Cousins Properties Inc (CUZ) 2004 Q1 法說會逐字稿

Please stand by we're about to begin.

Good day everyone, welcome to this Cousins Properties Inc. first quarter conference call.

Today's call is being recorded.

And now 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 thank you for joining us this morning.

I'm Tom Bell, President and Chief Executive Officer of Cousins and with me today are Dan Dupree, our Vice Chairman, and Tom Charlesworth, our Executive Vice President and Chief Financial and Investment Officer.

I'd like to welcome you to our first quarter conference call and at this time I'll turn the call over to Tom to review the first quarter's financial results.

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 8-K, filed on December 10, 2003 for discussion of the factors which may cause such materially 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 SEC.

For these items the comparable GAAP measures and the related reconciliations may be found through the quarterly disclosures and supplemental SEC information links on the investor relations page of our Web site at www.cousinsproperties.com.

Let me start off with a brief discussion of the highlights for the first quarter.

Net income available per share decreased 61 percent to 22 cents per share in the first quarter of 2004 compared to the first quarter of 2003.

FFO per share decreased 43 percent to 54 cents per share in 2004, compared to the first quarter of 2003.

These decreases are primarily due to a decrease in lease-termination fees.

The company received a termination fee of $20 million in the first quarter of 2003 from cable and wireless for termination of its lease at the 55 Second St. office building.

Total lease-termination fees for the first quarter of 2003 was $21.1 million, compared to $2.2 million in 2004.

The overall decreases in net income available and FFO also relate to the loss of rental property revenues from 2003 properties sales from tenants who effected early termination of their leases in previous periods.

The foregoing items are partially offset by increases in net profits from residential lot sales and tract sales totaling $4.8 million in 2004.

Lot sales net of cost of sales increased approximately $1.9 million.

Profits increased as the company's share of lots sold increased from 136 to 188 in the first quarter of 2004 and the mix of sales changed between the various residential developments.

The company's joint ventures had tract sales in 2004 which contributed $1 million to the increase.

Additionally, the company sold 11 acres for a gain of approximately $2 million at the North Point West Side mixed-use project, which is included in gain on sales of investment properties in the 2004 income statement.

The office division commenced construction of a 51,000 sq ft building 100 percent released to Inhibitex.

This building is being constructed on land the company owns in the previously mentioned North Point West Side mixed-use project.

The office division also acquired Galleria 75, a 114,000 sq ft office building in Atlanta, GA.

In the first quarter of 2004 the retail division commenced construction of Hannover Square, a 195,000 sq ft retail center in Richmond, VA.

Within the center, Target has purchased its own land and is constructing a 124,000 sq ft superstore.

The company is developing and leasing the remaining 71,000 sq ft, which was 27 percent leased and 38 percent committed as of March 31, 2004.

Construction is estimated to be completed in the first quarter of 2005.

Those are the highlights for the first quarter, now I'll discuss some other details of net income available and FFO describing changes between the first quarter 2004 and the fourth quarter of 2003 which you can follow beginning on page two of the net income and funds from operations supplemental details schedule.

In the office division, the company acquired 100 percent direct ownership of 100 and 200 North Point Center East in December of 2003 and acquired Galleria 75 in February 2004, resulting in additional rental property revenues less operating expenses.

Previously the company owned an indirect 11.5 percent interest in 100 and 200 North Point through our venture with Prudential.

Frost Bank Tower opened in January, 2004 at 58 percent leased and as of March 31, 2004, was 61 percent leased.

Increase in FFO from 555 North Point Center East and the Points at Waterview relate to termination fees of $1.6 million and $430,000 respectively, recognized in 2004.

With the recovery in the economy, we expect that the overall level of termination fees in future periods will moderate significantly from what we have experienced in the last couple of years.

In the retail division, the Avenue West Cobb and the Shops of Lake Tuscaloosa became partially operational in the fourth quarter of 2003 and the full quarter of operations is included in the 2004 results.

Also, FFO at the Avenue of the Peninsula increased primarily due to termination fees of $138,000 received in the first quarter of 2004.

2004 discontinued operations include North Side/Alpharetta I and II which are expected to be sold this year.

Two other office buildings, 333 John Carlyle and 1900 Duke St, are under contract to sell and are expected to sell in the second quarter of 2004.

