Cousins Properties Inc (CUZ) 2003 Q1 法說會逐字稿

Good day, everyone.

Welcome to the Cousins Properties, Incorporated conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Tom Bell.

Please go ahead, sir.

Good morning, everybody and thanks for joining us today.

I'm Tom Bell, President and CEO of Cousins.

With me today are Dan DuPree, our Vice Chairman, Craig Jones, President of the Office Division, who is on the telephone, Joel Murphy, President of the Retail Division, and Tom Charlesworth, Executive Vice President and Chief Investment Officer and Chief Financial Officer.

It is good to have you back for our first quarter call.

At this time, I will turn the call over to Tom Charlesworth to review the financial results.

Tom

Good morning and thank you for your interest in Cousins Properties.

First, let me briefly point out that certain matters we'll be discussing are forward-looking statements within the meaning of the federal securities laws.

Actual results may differ materially from such statements.

Please refer to our filings with the Securities and Exchange Commission, including our form 8K filed March 9, 2001 for a discussion of the factors which may cause such material differences.

I would also note that certain items we may refer to today are considered non GAAP financial measures within the meaning of regulation G as promulgated by the Securities and Exchange Commission.

For these items, the comparable GAAP measures and related reconciliations may be found through the quarterly press release and supplemental information link and the supplemental SEC information link on the investor relations page of our web set at www.cousinsproperties.com.

Before reviewing the quarter, I would like to point out that effective January 1, 2003, Cousins has adopted the [narrate -inaudible] definition of funds from operations or FFO without modifications.

Prior to 2003, we calculated FFO with certain modifications being made to the [narrate-inaudible] definition, including the elimination of straight-line rents, and the reporting of stock appreciation rights expense on the cash basis.

We believe that the use of narrate definition is more consistent with the current rules of the SEC, including regulation G, and we believe that there is value in the industry adhering to a uniform definition.

To help you better understand the impact of this change on Cousins, we have prepared a schedule covering the past ten years that reconciles FFO as calculated pursuant to [nay reach-inaudible] definition to FFO previous reported by us, and to net income.

The schedule is entitled funds from operations reconciliations ten-year summary.

It can be found in our quarterly information package which can be accessed through the quarterly press release and supplemental information link and through the supplemental SEC information link on the investor relations page of our web site which I referred to earlier.

As you can see in this ten-year summary schedule, this change in the definition of FFO generally has the effect of increasing reported FFO per share.

However, there is an unrelated change for the year 2002 shown on the schedule which has the effect of reducing reported FFO in 2002 under the [narrate-inaudible] definition and our old definition.

In February of 2002 we incurred a $3.5 million loss on extinguishment of debt as a result of refinancing of Bank America plaza debt.

As we reported at the time, we had taken this cost into account in analyzing the overall costs of the incremental $80 million of borrowings and felt that the refinancing terms were attractive, not withstanding the costs.

At the time we reported the $3.5 million loss as an extraordinary item in accordance with GAAP, and, as such, it was not deductible in calculating FFO.

In 2002, statement of financial accounting standards 145 was released and, as required, it was adopted by Cousins as of January 1, 2003.

SFAS number 145 provides that this loss is no longer to be treated as an extraordinary item, and that prior years should be restated.

This has no effect on reported 2002 net income, but has the effect of reducing reported 2002 FFO by $3.5 million.

Again, this is included in the funds from operations reconciliations ten-year summary schedule I referred to earlier.

Before I finish my talk, I will briefly review the entire quarterly package to describe other changes we have made to the quarterly materials.

Before doing this, I would like to review the financial highlights for the quarter.

Our FFO per share increased 102% in the first quarter of 2003 as compared to the first quarter of 2002.

Net income per share increased 217% as compared to the first quarter of 2002.

Both FFO and net income were positively impacted by a $20 million termination fee payable with respect to the termination of the cable and wireless lease at our 55 Second Street property in San Francisco.

This equates to 41 cents per share.

At the same time, net income was negatively impacted by increased depreciation of approximate by $4.2 million, with this being largely due to the write-off of lease-related costs associated with the eight lease terminations referred to in our press release including the cable and wireless lease termination.

Our continued financial flexibility has evidenced by our interest expense coverage of 4.62 for the first quarter of 2003.

The number being 3.08 if the cable and wireless lease termination fee is removed from the calculation.

