordinating more closely with our general contractors in subs, in some cases, stockpiling materials well in advance to allow us to stay on. Those schedules. And I think we're here at Cousins benefit from our 60-plus year track record and a lot of deep relationships with our construction partners and are certainly leveraging those relationships to do our best to be able to continue to stay on time. And so I think as we look forward into 2022, we're hopeful given the migration that we're seeing into our markets to take advantage of some additional development opportunities.

[Operator]

The next question comes from Jamie Feldman of Bank of America. Please go ahead.

[Jamie Feldman, Bank of America]

Very impressive leasing spreads this quarter. Is that sustainable heading into next year? Or is that more onetime based on the mix this quarter? Or maybe just talk about your mark-to-market?

[Richard Hickson, Executive Vice President of Operations]

Jamie, this is Richard. If you look at our pipeline, we feel comfortable that we will continue to be able to continue to post good rollups. This was pretty exceptional quarter. I think the best that we've posted in something like 6 years, I think, Greg said. So I wouldn't expect this every quarter, but we feel good about our going to continue to roll up.

[Colin Connolly, President and Chief Executive Officer]

And I think the pipeline of activity across our markets continues to be strong. And so there's obviously timing of leases and how those work themselves out and ultimately get executed from quarter-to-quarter. So you can see some -- obviously some variability in volume from quarter-to-quarter, certainly depending on our exploration schedule. But I think this is, again, second quarter in a row where we've driven what I would broadly characterize as pre-pandemic levels of leasing -- And as we look at the pipeline of activity in front of us, it remains -- does remain strong.

[Jamie Feldman, Bank of America]

And are you able to estimate the mark-to-market in the portfolio right now?

[Colin Connolly, President and Chief Executive Officer]

We have said for quite a long time that the mark-to-market in the portfolio is somewhere between kind of 8% and 10%. We said that before the pandemic, and we've delivered on that on average, that range going all the way back to really just after the Parkway transaction. And so we're obviously doing a lot of leasing and bringing some of our inventory to market. But again, we're seeing market rental rates continue to move in certain of our markets. So again, we're confident as we look forward over the next year or two that we'll continue to have again, variability quarter-to-quarter, but positive mark-to-markets.

[Jamie Feldman, Bank of America]

And then as you think about the types of products you want to own and the type of product you all now. And what percentage of the portfolio would you say is currently noncore? And I assume we should expect to see more dispositions and kind of portfolio repositioning acquisitions going forward? How should we be thinking about that?

[Colin Connolly, President and Chief Executive Officer]

Well, again, we have had a -- we think, a pretty unique and compelling strategy to invest capital into again, newer vintage primarily, but interesting type properties and have funded that largely to date through noncore sales. We certainly have not, I wouldn't say there's a specific percentage that is noncore. I think as we see new opportunities to upgrade and can do it in a financially compelling way. We'll try to take advantage of those opportunities. I do think stepping back, just looking at the work that we've done from the Parkway transaction, the Tier transaction, some of the specific property acquisitions and developments, we are -- feel very fortunate here at Cousins that we have assembled one of the newest, youngest portfolios across the office sector with an average age of 2004. So the overall portfolio quality is terrific. But again, as we see opportunities to upgrade and again, can do it in a way that financially is compelling, we'll look to take advantage of those opportunities.

[Jamie Feldman, Bank of America]

So by financially compelling, you mean are these neutral? Or what's your definition of financially compelling?

[Colin Connolly, President and Chief Executive Officer]

Jamie, it's there's various metrics that we look at in addition to upgrading the quality and certainly thinking about earnings, both on a short-term basis and a long-term basis. When we see properties that perhaps over time could have risk to its earnings stream based on the demand profile for that building. We certainly take into account short-term earnings, long-term earnings and are also focused on net asset value. And so it really is a balance here at Cousins that we work really hard. And I think as you look back over the last couple of years, we've been able to do some of this recycling in a positive way for our shareholders.

[Jamie Feldman, Bank of America]

And then finally, just thinking about Midtown Atlanta, which has been incredibly busy on the job front. How are you thinking about conditions there over the next couple of years with the supply picture? And I know you're making good progress at 1,200, but do you think there'll be -- are there supply concerns? Or do you feel pretty good about where things are heading?

[Colin Connolly, President and Chief Executive Officer]

Yes. We continue to feel very good about Midtown Atlanta. It is -- as you mentioned, it's been incredibly dynamic in the market. And the reasons for that are companies are recognizing that they can attract and retain some of those -- the best tech talent in the market, but also attract diverse talent. And so that's been a really positive, I'd say, win-win for the market and talent base here in Atlanta. And I would expect to see that continue. The power and the draw of Georgia Tech is very strong, and it's real, so the demand profile, we think, continues to look attractive. And as we look at the supply picture today, it's actually relatively muted. There -- with the delivery of our Norfolk Southern building, there's really just two projects under development today in Midtown and one of those is over 50% pre-leased to Invesco. So the supply/demand fundamentals are actually pretty strong on a -- if you look at it on a historical basis.