Their operations are not included in discontinued operations as the company will continue to manage these buildings.

We had questions on what the cap rate is on this transaction.

Staying within the guidelines for non-GAAP disclosures I can say the following: Our net income and funds from operations supplemental details schedule discloses normal property revenues less operating expenses for these two properties for the calendar year 2003 of $6,884,000 combined.

For the deduct termination fees received and recorded in the second quarter of 2003 totaling $611,000 you get a net number of $6,273,000.

Divide this by the 80 million price and you get a (inaudible) estimate of 7.8 percent.

I would point out that the buyer's assuming above market mortgage debt.

Also the price is $320 per sq ft.

The $80 million compared to the total adjusted cost before depreciation of $52 million as disclosed in our 10-K, results in a value creation of $28 million, or 54 percent of our cost, an outstanding result.

Continuing on, net profits from lot sales including our share of joint ventures increased $900,000 from the fourth quarter of 2003 to $3.1 million in the first quarter of 2004 as our share of lots sold increased from 173 to 188 lots.

Also, the overall profit percentage was higher for the 2004 sales due to the mix of sales within the residential developments.

Net profit from tract sales at North Point West Side decreased $3.3 million, the company sold 42 acres of land in the fourth quarter of 2003 and 11 acres in the first quarter of 2004.

Tract sales at joint ventures, however, helped offset the decrease in the North Point West Side land sales by almost $1 million.

Profit margins on the North Point land sales continued to remain in the 65 to 75 percent range that I mentioned last quarter, even after factoring in some additional infrastructure improvements required by the local governing authority.

This profit margin is only applicable to the North Point land sales.

Leasing and other fees decreased in the first quarter of 2004 due to a higher level of land sale commissions recognized on the sale of land in Irvine, TX in the fourth quarter of 2003.

Interest income and other increase in the fourth quarter of 2003 due to an increase in the fair value of the AtheroGenics warrants.

The calculation of this change in value is in part based upon the AtheroGenics stock price.

There is no way to predict future stock or warrant value movements and indeed, if the warrant values were to decline we could report a loss here in future periods.

General and administrative expenses increased from the first quarter of 2003, mainly due to an increase in compensation expense.

Total share of joint-venture FFO increased by approximately $1,282,000 for the first quarter of 2004 compared to the fourth quarter of 2003.

Some of the significant fluctuations by joint venture were as follows: Wildwood Associates decreased by approximately $1,032,000, due primarily to a lease termination fee of $1.5 million received in the fourth quarter of 2003 with no such fees being received in the first quarter of this year.

CP Venture II results increased by $1 million as a result in an impairment charge recognized in the fourth quarter of 2003 on the sale of 100 and 200 North Point Center East to the company, the details of which were discussed in last quarter's conference call.

No such charges occurred in the first quarter of this year. 285 Venture increased by approximately $363,000 in the first quarter of 2004. 285 Venture's contribution in the fourth quarter of 2003 was reduced from prior quarter levels primarily as a result of the creation of reserves for straight line rent receivables.

These reserves were established as a result of the pending restructuring of Marents(ph), the single tenant's lease which was finalized in January of 2004.

The restructured lease reduced the rental rate, the amount of space leased and the term of the lease, the new term being three years.

Reserves for straight line rent receivables created in the fourth quarter related to the floors that Marent(ph) vacated under the terms of its restructured lease.

The straight line rent receivables related to the remaining floors are being amortized against income ratably over the life of the restructured lease.

As I indicated in the last conference call, after the write-off of this receivable against continuing rent the property operating revenues after operating expenses under the restructured lease, assuming no additional leasing and the full recovery on our bankruptcy claim will be just above break even on an annualized basis.

In the first quarter we received approximately one month of rent under the old lease terms, resulting in a slightly higher contribution.

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

The bankruptcy claim resulting from the lease restructuring totaled $16.7 million.

We have recently sold this second quarter transaction for 54.75 cents on the dollar, or approximately $9 million, of which our share's approximately $4.5 million.

The company will most likely recognize some of this receipt as a component of FFO in the second quarter of 2004, with the remainder likely to be taken into FFO later, for example, through amortization of the remaining term of Marents(ph) three-year lease.