The 4.62 is shown on page 1 of the net income and funds from operations supplemental detail and reconciliations schedule in our quarterly materials, and is calculated by dividing the $60 million and $79,000 consolidated FFO before interest amount shown on such schedule by the $13 million consolidated interest expense, including share of JVs also shown on the schedule.

These amounts are reconciled in such schedule.

The 3.08 coverage number can be calculated by subtracting $20 million cable and wireless termination fee from the consolidated FFO before interest before making the division just referred to.

Adjusted debt to market capitalization was 41% at the end of the first quarter.

It is also important to note that the adjusted recourse debt to market capitalization is only 8.4%.

This is derived by substituting our $178.2 million of recourse debt for the $859.6 million of adjusted debt shown on page 1 of the net income and funds from operation supplemental detail and reconciliation schedule.

Such amounts are reconciled in such schedule.

Our strong balance sheet, combined with a highly leased operating portfolio, resulted in a very healthy financial position despite the difficult economic environment.

The company repurchased approximately 234,000 shares of its stock in the first quarter at an average price of $23.66 per share.

Since 1999 the company has purchased approximately 2.7 million of its shares representing approximately 5% of the outstanding shares of the company.

The split adjusted average price for these shares was $23.44.

You will find in our quarterly information package our net income and funds from operations supplemental detail and reconciliation schedule which I referred to earlier.

This replaces a schedule we previously provided which was called funds from operations supplemental detail.

Various changes have been made to reflect our adoption of the [narrate-inaudible] definition of FFO and to conform to the requirements of regulation G.

Rental property revenues, less rental property operating expenses for each property now include straight line rents.

These amounts are shown with other items of income and expense and add to and reconciled to FFO and net income.

The grand totals for FFO and net income appearing on page 5.

I would note that on page 1 of the supplemental detail schedule, we report that our second generation tenant and billing tech CAPEX costs were approximately $4.4 million in the quarter, roughly one-half of this related to our share of the AGLE's cost at 10 Peach Tree Place and roughly one quarter related to lease costs to the points at Waterview in Dallas.

I would now like to highlight the details of the first quarter's net income and FFO which you can begin following on the top of page 2 of the net income and funds from operations supplemental detail and reconciliation schedule.

Consolidated rental property revenues less rental property operating expenses increased approximate by $20 million over the fourth quarter 2002, approximately 18.8 million of this is attributable to the 55 Second Street building and arises from the previously discussed $20 million cable and wireless lease termination fee, but the property results being negatively impacted by the loss of two months of cable and wireless rent following the termination at the end of January.

Also positively impacting results was a 1.1 million increase at the Avenue of the Peninsula.

This includes approximately $800,000 of lease termination fees that we reviewed last quarter.

Also included in the Avenue of the Peninsula increase is about $200,000 of percentage rents.

I would also note that the two [Ciredos-inaudible] AT&T wireless buildings are in discontinued operations at the top of page 3 as of the end of the quarter since the sale contract for these properties was signed before the end of the quarter.

Tom will comment further on this a little later in the call.

Residential land division results for track sales net of cost of sales declined as no tracks were sold in the first quarter.

Where as, the sale and road out parcel and wild wood track were sold in the fourth quarter.

Partially offsetting this decrease was an increase in lot sales, net of cost of sales for both wholly owned properties and joint ventures.

In the wholly owned category, the Lakes at Cedar Groves sold 74 lots in the first quarter versus 20 in the fourth quarter and Rivers Call sold 2 lots in the first quarter versus no lots in the fourth quarter.

In the joint venture category, net water sold 119 lots in the first quarter versus 53 in the fourth quarter.

Combining wholly owned and joint venture lots, 195 were sold in the first quarter versus 73 in the fourth quarter and 192 in the first quarter of last year.

Development income and management fees declined overall from the fourth quarter of 2002 to the first quarter of 2003, largely as a result of the completion of various third-party fee assignments.

Below interest expense on page 4 you will note the loss on extinguishment of debt cost of $3.5 million in 2002 as indicated earlier.

This being a new item in the calculation of FFO.

As you see on page 5, we arrive at our consolidated FFO number and then show various items needed to derive and reconcile net income, to net income, I should say.

The first reconciling item is gain on sale of appreciated investment properties.

This declined by $1.2 million as a result of the fourth quarter, including a gain of that amount for the sale of Salem Road Station, a grocery anchorage center sold in the fourth quarter and there being no comparable gains in the first quarter.