[Operator]

The next question comes from Daniel Ismail of Green Street Advisors. Please go ahead.

[Daniel Ismail, Green Street Advisors]

Colin, you mentioned earlier about having prep levels of leasing as well as business leaders looking more towards return to office and making decisions. I'm just curious how that phase out over the next over the next year or so. Is it your sense that leasing volume across our markets return to pre-COVID levels? Or will there still be a big quality bias with A, winning; and B, lagging?

[Colin Connolly, President and Chief Executive Officer]

Well, yes, I think there's a clear flight to quality, and it is intensifying. And I do think it's likely to see continued bifurcation between the highest quality A product and B product. As it relates to the return to the office, we are hearing from more of our customers that they are making plans to return. And I think that is translating into more leasing activity. How that ultimately plays out will take some time. And I think you'll see some various fits and starts and the COVID virus will highly impact how that plays out, whether there's a resurgence or not. But I think many business leaders want their teams back together as I said most of the time, you could see some companies adopt a hybrid model, but it remains to be seen how much impact that actually has on demand as companies look for even in a hybrid model to generally have their teams together at the same time. And so it will play out over some period of extended time. But as I said, we're encouraged to just see the leasing activity return as those business leaders start to plan for the future.

[Daniel Ismail, Green Street Advisors]

Is it your sense for that '22 leasing volume and aggregates across the Sun belt will be lower than pre-target averages?

[Colin Connolly, President and Chief Executive Officer]

Well, I don't want to prognosticate too far forward, but what I can share is we look at our pipeline today in our markets and both from kind of early stage in later stage, it continues to be positive. And as I said, I think how that ultimately plays out will I think be highly influenced by the virus. But at the moment, we continue to feel very good that activity is strong, and we're optimistic that without kind of future flare-ups that will continue to be very positive.

[Daniel Ismail, Green Street Advisors]

And then last one for me on developments underwriting. Can you touch on this a little bit earlier, but construction costs heading up, land prices likely up as well. Is this about being offset by rental rate increases or pro forma rental rate increases?

[Colin Connolly, President and Chief Executive Officer]

Yes, that certainly would be our hope, right? We are certainly try to remain disciplined as it relates to our development yields. And so as construction costs increase and they are increasing I think our hope is certainly that rental rates increase with that. At the same time, we have seen in the capital markets, cap rates for trophy properties continue to compress. And so I do think that will have some impact on development yields as folks think about kind of the spread and the margin between development yields and in cap rates. But I think between kind of those two levers, the increases in rental rates and some cap rate compression, I think we're optimistic, as I said earlier, to try to get some additional development started next year.

[Operator]

We have a follow-up question from Dave Rodgers of it Baird. Please go ahead.

[Dave Rodgers, Baird]

Earlier. I'll go back and read it. Unfortunately, I got cut off, but I'm back. I had a question, and if you already addressed this when I was out, just let me know. With regard to 1,200 in Midtown, obviously, that transaction, you executed pre-COVID, did you pursue a single tenant strategy there, one? And then two, I guess, was there a change in how you would anticipate the tech tenants to look at that I guess, meaning with this movement towards ultra high quality from kind of the high tech companies. Did that make that less attractive all of a sudden to kind of that group of tenants than maybe you would have thought two or three years ago. So maybe a couple of questions rolled up in there about your tenant that you expected 1200?

[Colin Connolly, President and Chief Executive Officer]

Well, I'd -- we're really excited about what we got going on at 1200 Peachtree. And I do think it will continue to attract tech interest. I think kind of the overall mixing role of what customers find compelling. Oftentimes, it is newer vintage properties. But at the same time, some exceptionally well-located assets, a key intersection like that is in Midtown with some of the redevelopment and repositioning that we're doing we're very confident we can transition that asset into the sweet spot of customer demand. And if you look at our most recent lease with Visa, obviously, a financial services company, but they obviously at the same time, view themselves as a tech company and a fintech company. And I think that's a large driver of their move here into Midtown Atlanta. So we're hopeful to see interest from a lot of different industry sectors, but I think we'll see some additional -- we'll see some additional technology in that. And we're absolutely open and interested to a single tenant. But when the opportunity came up with Visa and the quality and the strength of that company, it was too good of an opportunity to pass up.

[Operator]

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

[Colin Connolly, President and Chief Executive Officer]

Well, thank you all for your time this morning and your interest in Cousins Properties. We'll look forward to having the opportunity to visit with many of you here in a few weeks at May REIT. In the interim, please feel free to reach out to myself, Gregg Adzema or Roni Imbeaux, if you have any follow-up questions. Have a great weekend.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.