The exact accounting treatment is now being determined in conjuction with the company and the joint venture auditors.

Also, as previously indicated we have interests of a number of hotel companies and undeveloped pad sites on the property as well as a trading center portion of the property which they believe can be converted into a hotel ballroom and conference center.

It remains to be seen if the sale of the pad site and training center can be effective.

Our intention is to achieve as much invested capital reduction as possible for recovery on the bankruptcy claim and possible sale on the pad site and trading center.

And on the leasing side, to improve rental revenues by re-leasing and improved rental rates at the three year marent(ph) lease term.

This is in effect a re-leasing and redevelopment project at this point and we are well qualified to execute on this plan to ultimate maximize the value of the property.

The company recognized $924,000 in connection with a final distribution from a German joint venture in the first quarter of 2004.

This is the venture that developed an office building in Dusseldorf, Germany in the 1990s.

The distribution occurred following resolution of some outstanding tax issues.

This is of course a one-time item with no further amounts expected from this venture.

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

The $1.1 million gain on sale of investment properties in the fourth quarter of 2003 includes deferred gain recognized on the 100 and 200 North Point Center East transaction discussed in the fourth quarter conference call.

The $648,000 gain shown in the discontinued operation subcategory in the first quarter arises from our sale in the interest of a small retail property in Macon, Georgia.

Total depreciation and amortization of real estate decreased $1.7 million in the fourth quarter of 2003.

Depreciation of consolidated properties increased primarily due to the properties recently acquired or constructed as mentioned in the opening highlights.

Depreciation and joint ventures decreased from the fourth quarter of 2003 due to the write-off in that period of tenant costs related to early terminations of lease agreements with no corresponding write-offs in the first quarter.

That concludes my discussion of the details of the first quarter's net income available and FFO.

Let me point out a change we made to the inventory of residential lots under development schedule included in our supplemental package.

We have added a column that reflects the total acres of land tracts owed and under option that are or will be available for sale as land tracts at each of their respective residential developments.

We'd not previously broken out and recorded this number.

The sale of these tracts will contribute to tract sales income in future periods.

One final comment before turning it back over to Tom.

Last fall the SEC in effect said that losses on sales of depreciable investment property should be included in FFO as defined by NARATE(ph).

This is accomplished through defining all such losses as impairment losses which are always recharged against FFO.

On the other hand, gains on sales of such properties are not to be included in FFO.

This is an anomalous result that has many people scratching their heads.

We will continue to report NARATE(ph) FFO but, similar to what some other real estate companies are doing, we are considering presenting an additional FFO metric.

FFO that includes (inaudible) economic gains on sales of depreciable properties.

We sometimes refer to this gain, the difference between the sales price and the undepreciated costs as value creation.

This would supplement the NARATE(ph) FFO number, giving an even-handed results which includes all sale activity, not just some of it, and reporting a useful metric unaffected by artificial depreciation, a metric that would reflect what is most important to us, creating value for our shareholders.

The current definition of FFO and related metrics such as stock price multiples fails to ever account for this component of economic performance.

No decision has yet been made on adding this new FFO metric.

Any comments you have would be welcomed.

It is noteworthy that the new metric would differ from net income principally due to depreciation.

Depreciation currently expensed and depreciation previously taken artificially increases sale gains.

I say this because we have seldom had an asset sale price which is less than our undepreciated cost.

For us, and many others, GAAP depreciation has not reflected economic reality.

One has to ask if we might consider addressing net income and depreciation directly.

In that regard, fair value accounting for investment assets as reflected, for example, in international accounting standard in number 40 offers an approach that may have significant merit.

Depreciation is not taken on investment assets but the assets are periodically not(ph) to market with changes running through the income statement.

There is a case to be made that at the end of the day the fair value balance sheet and income statement better serve investors and other statement users, and may even eliminate the need for the FFO metric resulting in the industry having an informative GAAP metric as its primary performance measure.

Such a change would also be consistent with the general movement to fair value accounting.

A number of organizations and professionals are now discussing and debating these matters.

It is a timely debate and one that we all need to pay attention to and participate in.

With that, I'll close my remarks and turn it over to Tom.

Thank you, Tom.

Well, the latest job numbers have convinced me that we finally have a real economic recovery under way.