The most significant reconciling item is the depreciation of real estate which increased in the first quarter in large part as a result of write-offs, lease costs associated with the lease terminations mentioned previously.

Finally, an impairment loss of $551,000 was recorded in the first quarter.

This reflecting a contract entered into the first quarter for the sale of previously depreciated property at wild wood, such contract being at a price that would result in this amount of loss when the property is sold in the second quarter.

You will notice that we have included joint venture detail and various reconciliations in the latter part of this schedule.

These reconciliations relating to the various components of net income and FFO.

One last comment related to this schedule.

We have in the past given perspective run rates for rental property revenue less rental property operating expenses for various properties.

Most often following an extraordinary event such as the Arthur Andersen lease termination last year and 101 Second Street and the cable and wireless lease termination this past quarter at 55 Second Street.

We gave this run rate for 55 Second Street in the last conference call.

I would note that we have no similar additional extraordinary events since the cable and wireless lease termination.

However, I would also add that at this time it is unclear as to whether or how to give such perspective information under regulation G. As a result, we will await further clarification on the subject from the SEC before deciding on whether we can and should offer further perspective run rates.

I appreciate you bearing with me up to this point.

I would like to spend just a little more time reviewing briefly the changes to the other schedules in the supplemental information package.

Following the net income and funds from operations supplemental detail and reconciliation schedule, you will find the pipeline schedule showing properties under development.

Please note that the cost numbers now presented are GAAP numbers not underwriting pro forma numbers that we previously used.

Again, this is to conform to the new rules that have a preference for the GAAP numbers.

Note that the expected GAAP cost for Congress at four is less than the previously reported pro forma cost.

This is primarily because of internal costs estimated to be capitalized under GAAP are less than the internal fees we include in the pro formas.

Our underwriting pro formas include what we consider to be market development, and leasing fees for our internal work on the project and exclude capitalized GNA costs.

The portfolio listing schedule has also been changed.

We have combined our traditional portfolio listing schedule with our geographic breakout which was previously contained in our schedule entitled income producing property portfolio, percentage of total property FFO by property type.

The use of FFO, a non GAAP financial measure in this later schedule bases presentation and other questions as a result of the new SEC rules.

So we have shown the geographic breakout using square footage on the main portfolio listing schedule.

At the end of the quarterly materials are two new schedules.

One is the ten-year reconciliation between [narrate-inaudible] FFO, old Cousins FFO and net income.

The funds from operations reconciliations ten-year summary schedule which I referred to earlier.

The other is the development starts and acquisitions ten-year summary schedule showing development starts and acquisitions by property type and dollar amount for each year of the last ten years primarily based on Form 10-K information.

This may be of some interest in the current economic environment which has some similarities to the early 1990s.

I will now turn it back over to Tom

Thank you, Tom.

I know this has been a particularly difficult quarter with regard to dealing with the new SEC requirements and regulation G. You and your team have done a great job.

We appreciate it very much.

As usual, I'll start with a few comments on the economy.

Unfortunately, since I've been speaking on the conference calls, it seems the economy has been stuck in a ditch.

And the overall economic news from quarter one seems to be more of the same.

Indeed, in addition to the major issues of the last few quarters, such as the bursting of the stock market bubble, terrorism, anemic job growth and earnings growth, we've added the most recent difficulty, the war in Iraq.

It makes sense these issues in combination would drag the economy down.

It makes sense it would take some time for us to work through these problems.

The results has been one of the longest running bear markets in modern history.

However, I agree with what some of the die hards used to say in the unusually long economic expansion of the '90s.

The business cycle is alive and well, has not been repealed, and I believe we will see some improvement in the economy before too long.

Although we don't seem to be there yet, there does come a time when the cycle turns.

I believe we are finally starting to build a base for recovery.

Major uncertainties surrounding the war itself in Iraq have been resolved, though transitioning the government in Iraq is still fraught with danger.

The severe winter weather is behind us, oil prices have recreated, and OPEC now once again is worrying about an oil glut.

On top of that, the consumer God bless her is still holding up.

Debt burdens do not seem to be placing undue stress on the consumer at this point and barring unforeseen setbacks, we may well be able to maintain respectable consumer spending growth.

Monetary and physical policy continues to be positive.

The last remaining hurdle is my fellow chief executive officers who having been burned by overspending late in the last decade are still reluctant to spend on inventories and new investments despite a prolonged period with low levels of both.

