Cousins Properties Inc (CUZ) 2003 Q4 法說會逐字稿

Good day everyone and welcome to this Cousins Properties Incorporated conference call.

Today's conference is being report recorded.

At this time, for opening remarks and introduction, I would like to turn the conference over to the president and chief executive officer, Mr. Tom Bell.

Please go ahead, sir.

Thank you Jennifer and good morning all.

I'm Tom Bell, President and CEO of Cousins Properties and with me today are Dan DuPree, our Vice Chairman via telephone.

Craig Jones, President to the Office Division, Joel Murphy, President of our Retail Division and Tom Charlesworth, he's our Executive Vice President, Chief Financial and Investment Officer.

I'd like to welcome you all to our fourth quarter conference call and at this time I'll ask Tom to review the fourth quarter and year's financial results.

Tom.

Good morning and thank you for your interest in Cousins.

First, let me point out that certain matters we'll be discussing today 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 10-2003 for 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, a comparable GAAP measures and related reconciliations might be found through the quarterly disclosures and supplemental SEC information links on the investor relations' page of our Web site at www.cousinsproperties.com.

I will forewarn you that my remarks today will be a bit lengthy as a result of our desire to be as transparent as possible on not only 2003 activity but also on key factors that will affect 2004.

Let me start off with a brief discussion of the highlights for the fourth quarter and for the year 2003.

Net income available per share decreased 39% in the fourth quarter of 2003, as compared to the fourth quarter of 2002.

FFO per share decreased 50% in the fourth quarter of 2003 as compared to the fourth quarter of 2002.

These decreases are primarily due to loss of rental property revenues from property sales, and from tenants who effected early termination of their leases in the previous periods, and to impairment charge, which is relevant for FFO purposes only and which will be discussed below that was recorded in the current period.

The foregoing items are partially offset by increases in net profits from residential lot and track sales.

Two retail centers opened in the fourth quarter, the Avenue west Cobb and the shops of Lake Tuscaloosa.

At the end of the fourth quarter, the Avenue west Cobb were 92% leased and while the shops at Lake Tuscaloosa was 85% leased.

An addition to the two retail centers opened in the fourth quarter, Frostbank Tower opened on January 21, 2004.

At opening, the project was 58% leased.

We are in fact in the process of today of signing another lease that will bring us to 61%, and we are happy to report increased leasing activities.

During the quarter, CL realty, our joint venture with Lumberman's investment company, commenced construction of Summer Lakes, a new residential development in suburban Houston, Texas.

This new development will include approximately a 1160 lots upon completion.

As discussed in our previous calls in the fourth quarter, we sold 42 acres and recently rezoned North point West side mixed-use project for a little over $8.1 million.

More comments on this a little later.

During the quarter, we acquired 100% of the direct ownership interest in 100 and 200 North-point center lease.

Two office buildings in (inaudible) Georgia totaling. 258,000 square feet for a combined price of $22.4 million.

The $22.4 million price being paid for by the assumption of $22.4 million of mortgage debt.

I'll talk more about this transaction later as I discussed the details of net income available and FFO.

Those are the highlights for the quarter before I begin discussing the details of net income available and FFO, let me summarize a few of the highlights for the year.

Net income available per share increased 403% in 2003 as compared to 2002.

This increase is primarily due to net gains on asset sales of $93 million, recognition of $90 million of deferred gain associated with the formation of CP venture as a result of the sale of one of these properties.

Termination fees at $24.7 million received in 2003 as compared to $4.3 million termination fees involve received in 2002 and block and tract sale net contributions of $15.9 million in 2003, as compared to $5.9 million in 2002 offset by loss of rents following asset sales, and early lease terminations.

FFO per share increased to 11% in 2003 as compared to 2002, this increase is primarily due to the termination fees and lot and tract sales increases mentioned earlier.

All partially offset by the loss of rents following asset sales and lease termination.

We declared and paid a special dividend of $102 million or $2 and 7 cents per share following the proceeds of the property sales and finally, we closed the public offering of 4 million shares of 7.75% series A, cumulative redeemable stock in 2003 that generated net proceeds of $96.3 million.

These transactions have put us in a strong position to take advantage of increased opportunities that will arise as the current economic recovery progresses.

At end of the fourth quarter, our adjust to debt to total market capitalization was 30%, the recourse debt to total market capitalization was only 1% and the credit facility balance was 0.

Now, I'll discuss the details of net income available in FFO, which you can follow beginning on page 2 of the net income and funds from operations supplemental detail schedule.

Consolidated rental property revenues less rental property operating expenses decreased $630,000 from the third quarter of 2003.

This decrease is primarily due to a termination fee received at 101, second street in the third quarter and related loss of rents following termination.

Rental property revenues less rental property operating expenses recognized from the opening of the Avenue west Cobb in the fourth quarter partially offset the decrease.

For the year consolidated rental property revenues versus rental property operating expenses increased $12.2 million over 2002.

Primarily due to the increase in termination fees mentioned earlier, partially offset by the related loss of rents following the terminations.

Residential land division results for the fourth quarter of 2003 increased by $3.8 million as compared to the third quarter of 2003.

Included in the residential land division results for the fourth quarter is the net profit on the north point west side land sales, which amounted to $5.3 million on the $8.1 million of sales.

In the third quarter of 2003, the company also had a track sale at Wildwood, an out parcel sale that generated net profits of $2.1 million.

The difference between the net profits from the land sales for quarter four versus quarter three account for the $3.2 million of the overall $3.8 million increase mentioned earlier.

The remaining $600,000 increase is due primarily to an increase in the number of lots sold in the fourth quarter as compared to the third quarter.