Indeed, the fundamentals seem solid with the consumer continuing to spend and corporate profits are looking up as well, and if we add to that an accommodative Fed, I think we have the ingredients for a very decent 2004, and hopefully and even better 2005.

I see this as a positive trend for our business and it should certainly add impetus to our development activities.

As noted in prior calls, we have already experienced increased development activity in both our retail and land divisions.

I'll be getting into this a bit more in just a little bit.

There's not much new to report in the state of our office market.

There continues to be significant overhang of available space in all of our markets and there continues to be intense competition for tents(ph).

On the positive side, however, a strong job growth, assuming that it continues, should help generate increased demand for an absorption of existing space.

We've seen some additional leasing traffic and some indications that some markets are actually beginning to improve, however, I still believe the office, the recovery of our office markets will be a long road and we are pleased that our occupancy levels through the downtrend have been relatively high and we look forward to building these levels even higher as the economy recovers.

We continue to be bullish long term in our key office markets like Atlanta, San Francisco, Washington, DC, Dallas and Austin.

While Atlanta had a significant downward revision of the published 2003 job growth numbers, we do believe the metro Atlanta market has very bright prospects for the future.

Over time, Atlanta job growth should exceed national averages by a fair margin.

In addition, Atlanta's still recognized as one of the best places to live in America.

I believe it was ranked number seven on the list just recently.

While we expect the office markets to take some time to recover, there are some bright spots.

We recently acquired a site in downtown Miami on Biscayne Boulevard, which I referred to in our last conference call.

We're considering different potential uses for this site, including mixed use or alternative uses in addition to office and we'll make the decision on the specific use in due course.

The good news is that we have acquired an extremely attractive land holding at a good price at a time when we are exiting other, more mature landholdings, where the value creation work has been done.

It is part of our strategy to maintain good land position, and this is a fine addition to our holdings.

Miami is a market we like and we would hope to do more there over time.

In addition to our recent land purchases in Miami, we have also recently made an $8 million second mortgage loan secured by three area office buildings, two in suburban Miami and one in suburban Fort Lauderdale.

While office fundamentals are still weak, asset valuations remain very strong.

We have indicated to you in the past that we have been considering sales of office assets and I'd like to report on our plans.

As Tom has mentioned, we have a firm contract in place for the sale of our two Alexandria office buildings for $80 million, and we'll have a very substantial gain as Tom pointed out on these assets, and we expect to close shortly.

We are also now committed to sell our northside Alpharetta one and two medical office buildings to a ground leasor under their right of first offer.

The details and timing are being worked out as we speak, but we expect that will close this year as well.

The price once again, is extremely attractive.

We have engaged a broker to market 101 Independence Center in Charlotte, North Carolina.

The marketing effort is well underway at this point, going quite well, and we anticipate the closing sometime this summer or early fall.

We and our partners have also agreed to market the completed office buildings in our Wildwood Office Park.

This is a major step involving a significant amount of property and this effort has recently begun and is expect it will take some time with a hope for closing later this year.

We're also looking at a number of other potential office asset sales candidates and will make decisions on whether to proceed with the sale of some of these assets in the near future.

All together we are pursuing the sale of roughly four-and-a-half million square feet of office property, approximately 1.5 million square feet of wholly owned, and three million square feet of joint venture properties.

And these numbers could increase.

Of course, these numbers can change based on our ongoing analysis and individual sales decisions.

And of course, with the exception of the buildings now under contract, we do not know at this point, exactly which of these will actually close or when they will close.

Our sense is current market valuations for our office products are excellent, perhaps at levels that would be very difficult for us to replicate in the future.

As such, as part of our efforts to actively manage our portfolios, and as part of our long-held value creation strategy for our shareholders, we will take these to market in order to lock in the value we have created.

As we have said before, as a result of these sales, there will likely be some negative near-term reduction in FFO and net income from operations.

All of this will make it very hard for you as well as for us, to accurately predict FFO and earnings levels for 2004 and beyond.

Nevertheless, we feel strongly this is the right time to capture this value in these office properties.

As we have said before, significant asset sales could result in another special dividend of some sort, for all the sales gains or perhaps under certain circumstances, even more than the sales gains.

As you'll all hopefully know by now, our mission is to create value for our shareholders, which is ultimately reflected in total shareholder return.