In my view they have correctly concluded that we still have not quite built a strong enough base for a healthy, sustained expansion.

But we are getting close.

And we are making progress.

Indeed, there is an increasing possibility we could have real GDP growth of 3% in the second half of the year.

Now, on to Cousins business.

Our office markets are still struggling with some continued deterioration.

Tenant bankruptcies and terminations continue to be a concern.

Although we have generally strong portfolio -- have a generally strong portfolio with low lease rollover, we are losing some tenants upon lease expiration and it is harder to release the space as it becomes vacant.

In addition, we see a few tenants cutting back their square footage on renewal.

And of course, there is still some bankruptcy situations out there such as Regus that we have to contend with.

The primary focus of our office group has been and is to maintain satisfactory lease levels at reasonable rental rates.

As I mentioned last quarter, I feel the leasing team did an exceptional job in 2002.

In the first quarter this year, they continue the pattern and scored some additional successes such as the previously announced new leases at Congress and fourth in Austin.

We currently have deals in progress in all of our major markets including Atlanta, San Francisco, and Austin.

Subsequent to the end of the quarter we signed a lease for 18,000 square feet for the former Arthur Anderson space at 101 Second Street in San Francisco.

This brings the portion of the former Arthur Anderson space that has been released to over 70% and raises the building's lease percentage from 83% to 87%.

We have also just completed a 214,000 square feet of new leases at Wildwood with Coca-Cola enterprises.

This space is in the 3200 building at Wildwood and is now under lease to a major user until October of 2006.

Of the 214,000 square feet, 169,000 square feet will have a lease term extending seven years beyond the original October 2006 expiration date.

Now, this does not lease currently unleased space.

We were able to help our current tenant while, at the same time, securing another long-term lease with an exceptional client, Coca-Cola enterprises.

In summary, we are having reasonably good success at maintaining our office portfolio and will continue to work on this.

As far as office development goes, as I indicated previously, we do not expect much activity in the next couple of years other than the occasional builder suit or other unusual opportunity.

By the way, this is reminiscent of the early 1990s.

We developed one office building in 1991 and did not do another until 1995.

Now, you can see this in the new development starts and acquisition ten-year summary schedule Tom referred to earlier which is added at the back of our quarterly information package.

The schedule start is also interesting because it shows while we are not developing office projects, while we were not developing office projects, we were developing retail projects in the early 1990s.

As with the early stages of the last economic expansion, we are now developing retail projects and expect this activity to increase.

The strength of our retail portfolio and the level of retail or interest in new stores bolster our sense we will continue to have retail development opportunities.

The strength of the portfolio as seen in the rising lease levels now 97%.

The level of retailer interest is seen in the leasing success we have are having with our avenue west cob development now over 70% committed.

At the same time, we are continuing improvement in the retail -- we seek continued improvement in the retail shadow pipeline.

I also want to emphasize that our retail development team led by Joel Murphy and overseen by Vice Chairman Dan DuPree is composed of very talented professionals, who I am confident can execute against these inopportunities.

As a first [inaudible] developer, we are finding opportunities in another sector, land and single family residential lot development.

We have commented over the last several quarters we like this business.

We see more potential in it and are working on expanding our operations.

Our 50-50 CL Realty joint venture with [inaudible] is intended to be the principal vehicle for this going forward and we recently announced 4 new development deals for CL Realty.

Our tempco venture in [inaudible] county has also recently announced a new single family residential development, The Georgian.

We do see a likely slow-down in this business from its historically high levels as the interest rates hit higher as the recovery unfolds.

However, we think the demographics and demand fundamentals well remain favorable for the residential business over the next several years.

We have said many times before Cousins is the developer creates value through the development process, and then when the market offers full prices, we harvest that value on behalf of our shareholders.

We currently have 3 properties under contract for sale.

The 2 Serretos AT&T wireless office buldings and the Mira Mesa market center.

Although any contract can fail to close, we have significant earnest money from both contracts and we expect the sales to close this quarter.

It has already been publicly disclosed by the buyer that we are selling the Serretos buildings now fully leased to the ATT&T Wireless for $79.2 million.

We are very pleased with this transaction.

The pricing on Serretos was affected by the fact that the property is not a ground lease, which is a slight negative for current buyers of this product type.

Although the cap rate might look a bit high due to the ground lease and the fact that we have high rents versus the current market, we feel the per square foot price in this property in this market for this tenant is very good.