For the fourth quarter, the company's share of total lots sold was $173 as compared to 93 lots in the third quarter of 2003.

Net profits from residential land activities were $13.9 million for the year 2003, as compared to 5.9 million for 2002.

For the year the company's share of lots sold was $488 as compared to 311 lots in 2002.

Leasing and other fees increased 3.1 million in the fourth quarter of 2003 from the third quarter and $2.7 million in the 12 month 2003 period as a result of increased fees from land sales brokered in Texas.

Interests and other decreased by $1.4 million in the fourth quarter 2003 from the third quarter of 2003 due to the payoff of the 650 Mass Avenue note receivable in August 2003.

And a reduction in the fair value of the arthrogenic warrants in the third quarter.

For the year, general and administrative expenses increased $1.9 million over the prior year primarily due to an increase in compensation expense partially offset by an increase of capitalized salaries.

Consolidated interest expense decreased $175,000 in the third quarter in 2003 primarily due to an increase in capitalized interest on projects under construction partially offset by interest recognized on debt assumed on acquisition of the 100 and 200 North Point center office buildings.

For the year, consolidated interest expense decreased $4.6 million mainly due to the increase in capitalized interest on projects under construction.

Capitalized interest totaled $5.9 million in 2002 and 9.7 million in 2003.

Loss on debt extinguishment in 2002 represented prepayment penalties occurred as a result of refinancing the bank America plaza debt.

Other expenses continuing operations increased $705,000 in the fourth quarter of 2003, from the third quarter of 2003, due to increases in predevelopment expense and minority interest expense.

Minority interest expense increased as a result of the 101-second street project, which in certain levels of cash flow as calculated - of course for the projects operating agreement.

For the year other expenses continuing operations decreased by 300,000 from 2002, primarily as a result of recognizing less minority interests expense.

Income tax provision increased $1.3 million during the fourth quarter of 2003, as compared to the third quarter of 2003, and $900,000 for the 12 month, 2003 period, due to increases in net profits from residential lot and track sales and increases in leasing and other fees both of which were recognized within the companies taxable rate subsidiaries.

Total share of joint venture FFO decreased by approximately $900,000 for the fourth quarter of 2003 as compared to the third quarter of 2003.

Some of the significant fluctuations by joint venture were as follows.

Wildwood associates increased by approximately $900,000 due primarily to a termination fee received in the fourth quarter of 2003.

Venture two results decreased by $1 million as a result of an impairment charge recognized on the sale of ICP venture II to the company of 100 and 200-north point center east.

And in 1998, the company transferred these properties to CP venture at a valuation of $46 million.

The sale of these properties by CP venture II to back to the company for $22.4 million resulted in a loss to CP venture II.

The company's 11.5% share of this loss, which was recognized as an impairment loss, was approximately $1 million.

The sale of these properties triggered recognition of the remaining deferred gain associated with the original transfer of the properties to CP venture.

Deferred gain equal to the amount of the company's share of the impairment loss was recognized in income as gain on sale of investment properties, which is not included in FFO.

While the remaining amount of the recognized gain reduced basis of the two properties.

285 venture decreased by approximate by $900,000 due to the establishment of the reserve for straight line rent receivables related to the January, 2004 restructuring of lease at 1155 Brehmner (ph) center west.

Straight line rent receivables related to the six floors vacating on the terms of restructured lease were reserved.

Straight line rent receivable balance related to the remaining floors would be amortized against income relatively over the remaining three years of their restructured lease.

More details on this lease restructure will be covered in a minute.

For the year, total share of joint venture FFO decreased by $1.1 million compared to 2002.

In addition, some of the other significant fluctuations that occurred were over the year as follows -- Wildwood associates recognized an impairment loss in 2003 as a result of land sale that occurred in the second quarter of 2003.

FFO from 10-Peach tree place associates increased $2 million as a result of the lease with AGL resources that commenced during the second quarter of 2003.

Last item included in the calculation of FFO available to common stockholders is preferred stock dividend, which reflects dividends paid or accumulated through December 2003.

The next two line items are excluded from FFO but necessary to recognize -- reconcile, FFO to net income.

Gain on sale of depreciated investment properties net includes deferred gain recognized on the 100 and 200 north point center east transactions that I mentioned earlier.

For the year, the company sold four other properties that generated combined gains net of income taxes of $93.5 million, in addition, the company recognized approximately $90 million of deferred gain related to the formation of CP venture. 2002, the company sold only one property for a net gain of $1.2 million.

Changes in total depreciation amortization of real estate and various periods primarily relate to differences in write-off of un amortized tenant improvements and related costs as a result of these lease restructuring and determination.

That concludes my discussion of the details of the fourth quarter in the year's net income available on FFO.

I would like to point out changes we have made to the supplemental information package.

We have taken the required reconciliations out of the net income and funds from operations supplemental detail and reconciliation schedule.

These reconciliations are now in a separate schedule entitled reconciliations of non-GAAP financial measures.

We have also taken the same store changes out of the net income funds from operations supplemental detail schedule and reported them on a schedule of same property growth.

We are reporting the same store changes on the sequential quarter over quarter basis and year over year basis.

We believe the sequential data we have provided in the past is the most meaningful data, the year over year data has been requested comparability purposes and we are happy to provide it.

One more item on the quarterly information package. 2004 office joint venture square feet expiring page 1 of the square feet expiring report has recorded at 26%.

This is a topographical error and should say 6%.

Before closing, I would like to make comments on 2004.

The economic environment in the company's operations is not static. 2004 expectations cannot simply be extrapolated from 2003.

Although there are many uncertainties, I cannot provide insight in a number of key areas.

Weakness in the economy in 2003 resulted in an unusual number of tenant lease terminations during the year.