These asset sales and any accompanying distributions will enhance shareholder value over time.

In the near term, most of our value creation effort through development is likely to occur in the retail and land divisions and this is similar to the beginning of our last business cycle in the early 90's.

Retail looks very good right now.

The economic recovery with the consumer is, with the consumer in reasonably good shape is contributing to this of course.

We have significant activity on the retail development front.

We recently bought land and commenced development of Hanover Square, a power center in Richmond, Virginia in the first quarter.

Also as noted in our supplemental disclosure materials, we have an expansion of the Avenue Peachtree City underway, and we have acquired land adjacent to the Avenue Westcott (ph), which we hope to ultimately rezone and use to expand that center.

As we have previously disclosed, we have rights to acquire additional land adjunct to the Avenue Viera, now under construction in Viera, Florida, that we plan to develop as a power center.

This is now in the pre-leasing stage.

In addition we have a good number of other deals in our shadow pipeline.

One that is extremely attractive is an approximately 350,000 square foot power center in San Jose, California.

We have 32 acres under contract to purchase, which is adjacent to the downtown core of San Jose, a tremendous retail site.

We have strong tented interest, including a signed letter of intent with Target.

We are well on our way to some other key retailer commitments, assuming we can firm up sufficient pre-leasing and take care of a number of reasonably manageable entitlement issues, we should hope to start this project late this year or early in 2005.

Another exciting pre-development deal that we hope to start very soon, in association with Jim Wilson Associates, is the Avenue Carriage Crossing in Colebrook (ph), Tennessee, an affluent suburb of Memphis.

This avenue would contain approximately 800,000 square feet upon full build out and will open in October of 2005.

The project would be anchored by two department stores, a national bookstore, and include over 80 additional retailers and restaurants and an outdoor setting that our Avenue projects have come to be known for.

The land acquisition of 137 acres would also include acreage for a power center that we would hope to begin within the next 18 months or so.

Today the Avenue Carriage Crossing is 55% signed, or very close to signature, another 9% in the midst of leased documentation, and another 9% committed.

That's 73% all together.

We hope to have an announcement on this project very soon.

In summary, our goal is to add more retail projects to our pipeline schedule by the end of the year, and we are well on track to do that.

On the land side, we are very pleased with our subdivision lot sale and our track sales program.

As we discussed before, we expect increasing contributions from this group, and indeed, we are seeing this in the first quarter results.

As many of you know, we are a diversified developer and a primary mission of ours, being the creation of value through development.

We do this in a number of real estate sectors.

Over the years, we have been involved in most sectors and from time to time, we constantly look out for new opportunities, both in our existing sectors and in the new sector.

As recently announced, Forest Robinson, a respected industry veteran, has joined us to run our newly formed industrial division.

Forrest has a very successful track record, having served as President of Development Codina Group since 2001, Executive Vice-President for Duke Week's from '99 to 2001, and prior to that term, as President and Chief Operating Office of Weeks Corporation.

He has extensive experience in industrial development, construction, marketing, property management, financing acquisitions, and dispositions.

We were also extremely pleased to announce an industrial joint venture with Ray Weeks, whose reputation and strong national background are well known.

In my view, Ray is one of the preeminent developers of his generation.

Our new industrial venture will operate under the Cousins/Weeks name and we will undertake industrial property development in selected markets.

We will commence this activity in a very measured way consistent with Cousins conservative nature, and our start-up costs will most likely result in some dilution in FFO in the first year or two.

Nevertheless with Ray and Forrest on board, we fully expect to see some exciting new opportunities from this initiative in the not-too-distant future and we are delighted to have another arrow in our development quiver.

Finally I would like to comment on the recent activity in REIT Stock Prices.

The recent pullback has been dramatic, but not unexpected.

It is ironic that indications of a stronger economy, which will most likely help our core business, including value creations through development, has resulted in such a sell-off of real estate stocks including ours.

We are not alarmed by this.

When asked to predict future market movements, a market sage once commented that the market will fluctuate.

In my view, the most significant result of these recent events is that quality companies such as ours can be bought at a lower price, which should be a plus for many investors.

If this trend should continue, it might also provide a buy-in opportunity for our company as well, and in this regard, you might have noticed a recent announcement of the adoption by our board of a new stock buyback plan.