Now, moving on to Mira Mesa, the contract price for Mira Mesa is approximately $86.5 million.

This is an exceptional price for an exceptional piece of real estate.

We will update you with more complete information when these sales close.

We're also currently marketing to other retail properties, perimeter expo and presidential market center here in the Atlanta area.

These are in the early stages of marketing and do not know if they will ultimately be sold.

We have seen a lot of interest and very good pricing.

So we are optimistic.

We are also assessing whether other properties, principally office, may be right for harvesting.

I have commented before there are a number of potential uses for sales proceeds, paying down debt, funding future investments and developments, potential stock buybacks and potential special distributions.

The ultimate decision as to how we will use the proceeds will be based on many factors, these include the magnitude of new investment opportunities, the pricing of our stock for buyback purposes at any given time, the reef distribution requirement for gains recognized and availability of other funds to name a few.

I would note that as I have said before, we do not have to distribute all our taxable gains in cash in order to comply with redistribution rules.

We have a ruling from the IRS that would allow us to distribute it through a stock dividend.

As a practical matter, we will wait until closer to year end to assess all of these factors before deciding whether any special distributions are appropriate.

Concerning our stock bay back program, it is hard to say if we will have further opportunities to buy back our stock under our current plan at price levels that we think are attractive.

As Tom said, since 1999 we have bought back approximately 5% of our shares.

This ultimately enhances the return to our current shareholders.

One further comment on asset sales.

I will reiterate as I did in the last call, that significant sales can have significant impact on net income and FFO.

Loss of property revenue will initially have a diluted effect reducing results.

Of course, the sales gains can have a positive impact on net income at the time of the sale and over the long term we believe our shareholders results benefit from timely asset sales.

Nevertheless, all of this makes forecasting in the short term very difficult.

Finally, I would like to share with you a brief summary of our current strategic focus.

This follows an extended open-mind review by our board and senior management team.

It may be no surprise to you that we have essentially confirmed our core principles.

The key action points for the near term are as follows.

In the office business, maintain the lease levels of our existing portfolio and pursue build a suit and build a sell opportunity.

In the retail business, maintain the lease levels of our existing portfolio and pursue development of all product types, including avenue, high quality power centers, and grocery anchored centers.

We will expand our land and residential single family lot development business and continue to harvest the value created in stabilized assets when full pricing is available.

Consistent with our history, we will seek appropriate opportunities in other real estate sectors and also consistent with our history seek to control additional land tracks under attractive arrangements.

We will target and development and return levels consistent with our performance through the last cycle and we will provide exceptional execution in everything that we do.

In closing, we continue to deal as best we can with difficult economic times.

Thus far, we have faired fairly well minding our core business and taking advantage of the opportunities offered by the markets.

As I look ahead, I believe we will begin to recover and the economy will begin to recover in the not too distant future.

And I believe we are well positioned in financial strength and portfolio strength and talent to create good value for our shareholders' as we exit this down market.

This concludes my remarks.

At this time, I would like to open the floor to any questions.

Do we have any questions?

Thank you.

At this time, if you would like to ask a question, press star one on your touchtone telephone.

Once again, if you would like to ask a question at this time, press the star key, followed by number one.

We'll take our first question from Greg White with Morgan Stanley

Good morning, guys.

Good morning, Greg.

For Tom Charlesworth, I know you didn't give expense the same store data as in the past.

Am I missing it?

I looked and couldn't see anything this time.

You said same store data, Greg?

Yeah.

We actually took that out And let me explain the process there and what our intentions are going forward.

Same store data is based on rental property revenues less rental property operating expenses.

That is a non GAAP measure.

We restated all prior years of FFO, and we had to convert that for all years for all properties.

We frankly did not have enough time to convert same store calculations using that new measure which, basically, throws straight line rents back into the calculation.

In addition, I don't think we're entirely clear under regulation G whether we have to do any additional reconciliations to support that, and we would like to see some further clarification of that.

The bottom line being that we hope to have some kind of a reasonably good same store number for you by next time which both is meaningful and, two, has whatever is needed for reg G

Tom, if you -- I respect your inability to get a finished number for this quarter.

If you think back over the quarter, can you give us any sort of subjective commentary as to what you think happened to same store?

Down marginally?

Was it flat?

I think you can go through the net income and funds from operations supplemental detail and reconciliation schedule.