Related termination fees total approximately $24.7 million, and 50 cents per share FFO effect based on 49.415 million diluted shares.

And of course, the lease terminations and sales resulted in the loss of ongoing revenues from those leases.

We do not anticipate at this level of terminations in 2004.

At the same time, releasing the vacated space will in most cases be accomplished only over time, leaving current income short of Ultimate potential.

One of the larger leases terminated in 2003 was the Cable and Wireless lease and our 55 second street building in San Francisco.

We announced in December that we signed a lease with KPMG for 90,000 of the 158,000 square feet vacated by Cable and Wireless.

Since we have additional space to lease at this building, I cannot give the exact terms of the lease, however I can say the following.

Occupancy under the KPMG lease will occur in the fourth quarter of 2004, and rent will commence in the first quarter of 2005.

The overall rent level was consistent with the general market rates in the area for this quality of property.

There was substantial tenant improvement allowance provided under the lease with this being funded from a portion of the $20 million termination fee received from table Cable and Wireless.

I would also note that we have never funded the $5 million allowance, which was originally due to Cable and Wireless.

And I would note that although certain Cable and Wireless entity have filed bankruptcies, our termination fee received earlier this year is not subject to recapture through the bankruptcy proceedings.

Next we own a 50% interest in the entity that owns the $362,000 square foot, 1155 crumb center west building that has been 100% occupied by Mirant.

Mirant as most of you know is in bankruptcy and as a result has had the right to reject the lease in full, and vacate the premises.

As has now been recently announced, we have negotiated an amendment with Mirant that reduces the square footage occupied to approximate will 212,000 square feet, all on the lower floors and the trading center, decreases the rent on the remaining space and shortens the term to three years.

This arrangement has not yet been approved by the bankruptcy court, but it is currently expected to be in the near future, perhaps within a matter of days.

Rental revenues will continue at the original rate until that time.

I can summarize the economic impact of the amendment by saying that after a FAS 13 straight line with rent receivable write-off against continuing rent, which I mentioned earlier, the property operating revenues after operating expenses under the restructured release, and assuming no additional leasing will be just above break-even on an annualized basis.

Of course we have additional square footage available to lease to others in the top floors of the building, although expect the lease up to take some time.

In addition we have - we will have a substantial bankruptcy claim in the range of $16.7 million for our partnership in connection with the amendment.

We expect to recover on this claim, although the exact amount is not known.

Currently, we understand that these types of Mirant claims are trading at approximately 60 to 65 cents on the dollar.

It's unlikely that we would correct on this claim for 2004 unless we choose to sell the claim prior to the payment.

We also have interest from a number of hotel companies in an undeveloped pad side on the property.

Initial studies have indicated that at the conclusion of Mirant's three-year lease term, the trading center could be converted to a hotel ballroom and conference facilities and connected to a hotel tower to be built on the pad site.

Although there is know assurance that this would be successful, we would hope to sell the pad site and trading center at that time, receiving additional funds that would lower our economic basis in the property.

We also expect the office market to be improved at that point.

In summary, our plan for this property is to achieve as much invested capital reduction as possible to recovery on the claim and sale of the trading center and pad site and to improve rental revenues at property by re tenanting as the market recovers.

The short three-year lease term with Mirant should help in this regard.

We are disappointed that Mirant has had difficulties and has had to restructure its lease.

But we feel, we are well positioned to reduce the invested capital and well qualified to in effect re tenant and redevelop the property.

As we reported in our last conference call, we were successful in rezoning 216 acres of land at north point in (inaudible) Georgia and we expected to have significant track sales starting in the fourth quarter of 2003.

As discussed earlier, we did in fact have the anticipated level of sales in the fourth quarter.

We expect significant additional sales in 2004.

As noted in our prior call, however, land sales can be uneven when looked at on the quarterly or even annual basis.

In addition, specific future sales visibility typically extends out only two or three quarters with sales beyond that point being less certain.

These factors make estimates for 2004 and beyond more difficult.

Another comment on the sales in our prior call, we indicated that the overall expected profit as a percentage of sales prices was between 65% and 75%.

Sales in the fourth quarter effectively came in at the lower end of this range due to a accrual of a portion of the profit.

The previous profit range given for all sales is still a good estimate, with the potential for profits in the upper half of the range overall at the end of the day.

In December 2003, the compensation committee of the board awarded incentive compensation in both restrictive stock and stock options.

We do not expense the options; we will expect the stock grants.

In 2004, this should equal $1 million approved evenly over the year, with additional expense possible, further grants were made this year.

As we have indicated in prior calls, we see strong potential for increased retail and residential land development as economic recovery unfolds.

In preparation, we have augmented both groups with additional talented people.

As Tom, Dan and I have said in the past, we believe the teams are the strongest.

We have ever had and expect to create significant value in these areas in the coming years.

We see the development of these groups increasing with quality deals.

A number of which should be commencing this year.

As we increase the number of deals under the development, our capitalized G&A should increase but the amount and timing is difficult to predict.

We expect to generate new FFO from development projects coming online this year, including Frostbank Tower (inaudible), the contributions from Avenue West Cobb and the shops of lake Tuscaloosa, which opened last year, will be increasing as well.

In our prior calls we mentioned that we are reviewing the possibility of selling some office assets.

There are indications that certain of our properties may garner exceptionally attractive pricing in today's markets.

And indeed, there appears to be a significant amount of capital pursuing properties, including quality office buildings.

As you know, our primary mission is to create value through development.

Once we have maximized this value, it is often in our interests, and the interests of our stockholders to harvest that value and redeploy into new developments or where we do not need the funds, return the funds to our stockholders.