Our strategy is longer-term and focused on our core business of creating value through development.

As a result, we are not overly concerned about short-term fluctuations in the stock market, and we feel very good about these core businesses, seeing opportunities to create and harvest value, consistent with the basic strategy we have discussed with you before on these calls, and in our annual reports.

If along the way we get opportunities to buy back our stock at a discount price, all the better.

Having said that, I doubt the recent REIT stock pullback signals any real significant change in real estate stock investment fundamentals.

These are great holdings and longer-term diversified investment portfolios, and I believe the investment community in general knows that this is true.

With that, I'll close my remarks and open the floor to questions.

Questions please?

Thank you.

The question-and-answer session will be conducted electronically today.

If you'd like to ask a question simply press the star key followed by the digit one on your touch-tone telephone.

Also if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, if you'd like to ask a question or make a comment, press star-one at this time.

And we'll first hear from Greg Whyte of Morgan Stanley.

Good morning guys.

Tom, you've been fairly explicit over the last few quarters in talking about the asset sales and even the potential for a special dividend.

Can you give us any greater sort of detail on the likely timing of that, and I'm also curious to know when Tom Charlesworth was going through the results, he suggested there may even be a loss on some of the Saprogenic warrants (ph), and I wondered to what extent you might have losses that would offset some of the gains and might influence the size of any special dividends?

Great, this is Tom Charlesworth.

I did not mean to indicate there would be any significant Saprogenic (ph) loss per se.

We have no idea if that would be the case.

I was just noting that the stock price movements have to run through the P&L.

I don't think it would be significant, especially in terms of the magnitude of the asset sales that we're looking at.

It's done nothing but go up so far Greg.

I realize that.

I just wanted whether there was some foreshadowing there of any sort.

No, just can't predict the future and since we keep marking it up, we want to remind everybody that it's also possible that it could down, like any other equity.

It's not a one-way street necessarily.

But we have no reason to believe it's going to go down.

And with regard to the asset sales, you know, our goal is to get these sales done by the fall, not just the ones that we mentioned, but any others that we might consider, and that would require us to make a decision with regard to the proceeds this year, which we fully expect to do and as we have done in the past, we'll, you know, take our recommendation to the board and the board will determine what to do with the proceeds, but I feel that you know, a special dividend is certainly something that we'll seriously consider.

OK, then just on the operating side, maybe for Tom Charlesworth, I noticed, maybe this is a little crude, but if we back out the termination fees in about the first quarter this year and the year-ago quarter and look at the expense margins that they ticked up a little and I'm just curios to know, is that a trend or does it merely reflect some sort of change in the mix of the business line?

I don't think it indicates a trend at this point.

It's just fluctuation and I wouldn't read much more into than that.

OK, and then just one last question, on the Frost Bank Building in Austin, you opened that earlier this year, does, when do you consider that quote, unquote, stabilized?

Well, Greg, we're reporting different I guess you would say, phases and operations as it leases up.

We pro forma at least up to occur through 2006, and we don't expect it to be fully up and running until that point in time.

OK, but in terms of sort of, capitalization of expenses, I mean will you do that on a prorate basis through that time period.

Pretty much so.

OK, that's helpful, thanks guys.

Greg, you know, one other thing on the expense side, the G&A side, as we've mentioned before, we are investing and have been investing fairly significant in our retail business, recently, because we've ramped up the volume of business that we're doing, development business we're doing in retail so significantly.

And as those projects come on line, more and more of that expense is capitalized, so I think as Tom points out, it's going to fluctuate over time, but I think that's part of the reason that you've seen some increase recently.

OK, thanks.

Our next question comes from John Lutzius of Green Street.

Good morning.

First I wanted to say congratulations on teaming up with Ray and Forrest.

We're excited to get their talents back in the public market.

Thank you John.

So are we.

Very talented, very high reputation folks.

Can you comment a bit about the assets of Cousins/Weeks on day one?

Are there any, is there any land in it, any buildings, any options?

What do you start with?

John, this is Dan DuPree.

No, we're starting with people.

We're starting with talent.

As you know, typically we're not a good acquirer of hard assets at retail.

So we're starting with Forrest.

He should join us in mid-May.