A lot of words there.

You can see there has been some weakness on the office side.

Retail looks very, very good.

Office has shown a little bit of downward pressure.

I think that reflects what our business people are feeling, our leasing people are feeling that in most of our markets on the office side, we're still not quite there at bottom.

I think maybe in Atlanta the gut check for our leasing folks is maybe it is starting to bottom.

Generally, that's not the case

Okay.

And if we can continue on that vein, maybe Tom Bell referred or you referred to the higher than sort of run on the TI leasing commission staff in second generation.

A lot of that was on the office side.

Can you give any indication what you think is a reasonable run rate for that going forward?

Are we at peak levels now?

I have to smile.

When you say run rates and that sort of thing, we are probably getting into non GAAP measures which become hard to figure out how to do on the conference call.

At least the first time through.

Let me make a comment about that second generation.

There's a big chunk on 10 Peach Tree Place which I frankly view as more akin to a value added acquisition or development, which we are going to, for the first time, start to get really decent NOI out of.

You know we held that property for the last decade but it was under an unusual arrangement, and our partner, Coca-Cola got most of the benefit and we got virtually nothing.

So that may be more akin to first generation, in my mind but there will be more TIs.

Clearly, one thing that had happened in the marketplace is to get lease deals you have to put out more.

San Francisco seems to be the biggest at this point in terms of the magnitude of per square foot TI costs.

I don't know if I answered all your questions.

This is helpful.

On the retail side, you referred to a lease termination fee and the percentage rents which helped out at avenue of the peninsula.

If we strip those out, can you give us an update of what is happening at that asset?

Well, I'll let Joel and Dan comment.

This is Tom again, Tom Charlesworth, after I make a comment.

I think it is a little bit of up and down.

We have some tenants doing well, some with tenants with increases, obviously getting percentage rents which, in large part, is related to the theater is a very good positive indication, especially on the traffic side.

Some tenants are not doing as well as those with increases, but I think we are making progress.

Greg, on the termination fees were on two retailers that were -- it had nothing to do with avenue of the peninsula itself.

It was due to their continued weakness it was important for us to execute against that, and get the money now and move on releasing the space.

Sales were flat during the first quarter as we reported last time, they were up 5 to 6% in the fourth quarter last year.

As we said, we're working through a good holiday season to start leasing the remaining 12% or so of the project now

Okay.

Just one last question.

Tommy, the impact of the straight line rents in the first quarter, and I know you've put in some of the detail.

On a per share basis, can you give us a rough range?

I don't know that I can do that.

I mean, that's a non GAAP measure by itself.

I don't have a reconciliation I can give you on the phone.

My understanding is I have to give you that reconciliation on the phone.

That's something we'll try to look at going forward whether we can break out straight line some way

Can I just clarify with you, in terms of your inclusion of the straight line rents, are you still excluding the CPI adjusted rents or leases?

We are following GAAP, and GAAP provides, in certain cases, you straight line the rents.

We have some leases that are written in such a way that the bumps in the leases each year are not straight lined, and those are situations where there's a CPI escalator that allows under the GAAP rules for the lease to be treated as income on the contractual rate instead of straight lining.

We do have a lot of those.

You will find a lot of straight lining, Greg, on properties we bought

No.

My point is, Tom -- and I know you've gone through a whole heap of work here.

It might be helpful going forward given the fact you guys still do have a significant component of leases that are CPI related that you give us some sort of breakdown.

I think there is a conservatism to your numbers still set apart from others, despite the fact you are now complying with a [nareef-inaudible] definition.

This is Tom Bell.

To the degree that we can do that and meet the requirements of reg G, which we feel are making our reporting much more difficult both in terms of getting the work done and in terms of valuable transparency to the investor, to the degree that we can figure out a way to do it, we will do it.

We want to provide you with more information, not less, but we want to be very careful that we don't step on our toes here as we try to deal with these new reg G requirements.

and, Greg, that's a good suggestion.

I think that's a correct statement, that we do, perhaps, because of the way the leases are structured, have, perhaps, a more conservative result anyway, even under GAAP.

You know, there are benefits as well as costs of conforming to GAAP.

One is what the investment world and the SEC want.

The other is it is not ideal in a lot of respects.

Maybe straight lining is one.

Maybe depreciation is another one.

We've talked about that before

I'll yield the floor.

Thanks a lot, guys.

Next, we'll go to Stuart Axelrod with Lehman Brothers

Hi guys.