We currently have a non-binding letter of intent to sell two office buildings.

It is possible that one or more will in fact be sold this year.

This by itself can initially dilute or reduce FFO, another factor making it difficult to predict results for this year and future years.

We believe that it will over time, however, enhance total stockholder returns.

We are deploying from an asset that has maximized its value to an investment in a new development project is purely beneficial and distributing funds that are not needed for future development special dividend as we did last year, lowers the stockholder's capital investment and the same level of new development in the future enhances their overall returns.

This is the right long term strategy and we are not reluctant to incur short-term dilution to achieve a long-term result.

In summary it, is difficult to predict earnings in FFO this year.

Although, there may be unavoidable, unpredictability here, our mission and strategy are clear and we believe we are well positioned to perform for the stockholders in the coming years.

With that, I will close my remarks and turn it over to you.

Thank you, Tom, for that exhaustive report.

It appears in our view that we may finally have an economic recovery underway.

Most observers seem to feel we'll see good GDP growth in 2004 and consumer spending should continue at a respectable pace.

And most economists also expect business investment to increase this year.

In this environment, we expect our residential land and retail businesses to see more good development opportunities, which meet our investment criteria, will be nice for a change.

The big question from our perspective, of course, remains job growth in general, and office job growth in particular.

Some commentators seem to believe we have had some sort of secular or structural shift in our economy, in which economic growth occurs without traditional job growth.

As I point to productivity enhancements and the off shoring of office jobs as the cause.

I personally do not buy into the no-job growth theory.

There are limits to productivity improvements and at some point, companies have to hire to sustain improvement and growth in their business.

The U.S. economy remains the most entrepreneurial and innovative in the world.

As far as out sourcing goes, I agree it is a trend worth watching and one likely to increase, but I'm skeptical it, will are have a significant long term impact on the overall job situation in our economy.

I do believe it might slowdown job growth temporarily and as a result also retard a recovery in some of our office markets.

Our country's most significant economic challenge is to remain innovative and Foster education and reeducation of our work force.

In the long term, as long as we maintain an educated innovative entrepreneurial workforce, we will continue to create jobs and opportunities.

The standpoint of Cousins Property, I would add more comments.

One of Cousins' strengths is its diversification, which has paid dividends during the recent downturn in that we have been able to mitigate some of the risks of the downturn in the office sector.

As Tom said, we now have the strongest retail team ever at Cousins.

I'm pleased with the number of qualified pipeline projects in which we are working and based on that pipeline, I'm optimistic that we will see increased retail development in '04 and '05.

Similarly, our lease residential land group (ph) will continue to make increased contributions to our company.

Last year, we saw an $8 million FFO from the residential land division and we expect and an additional growth in '04.

Last year, we provided you with the schedule, which shows the development activities in the last business cycle in the 90's.

This is on our web site; the schedule of development starts and acquisition is that the supplemental SEC information link on the investor relation's page of our web site.

This shows the ramping up of the development in the early part of last cycle, led by the retail and in the current cycle, we once anticipate increased development to be led by retail and residential land development.

We have a large percent of the office assets in Atlanta and San Francisco.

Over time, we believe San Francisco will be a sound office market, due in part to constraints on development, and there are indications that the San Francisco office market has already turned the corner.

We also believe in Atlanta, our hometown.

Recent job growth data for Atlanta has been very strong with Atlanta near the top of the list for job creations for the entire country.

Now, some have questioned whether or not these statistics are in fact accurate.

And we agree they may or may not be right in the short term, but either way, we believe Atlanta has the ability to provide well above average job growth over time.

In fact, Relin Ellis stated they expect Atlanta would be the strongest office market in the US over the next five years.

Cousins is certainly well positioned, very well positioned to take advantage of this growth in the metro Atlanta region.

I might also add that we are optimistic about the long-term prospects for certain other of our markets including Austin, Texas, and Washington, DC.

But that, of course, is all in the future.

As far as our current office business goes, we are still experiencing softness in most of our major markets.

While we expect to see modest recovery in 2004, our major markets still remain very challenging.

The Mirant situation, which Tom described is one aspect of this.

We continue to deal with some tenant bankruptcy issues, albeit at a lower level.

It's our sense that the office tenant base should begin to firm later in the year.

But it's going to take some time for the office market vacancy rates to fully recover.

To the extent we have rollover in our office tenant base in the next year or so, we expect additional softness and re-leasing, and the level of rental rates.

Having said that, I still believe we will be successful in our re-leasing efforts, in spite of difficult market conditions.

This is evidenced by our successes with such transactions as the AGL lease in Atlanta and leasing Arthur Anderson space in San Francisco after last year or so and most really in the KPMG lease at 55 second street in San Francisco, which Tom talked about just a few moments ago.

As far as office development goes, we do not see any -- we do not see many office development opportunities that meet our return requirements, but there are a few, and in this regard, we working on a 500,000 square foot office tower in downtown Miami.

If we decide to move forward with the project, this building would most likely open early in 2007.

To date, we have tide up the land and performed predevelopment work including entitlement and pre-leasing.

It is by the way a terrific site at 50 Biscayne Boulevard, which is just across Biscayne Boulevard from Bayfront Park with an unobstructed view of the bay.

At downtown Miami has not had a new office tower built since 1987.

And in part, as a result of this, we have had terrific interest in our pre-leasing efforts.

But we do not have any signed leases at this point it is likely that we will acquire this site, although we will not commence construction until we have significant pre-lease.

Our retail business continues to gain strength in our properties are performing very well.

Our shadow pipeline is looking better and better and the number of new opportunities being explored is increasing.

A couple of projects that we have been working on for some time are advancing to the point where I hope we would be able to commence them in the next quarter or so.