There are certain assets that Ray's family has that under the Cousins/Weeks banner, we will be managing and leasing at some point in time, but no hard assets.

Can you give me some sense Dan of how fast this venture might grow, what kind of dollars we might end up with?

John, really not.

Candidly we don't have competition for capital amongst our individual divisions.

We would like, we would like each of them to do as much business as they're comfortable doing and can do at returns that meet our thresholds.

And so I would tell you there's no limitation on what we're willing to commit to, to the industrial division, but it's going to have to settle out.

What we've got to do is when Forrest gets here, we've got to develop a well throughout business plan, and that will involve most likely staking out some land positions and particularly in Atlanta to begin with, and then put ourselves in a position where we can effectively compete for the build-to-suit and other business, as it comes at us.

In the present market John, I think you know, you could expect us to take a land position this year in all likelihood.

I think mostly you'll, you'll see it for doing mostly development activities.

I don't see us as an acquirer, as Dan said, of industrial properties that are retail type, unless we're developing, you know, investing in a park that has future development opportunities involved with it.

We might be willing to do that.

So I think, you know, in and throughout the rest of this year, and probably most of next year, we're going to be acquiring land and investing and then we'll begin the development cycle moves forward and hopefully the industrial markets improve a little bit, we'll be growing that business, and as Dan said, we're willing to put as much capital in that business as you know, that we can underwrite at our return standards.

If I were to guess that Atlanta and Miami would be the key target markets, at least initially, is that?

Yes, sounds like good places to start.

But I think particularly day one, Atlanta, I mean, this is a great industrial market in normal times.

We know it well, certainly Ray and Forrest know it well, and attacking this market will give us the best opportunity to build a base that we can move forward on.

OK, moving off that topic can you clarify your comments about potential sales at Wildwood?

Are we talking about potentially selling the whole park, most of the park?

We're talking about selling all the finished buildings in Wildwood.

So two-and-a-half million square feet , roughly.

Well roughly.

Appropriate.

A little bit more than that.

OK, that's a somewhat surprising to me, can you comment a bit on just how overpriced you feel like the office market is.

Well I'm concerned there might be some buyers on the phone, so I wouldn't want to talk about how overpriced I thought the market was.

I think the market's offering very good pricing and good values for quality buildings and quality assets, which is what we have particularly have here in the park, and we can sell the buildings that are here in the park, that are finished and still have future development opportunities.

And I would guess, though I don't - certainly don't know for sure, but I would guess ((Acquire)) would want Cousins to manage the park and manage the buildings.

But we just think the timing is right, John.

You know what the deal is here.

We've talked about it many times.

That if we think that we can capture the value in our assets and get pricing that we're not likely to see again in the, you know, in the near to medium term, then we feel it's our obligation to capture that value and reinvest - either give it back to our shareholders or reinvest it on their behalf.

That's sort of our fundamental philosophy.

OK.

Can you comment briefly on further, at least on market conditions in Atlanta?

Are leasing economics, when you really look at it on a net affected rent basis, are they (inaudible) now or are they still moving down?

Well, I think that the general consensus in the market - you know, if you talk to the people that are in the market everyday, you know, in the big brokerage operations and stuff - they feel like they've sort of stabilized.

And they're not moving down.

And, you know, even the Senate contributions that you have to make have stabilized.

We're seeing a lot of activity in the market right now by people who want to, to use the financial term, blend and extend their leases, which would indicate to us that they think that they're at the bottom of the market and now's the time the smart guys get in, even ahead of their rollovers.

So, I think it's probably bottomed out and we'll see some improvement through the course of this year and, as absorption takes place, and more improvement next year.

You know, the - Atlanta Regional Commission and, I guess, based on census data, projects that we'll have 2.4 million people move to Atlanta or increase in population in the next 25 years and create another 1,800,000 jobs.

So, I think that they rate that as one of the fastest growing job creation markets in the county.

So, we know that this market - this market's going to provide us with more opportunities and we know that leasing's going to tighten up and pricing's going to get better.

It has been slow.

It's slower than most people expected.

I think it's going to be awhile yet before we see replacement pricing, but we think the market's going to get better this year and next.

Dan, do you have ...

I would agree with that.

The main thing is that we're seeing - well, we're not seeing much movement in rates.

We are seeing a fairly significant increase in traffic.