Any up front capital costs or reimbursements for the infrastructure work at the new C and L realty joint venture?

Upfront reimbursement at C and L realty, I'm not sure I follow.

Those are the residential land, primarily sub division deals.

What, Stuart, do you have in mind?

Well, the infrastructure that's been spent already

In most cases, Stuart, these are projects, are projects that already under way by lumber mans, the tim pel in land development division.

So we are coming in to the latter stages, the very late stages of two of the projects and fairly early stage of the Fort Worth project.

We will and are experiencing development costs, as you would expect, as we prepare these lots for sale

Okay.

You also referenced some improvement in the avenue shadow pipeline.

Can you elaborate?

I'll let Joel take that one.

Yeah, we are out there with this business.

I think what we're starting to see is, as the success of our previous projects are making retailers realize this is a venue which creates a great value proposition for them, in the sense of good sales per square foot and more controlled occupancy cost which they're all, because of their businesses, looking to garner.

As a result, opportunities are coming to us from a wider geography and as well as from a variety of different sources, and we're now starting to see the momentum of the success of the other projects and the increasing number of retailers that are seeing this venue as attractive.

We're out marketing these projects.

We'll market them in the Las Vegas convention in the next month or so.

We've continued to push our shadow pipeline as we always have.

We're optimistic

As we mentioned before, Stuart, we are seeing the department stores, the traditional department store anchors for malls expressing increasing interest in involving themselves in these life style centers.

So we're presently looking at some opportunities which we call avenues plus, which are traditional avenue with the department stores -- department store anchors, if you will.

Okay.

Tom, you referenced an IRS letter regarding potential stock dividends.

Would that be taxable to investors?

Yes, it would.

Here is David Schulman.

Alright, thank you very much.

David?

Stuart asked my question.

Thanks, Stuart. (laughter)

Thank you, guys.

Once again, that's star one if you have further questions.

We'll go next to John Lutzius with Green Street Advisors

Good morning, I'd like to welcome back, Dan DuPree.

We missed you.

And Dan, if you would, it would be great if you could spend a minute or two talking about your perspective on the development opportunities out there, the sectors that are most interesting.

Just a sense of your outlook.

Well, John, thanks for the comment.

You know, really the period that I've been back, it's amazing how much stuff you can forget in a year and a half.

As I get older, I seem to forget more anyway.

So we've really spent the bulk of the time trying to understand exactly what the circumstance was division by division, and I think generally what's been discussed here to date in this call really expresses my view on where the development market is.

What I would tell you is this, that we have always been opportunistic company.

There are opportunities that are presented in any market.

You know, the challenge is not to forget to come up occasionally from your day in, day out battle with our primary issue, which is keeping good control on the existing portfolio, but sticking your head out periodically and taking a look at what the market gives you.

We're doing that, I think, right now.

I'm very confident that we will be very well positioned going forward to do some good stuff.

I know that's a vague answer.

I think part of that is in the spirit of the new vagueness that surrounds the public marketplace. (laughter by all) I'm surprised when I walked in the room they didn't put a muzzle on my mouth.

The truth of the matter is, these are difficult times, but there are opportunities out there.

There are opportunities in some areas more than others.

We're attacking those areas

Let me probe the vagueness respectively or with respect, I guess, is the way to say it.

In the past we talked about retail development opportunities.

There was a sense that the Paris business center was the place to be perhaps in the early '90s.

That business has not been as attractive as I understand your view.

Can you update your view on the Paris center business in general?

Has that come back a bit?

Certainly, as I understand it, the prices that investors are willing to pay for these type of assets are at pretty high levels right now.

John, I think in the late '90s there was concern by us and others about the impact of E-commerce and what that would do, particularly to big box retailers.

I think, rightly, we took on a more cautious approach to big box retailing.

I think events have proven that the retailers, by and large, were smarter than we thought they were, and that they were able to adapt to the changes in retailing and utilize E-commerce largely.

So I think our view would be that power centers are viable, and where we find good opportunities to deal with high quality, well capitalized big box retailers, that's something we want to do very much

Just one last question on development, to what extent is Cousins worried about the idea of allocating more capital to residential land business at a time when there's at least some fear that it's at a frothy level that it might reverse from

John, this is Tom Bell.

I'll respond to that.

It is an issue that we pay a lot of attention to.