Holiday sales in the existing portfolio were strong and consumer acceptance of our branded Avenue projects continues to grow.

This bodes well for our leasing momentum as we bring new Avenue projects to the market.

We have also significantly increased the number of power center projects in the shadow pipeline.

This is a conscious effort on our parts to become active again in a retail product site where we have enjoyed great success.

Land residential business is also very strong.

Our quarterly information package shows you that their contribution to the company has been increasing and we expect this to continue.

Both lot sales and tract sales have been doing well and should continue to grow in 2004.

Tom also mentioned sales of office assets.

We are actively evaluating the number of properties for potential sale at this time.

When we can sell an asset and what we believe to be a very attractive price, we feel continuing to hold the asset offers us very little opportunity for additional value creation for our shareholders.

As most of you know, we believe capturing the value we have created when the price is right and redeploying that capital to create more value or scripts in the proceeds to our shareholders, enhances shareholder return over time.

And of course, we remain very focused on delivering shareholder returns.

When we talk about things such as asset sales, invariably questions arise as to what would happen with the dividends.

We are certainly able to maintain the dividends at the current level.

And growing FFO with new development properties coming online in the coming years enhances the sustainability and would be the potential for increases in our dividends.

Of course, we sell a large amount of assets and distribute significant amounts of money, following the sales, keeping the same dollar amount dividend represents a significant increase in the dividend yield to our stockholders.

Nevertheless, while we have a strong inclination to continue the dividend and to increase it in coming years as FFO increases, if we have significant assets sales, the board will necessarily make an in-depth evaluation at that time to determine the most desirable level of dividend.

The past couple of years have certainly been challenging for all of us at Cousins, and everyone in the real estate business.

Difficult economic conditions exacerbated by the geopolitical situation and terrorism incidents have made it hard for the economy to get going again.

I feel very good about Cousins properties, however.

We have used the last couple of years to position ourselves for the next development cycle and in this regard, I think we have been very successful.

Our financial condition is excellent, with low dead levels, a solid balance sheet and quality assets.

We have also positioned ourselves well for our shareholders.

With our stock buy-back program and capital restructuring including the preferred offering in our special distribution, which could be followed by more distributions in the future.

Our development teams are strong-as strong as they have ever been and the office, retail and land and residential divisions.

And finally, the opportunities in retail and land and residential development seem to be coming our way.

In the meantime, we will deal with the office issues and will at the end of the day do quite nicely in that businesses as well as we have in the past.

In short, I think we're well positioned to perform for our shareholders in the coming years.

That concludes my remarks today.

We would be delighted to take any questions that you may have.

Do you have any questions for us

[OPERATOR INSTRUCTIONS] We will take the first question from Greg Whyte at Morgan Stanley.

Good morning, guys and Tom.

I want to thank you for the additional information. 's helpful.

This just to go to some of points that Tom and both Tom Charlesworth talked about the potential office sales and then I think Tom you gave more color about the potential dividend aspects there.

Is there any way that you could frame that a little more for us in terms of -- if I'm understanding you correctly, a significant amount of office asset sales might ultimately result in the adjustments to the existing common dividends, is that correct?

Well, Greg, as we look at it today and we make our estimates, which admittedly change you know, based on what we might actually end up selling and the prices that we could get and what the dividend would be, but if we make our estimates today, I think we can sell assets, pay a special dividend or reinvest that money in development and maintain our dividend at the present level.

OK.

But it depends on how many assets we sell, you know, and how much development we do.

And those are unknowns.

But if you ask me to make a --you know, a forecast on this today, I would say that we could sell office assets in 2004, get very good pricing on behalf of shareholders, capture that value either use it in development or return it to our shareholders and maintain our dividend at the present level.

OK.

That's fair.

Great.

A couple of other things here.

Just in terms of the lot sales.

Obviously, we have seen that the contribution to FFO are ramped up fairly dramatically through the latter part of last year and when I look at the inventory and pipeline that's gone up as well.

Can you make some sort of objective comments about where the business is today?

Give as you feel as to -- I mean what I'm trying to do here is separate out the increased size of your business with the actual sort of business environment.

Well, we made a significant commitment to building our residential business and our land development business along with the partners at Temple-Inland.

And as you know from reading the schedules that we have increased the inventory of lots available for sale, very significantly and we have increased number of lots that we have sold and plan to sell on an annualized basis quiet significantly.

It is our hope that we can continue to grow this business into the future.

But as you know, from our past conversations, and calls, you know, we have fairly conservative and strict standards for how we enter into the lot development business, because we understand that the business is susceptible to significant changes over time.

So, we try to structure our land transaction transactions in ways that we could prudently ramp that business up, but not get caught if there's a is significant downturn.

Right now, we see a very strong market driven by not just interest rates but demographic trends, in other words, household formations in the markets where we are operating, which are basically, Georgia, Florida and Texas.

They continue to be very strong residential markets, and that's where our business is focused to date.

So, we believe that we will be able to continue to invest more in these businesses, and reap more rewards for these businesses in '04 and '05 and beyond.

But Tom, if I look at the margins your expenses on the residential outside as a percentage of actual sales, year over year went up, OK.

So I guess that's where my question is coming from is give us some sort of a qualitative comments.

Are you having to adjust prices to maintain current lot sales volumes, or is it just a change in the mix?

That's not what's going on, Greg.

The pricing so far has held up very well.

OK.

In fact, I think I can safely say in '03, almost all of our developments we were able to either sustain or increase our pricing on the lots.

But we have also increased our staffing to deal with the growth and we have added significant staff, and, you know, residential development is a lumpy business and it depends on, you know, if a lot of lots are taken down in a given quarter by the builders, then the numbers look one way.

You know, the next quarter, you might not get much takedown and the numbers would look differently.

So you have to look at those numbers over multiple quarters to get a feel for what they are in an ongoing basis.

In terms of the ratios of cost to revenue.

Greg, this is Tom Charlesworth.

I would point out one more thing too.

As you look at the schedule entitled inventory residential lots under development and you look at page two and see a relatively long list for us of new projects that commenced in the year 2003, that's the first column that shows the year commenced.

Yep

And you can see there's a fair -a pretty large number of lots associated with those that will be dealt out over time, but not many sold to date.

Typically takes a little while before you get into the lot sale mode.

So you can see a fair amount of product that will be coming downline.

You should know, Greg, I don't know that we have discussed this before, but you should know that we have a high margin hurdle for our residential business.

Because we think the business has had more inherent risks in it.

But the margins are, you know, acquired over time.

Any time you enter into a new residential development, you have more infrastructure cost at the front end of the development than at the back end of the development.

That skews the ratios a little bit.

I think that's the point Tom is making.

You have more development costs at the front end.

OK Two other quick questions and I'll yield the floor.

In terms of your year over year same store, the retail operating expenses seemed to spike sharply and I just -- is that as a result of a couple of new projects coming online or was it something else?

No, Prolific if you ask vendors.

Those retail guys.

Greg, this is Tom Charlesworth again.

I want to say one thing first about the retail same store numbers having sold a number of retail projects last year.

There's a very, very small sample set so what happens in one project can skew those percentages, as we add more retail product of course it will become probably less volatile.

On a year-over-year basis, the big thing that caused that change was a legal related expense at Avenue of the peninsula, which we reported, I think, in the second quarter.

And even though we expensed it, we do believe that we are owed reimbursement, by, the insurance company and we are pursuing them for that, but we have not gotten it yet.

In addition, I have to say that we did hired some more people at AOP, Avenue of the peninsula and that did increase the expense to a bit as well.

OK.

And then just finally on the Mirant stuff.

I just was curious with the timing.

Did you not receive any rent from Mirant in the fourth quarter?

No.

You had the write-off of the straight-line rent receivable against the rent collected.

So, it washed out in the fourth quarter.

We received our regular rent, and you know, and we continued to receive our regular rent, and will until the judge acts, or the court acts one way or the other.

But we had this offset, which Tom discussed.

And -- you know, when you record straight-line rents, you book it as income and the other side as the receivable.

Well, when you restructure the lease, and those floors go away and we know even though it hadn't happened in the year that it's going to in all likely will happen, we have to make an adjustment at that point for those floors.

If I could just may be push a little bit more on the Mirant stuff.

If we had look back at your past run rate on a GAAP basis, say you were getting in second, third quarters etc in terms of the restructured level, where do you think you have gone to, is it 50% of prior levels?

Greg, Tom Charlesworth again.

What I was trying to say to you is give you a base taking into account the restructured merit lease.

And the problem with the lease is although we're getting cash, we're also writing off the receivable on the retained floors against that income for the next three years.

And that will bring the accounting reported, if you will, results down to about a break-even point, so, the issue there is when do you release the rest of the space, and at what rate, and as you know, we don't project those types of thing, but you're well qualified to do that yourself.

OK.

But there would be you think your cash receipt here is going to be in excess of your GAAP you will see it for the next few years, then

Yes, it will.

OK.

That's helpful.

Thanks a lot, guys.

Appreciate it.

We'll go next to John Lutzius with Green Street Advisers.

Good morning.

Tom Charlesworth, just I wanted to go through the one-time items in the quarter.

The key ones are the gain on un-depreciated assets of about 11 cents per share and the brokerage commission in Texas of about 6 cents per share.

You say the gain on un-depreciated assets you're talking about land track sales?

The -- I believe this would be the north point?

Right.

And I think I guess I would not characterize it the same way.

You know, as Tom said last quarter and continues to say, we view that business as, an non-going business that we have as a core competence team we expect the revenues to continue not only at north point, but also in other places.

And I would point out, for example, that some of the projects that are on the list of residential projects do have tracks with them, including commercial tracks.

So, there will be ongoing activity there.

As I said in my comments that even the north point activity will be significant in 2004, just by itself.

Yeah, it seems like north point will be robust in '04, but it certainly is a finite remaining asset.

I guess you're making the point that as north point goes away there will be other things behind it.

That's correct.

Now as far as one-time things John, you know, one that's count in the head scratcher that impairment loss, which for GAAP purposes basically nets out, but for FFO is a hit.

And that's not only one time, but it's sorted of hard to understand, but that is GAAP.

Now, you are right, John.

Tom Bell, you are right, at least the leasing fees that we received in Texas for the leasing that we did there last year was a very significant amount, much higher than we have received in other years, probably than we will receive this year.

They just had a very good year.

A lot of things happen late in the year.

That's the business that we are in.

We continue to be in, obviously, but that was a significant number in the fourth quarter.

OK.

Just circling back briefly, Tom, to the head-scratcher.

The loss -- we are talking about the CP venture, right?

Yeah.

That's about a million dollars?

Correct.

You're saying that the net effect when you work it through, is that, that loss for the purposes of FFO actually flows through?

Well, what I'm saying is that, in FFO you record the $1 loss, below the line in getting to net income.

You add in $1 million gain from the original transaction and that.

OK.

We followed all the GAAP rules mechanically, but it got to kind of an odd result.

It is correct GAAP, but at the end of the day, economically, we made a lot of money on that deal.

We didn't lose anything and we bought a project at a very low per square foot that we're going to make more money on.

OK.