As I said in my comments, we do expect that there will be some decline from today's very high levels when interest rates move, and we assume that they will move.

We have structured our transactions, by and large, in a way to insulate us against this move, and even if the -- let's say that the residential business was to decline 15% or 20%.

That still leaves a great deal of residential activity in the principle markets, which are the greater Atlanta area and Texas area.

Both Houston and Dallas, have even with a 20% move still have significant new home sales as would Atlanta.

So I think a combination about being careful about what we involve ourselves in terms of location and how developed the projects are and how we structure the land takedown and the very significant demand, demographically driven demand for the product type that we're producing which is generally at the lower end -- not at the lowest, but the lower end of the cycle, puts us in a pretty good situation to deal with the center if it were to occur

John, this is Tom Charlesworth.

Another thing to remember about residential is that, by and large, these deals are multi, multi year deals, and will be running for some time.

And from that stand point, it's not irrelevant to think about the short term and what could happen with, perhaps, some drop back in demand.

Longer term, the demographics are really key.

I think we and our partner feel good about the demographics over time

John, one other thing while we have you with regard to Dan's arrival here and his usual modest response.

We are both seeing more development opportunities and I think that's partially the market and partially Dan and his market team's aggressiveness and pursuing more development opportunities since Dan's arrival

I'm not surprised by that.

Thank you very much.

We'll go next to Patrick Beatty with InvesCo

If you could comment on the development pipeline in the supplemental.

The only avenue project you list is west cob.

Is that because the other ones are still in predevelopment phases?

Can you talk to -- there was one in Little Rock and then, I guess, Memphis and Florida that you were locking at.

Patrick, Tom Charlesworth again.

What you see on that schedule are projects that are actually under way.

We have what we call our shadow pipelines, which is a number of deals we're working on.

Typically, Joel and the group crank in a bunch of deals at the very front end and only a few come out and end up being deals that we do.

So we tend not to disclose specific deals because then we'd be saying, well, this one is on for now and that one went away, and so forth.

We just don't get into it.

But Joel is working on deals in a variety of locations.

I know Little Rock has been mentioned.

It's not something that is committed to at this point.

It is not on the schedule.

I don't know if we know that it will be.

Generally, we like to tell you about those deals when we commit to them and are sure about them

Okay.

And with regard to Congress and fourth, I know the market has changed dramatically since you announced that.

With a currently 46% leased, how does that compare with, you know, where you thought you would be?

We're feeling pretty good about Austin right now and Congress and Fourth.

I think the lease is pretty close to pro forma.

We are close to where we expected to be at this time, and we have other leasing activities under way which we hope will bear fruit.

The difference is, obviously, in the per square foot range we're able to get for the space we are leasing.

The market has declined significantly since we pro formaed that project.

Fortunately, we are getting significantly up higher than market rates for our building and have consistently been able to do that and think we will continue to do that in the next round of leasing that we're working on now.

As we've said in prior calls, the project is not going to perform at the level that we originally pro formaed it at, but it is going to pro forma at what we believe -- it appears it will pro forma at what we believe will be a very satisfactory level.

So let's say I've used pro forma three or four times, which I wasn't supposed to do, but I didn't use any numbers. (laughter)

Okay.

Significantly, can you define that or give me a ballpark?

You mean, can I tell you what the yield is going to be on the building?

No, I can't.

The rates you're getting are still higher than the comparable buildings around there?

They're $7 to $10 above market.

Okay.

Thank you.

We'll go neck to a follow-up with Stuart Axelrod from Lehman Brothers

Are you going to book any gain on the Serretos and Mira Mesa sale?

Well, yes, we'll have to.

I mean, we have -- Stuart, you can break up gain into two pieces.

We like to think of it initially sale price over our all-end cost before depreciation, which is what we call the value creation, which is what we try to do.

We try to create value for our shareholders that way.

They will have both have gains on that basis and also have depreciation recovery, which will increase the gains.

As happens with almost every property we deal with, everyone that I can remember, depreciation is always recaptured.

The GAAP depreciation is not really an economic depreciation, at least for us.

As you can figure out from Tom's comment on Mira Mesa, the gain will be substantial.

Is the Serretos sale contingent on the McGuire offering?

No.

Okay, great.

Thanks.

Gentlemen, at this time we have no further questions.

I would like to turn the call back to our speakers for any additional or closing comments

Thank you all for joining us again.

We look forward to speaking with you at the end of our next quarter.