So, for net income purposes, the loss was offset by the recaptured gain, but for FFO, only the loss flows through.

Yeah and you understand that originally, the gain on that transaction was not run through the P&L, it was put on the balance sheet and that was basically run into the P&L over time.

The portion of the gain on these properties, which we basically realized back in 1998, we just basically now washed through, but on the P&L only to the extent of the impairment loss, the rest of it had to go on the balance sheet against the basis of the property.

It's correct GAAP accounting, but.

Continues to -

It needs to be explained very carefully, so you really understand what happened.

Right.

OK.

With respect to the Frost Bank tower.

Is it the case that you will be capitalizing that project for the next year or so?

Well, we, you know, I think it's fair to say, John that, we expect to start recognizing income on that, and have a positive contribution starting in the second or third quarter.

So that, will be coming online in terms of being positive and will be increasing over time.

And as we said, knock on wood at the end of the day, we should be at 61%, and we, our people feel that there is an increased level of leasing interest and activity and so, we're aiming for higher numbers before too long as well.

I understand that the project is open now from an operating point of view, but from an accounting point of view, you're not going to continue to capitalize?

Some would be capitalized to the portion that's not leased, but for the portion that is, we'll have operating revenues.

OK.

So, you kind of break the project into components?

Yeah.

OK.

What's break-even occupancy for that?

My guess would be somewhere in the 60% range.

I haven't calculated that lately, I'm looking at Craig and maybe Dan commenting, too.

I suspect it's a bit higher.

Craig Jones Yeah, it will.

It's obviously a function of what your cost of funds is.

We don't have a loan per say on that.

Yeah.

But I think it's safe to say that it is our goal to get there this year.

Craig Jones yes.

To break even?

Yep.

On an un leveraged basis?

Hopefully do that.

Craig Jones To get past break-even.

To get past break-even.

In the past, one project, large project that didn't turn out too well was Avenue of the peninsula and you folks provided very detailed NOI disclosure on that project.

Are you going to do that here for Frost Bank?

Well, you know, I think we started providing that after the schedule of completion time.

I think, you're going to see in Frost Bank, you know, operating positive operating results that do ramp up over time, and I don't know that there's going to be the kind of variability, maybe or issues that we had in Avenue of the peninsula.

So, I don't anticipate doing a similar kind of thing at this point.

I don't anticipate a need to.

And as you bring up AOP, I think we also feel like we still have more to do there and we are going to be coming out in better over time as at that location as well.

OK.

Just couple more questions.

Moving on.

You mentioned the potential, the CBD development in Miami.

Can you talk a little bit about your connection there?

Are you working with a local partner?

What brought you to that market for that asset?

Well, we liked the Miami market because, it's fits all our market criteria.

It got solid growth, and good weather.

And therefore, solid growth, and we feel like the Miami market for this creative business has turned into the capital of the, you know, of Latin America.

So, we think that the growth there can be sustained over time and yes, we do have a local partner.

I'll let Craig or Dan talk to that.

This is Craig Jones.

We're affiliated in that market with a couple of fellows with ACP realty that have previously been primarily acquirers of existing assets.

But they at one time or another controlled up to 5 million square feet in the Florida market, so they're substantial players and have an existing leasing organization.

Would it be leasing primarily that they would be bringing to the table?

Yes.

Very helpful.

Good entitlement process, obviously, and with the local politics, but also very helpful on the leasing side and we have been very favorably impressed thus far with how the market has reacted and the leadership that they have provided in the leasing arena.

OK.

OK.

Then just last question.

Dan DuPree is on the call, right?

Yes, he is.

Hey, Dan.

Hi, John.

I wondered if you might make a comment or two about the shadow pipeline on the retail side perhaps, with respect to the mix of product Avenue, neighborhood centers, whatever, and then also just a comment, if you would, on where yields are.

Obviously, CAP rates have come down dramatically over the last couple of years over the last year.

What's happened to development yields?

That's about four different questions.

First of all, as to the extent of the pipeline, probably the best way I could characterize that is, when Joel Murphy sat down with Tom Bell and myself, my first week back, we did a pipeline review, and I believe there were like eight deals on that sheet.

Now, these are deals that would be from about ready to start construction to the early stages of contract negotiation where we felt good about the site.

A week before that, I think, we had over four times that number on there and they were, by and large, they were much more scrubbed.

They were much further along.

Joel in the retail group are just, are just doing great work right now.

And, as to the mix of them, I was thinking that I would tell you that where the majority of our effort is probably still on the Avenue, there's a, there's a significant focus on becoming more involved with the power centers again.

We may have overreacted to concerns about changes in technology that might have impacted that.

Clearly that hadn't been borne out.

I was going to tell that you we were doing relatively less on the neighborhood center front, but we are, we're actually through a venture more active on the neighborhood side than we have been in the past, although it's certainly, it doesn't measure up to the other.

In terms of yields, I don't think we are materially changed our thresholds for development yields in retail.

I don't think we have had to.

There might be a little bit of slippage, but not anything like the increase in valuations through the reduction of CAP rates.

So, we're getting great spreads.

We're getting great spreads between development yields and what the market will reward you for in terms of CAP rates.

Did I get it all?

Yeah.

That's a great update.

Thanks a lot, Dan.

All right John.

Joel.

Do you have anything you want to add to that?

No.

I think, that Dan has characterized it well and we're pleased with all of the things we're working on and pleased with how they are progressing.

Thank you.

Anything else, John?

Any more questions?

Yes.

We'll take our next question from Chris Halley with Wachovia Securities.

Hi.

Good morning.

Hi, Chris.

A question about your, Dan just mentioned the Kipson development joint venture.

Assuming that as a predominantly neighborhood centers and one of that, in a senses to what type of additions or backlog that is adding to your pipeline?

Is that the primary reason, Dan, that you had indicated that less neighborhood, but this joint venture, maybe there's more neighborhood coming?

I would tell you that, we're paying more attention to that product type, but I'll tell you also, ironically that, on the pipeline report that I was referring to, we don't include this, so anything that we get out of that just kind of further deepens the shadow pipeline.

We, you know, time will tell just how valuable that, those efforts will be.

So, little early, but I will tell you, we're certainly encouraged that there's significant opportunity there.

Could you go into a little more on that development on that joint venture?

Goals?

Let me just, this is Joel Murphy.

Let me add to that, I think the key thing here is we have been successful in the neighborhood center, neighborhood center efforts over the years, and they have also had a high margin for us, because obviously, the attractiveness for our exit, other people's entry into that asset.

Yet, at the same time as our pipeline has grown on larger volume deals both avenue and power center, we have come to the conclusion of two things.

That in order to execute our plan that is the primary focus, Avenue and power center, we don't want to be dispensing, using of the human capital that is necessary to do a smaller deal and at the same time, in the neighborhood center business that is so locally based with people that are in that business all day, every day, with the grocery anchors, with the local shop leasing and really finding the key land sites that are very competitive, that effectively out sourcing that, but bringing our capital oversight and development expertise to the table with a partner like Gibson that has the relationships was the way to go.

As far as a projection in the future of what kind of deals, we're not in a position to do that.

Really, that venture is just getting ramped up.

Great.

If I can go back to.

Thank you for that.

If I can go back to the land issue and pipeline growing, what would you say after build out infrastructure improvements put in for some of your larger lot, larger projects.

What is the kind of minimum cash margin or economic margin you guys are looking at?

On today's capital being put to work?

I don't think we should not speak specifically to Cousins, so, you could look back (inaudible) to see what margin had in though the projects are so long life it's hard to say but, I can tell you that generally, when you talk to people that are in this business, they underwrite to about a 25% return.

All right.

And I think that's not a bad number for people who know what they're doing in that business.

And that is over varying build out time periods.

That's a constant return over the life of the project.

OK and that is a, that includes the expected, all end costs, infrastructure, early development, etc.,

Right.

Yeah.

OK.

And that is a kind of an economic return, though.

From a -- or economic cash.

GAAP margin - is there a significant difference between the recognition for GAAP versus your cash numbers.

Well, This is Tom Charlesworth again.

GAAP can do some strange things and it's not necessarily all that consistent from time to time.

I think, you know, we -- in conjunction with the return number that Tom was giving that, generally, you know, we have --we look at margins as well, which are in the 30-ish-plus range.

And over time, I think your GAAP profit percentages should reflect that, but, you know, it's hard to project a specific project at a specific time.

I guess what I'm trying to highlight, I appreciate the numbers is by putting money to work today at tighter margins.

I would expect versus the return on capital as you are getting from projects invested three years ago.

And are you -- it seems though you're building a pipeline larger than it has been in the past and at this point in the -- if you want to call it a housing cycle, are you getting the commensurate return for the risk you are taking?

Chris, our margins are not being denigrated in any way.

We are underwriting the projects the same way today as we were underwriting three or four years ago and we have not seen at this time though, obviously, this could change, depending on what happens in the marketplace.

At this time we have not seen a need to change our underwriting standards on these project.

So, we are investing this money, you know the same rate in '04, the same expected return in '04 as we were in '03 and '02, and '01.

Okay.

Yeah.

And the last question regarding the CP venture.

What is the intermediate prognosis for the office assets there?

And related to that, would you care to comment on any submarket pricing trends in Atlanta on that office side?

Do you want to take that?

In terms of the -- well, the first part of it about the CP --are you talking about the assets that are sill in the CP venture.

Actually the ones that have essentially been consolidated through your purchase.

You are talking about the - you mean some at the north point quarters.

That's correct.

Okay.

The prognosis is, again, that market in particular is -- still has a great deal of distress from a pro forma standpoint.

We're not anticipating a lot of up-tick in 2004.

Although that being said, we have already had some good interest in one of those buildings in terms of perspective tenant.

But generally speaking, I don't think we'll see much in 2004, but again, we bought it at such an attractive price, I think we're going to see real good yields over time.

You know when we underwrote that project.

We didn't really expect to do much leasing in '04.

We thought it would be that may I think was second half of '05.

Right.

Well, we bought it at a price that even after paying what we would considered to be a you know pretty liberal P.I. and full investment in the building we'll still be at first quarter quite cost where it's a very attractive transaction even if we do have to sit on the space, if you will for a while.

So, our leasing people had breakfast with them, this morning, indicated that we do have more interest out there, in that market suddenly than we have had recently, so, you know, maybe it will be better than that.

But that's the way we underwrote it.

Quite again, just to give you some reference on the underwriting.

Basically, assuming cost of carry like Tom said, a pretty substantial T.I. numbers.

We should still be in the property at a basis that's about $50 to $60 a foot under what we sold it for.

But -- I mean, not sold, but putting into the venture part in 1998.

Thank you.

All right.

Chris.

There are no further questions.

I'll turn the conference back over to you, gentleman for any additional or closing remarks.

Well, I want to thank everyone for participating.

We are doing our best to make this as transparent as possible for you, and for your investors and for your many constituents.

There are - there's so many changes going on not only in GAAP and SEC. requirements but also in our business.

I know it's difficult to follow, but I can only promise you that we'll do everything that we can and not only this call but in future calls and future packages to make it as transparent as we can, and if you have ideas and suggestions for us that will help, don't hesitate to lets know.

Thank you for joining us.