And that's usually the first step to going the other way.

OK.

Just one last question.

Can you comment on the negative same store NOI in the retail properties?

What were the key contributing factors?

John, this is Tom Charlesworth.

The first quarter to first quarter increase is related to ((AOP)) expenses and, you know, as I said before, having sold a number of retail properties last year, we have a very small sample set.

And it's not that meaningful.

Those expenses have fluctuated.

As we build back the retail portfolio, I think it's going to become more meaningful.

OK.

Thank you.

Thank you, John.

As a reminder, to ask a question or make a comment, press star, one.

And we'll now hear from David Tody (ph) of Lehman Brothers.

Good morning, gentlemen.

Two very short questions for you.

The mezzanine debt position.

Do you see this as a one-time item or do you see this increasing going forward?

Well, I don't want to say it one-time because then, if we do it again, you'll say, well, you said that was one-time.

But it's not a core business of ours.

You know, this was an opportunity that had been brought to us by people that we have done business with in the past, with whom we have a lot of confidence in a market that we're interested in.

It has a nice return associated with it, so we felt very comfortable in doing it.

If we saw other opportunities like that, we would do them.

Right.

But it's not something we're out looking for.

OK.

Does that answer your question?

Yes, that's great.

Thank you.

And one last question - the ((Hunting and Williams)) lease.

Do you have any update on the status of that?

Unchanged.

Great.

Thank you very much.

Thank you.

Next, we'll hear from Chris Hayley (ph) of Wachovia.

Good morning.

Hi, ((Chris)).

Congratulations on setting up the operation with Ray and Forrest.

Thank you.

Look forward to seeing them.

Dan, you mentioned that this, I guess, in the press, you said that this might be your fourth leg on the chair.

Is there a fifth leg or would you care - would you care to talk about the four legs in broad terms?

Tell him if there's going to be a fifth and sixth leg, he's going to have to change it to a couch.

Right.

Right.

We, historically, ((Chris)), the company has been a diversified company.

Tom Cousins started out building homes and then developing subdivisions and then he had excess land and moved into apartments and retail and then into malls.

It's sort of the history of the company.

But I think what's instructive in that is every time we have diversified, that I know of, it hasn't been internally reallocating human resources.

It's been attracting talent that has expertise in the areas where we diversify.

And it goes back to the question that was asked earlier.

Did we buy hard assets?

We are - we are hugely attracted to talented people that can - that can create value.

So, as we have done here with Forrest running the division and setting up a - you know, going one step further than that and creating a joint venture with Ray, that basically give us a terrific one-two punch in people.

If we have other product types that we think are suitable for accomplishing our investment targets and we can marry up those product types with people with the expertise to deliver, then we're going to continue to do it.

That having been said, we have had in our mind, I think, for about 30 years, the notion of going into the industrial business.

The stars just, I think, properly aligned themselves over the last six months with Forrest and Ray.

And so there's nothing else on the immediate horizon that I can - I think we can foresee.

When you look at the capital debt, Cousins Corp. will be allocating - Cousins will be allocating to this venture, how to you look at the returns, the marginal returns versus what Cousins, the three legs do right now?

Yes.

I - well, that's a good question.

By and large, depending on where we are in a particular cycle, the spreads between what we can invest capital at and what we can make on the sale of those assets, ultimately - the ultimate distribution of those assets - it widens and it narrows.

Right now, clearly, there's a - there's a very small gap in office.

There's a much wider gap in retail.

That has - that changes from time to time.

I would tell you that where we sit right now, industrial is probably a little further advanced in its recovery, although not much in the office market.

Therefore, the spread between going in yields and exit yields is probably slightly better than office today.

And not as good as retail.

I think we expect those three different components, leaving the land division out for a second because it operates differently.

You know, I think they're going to shift with the passage of time.

And the thing that we love about being diversified is that these products respond differently at different points in the market, which allow us the opportunity to make our investments in those areas that the market favors best at a particular time.

You know, where developers have always gotten in trouble is trying to force development when the market wasn't there.

By being diversified, we have - we have more flexibility and we have an opportunity to be a little bit more consistent in our development activity.

The - are your intentions with this venture to be a holder or to be more of a turnover entity?

Plain strategy is our other product type, ((Chris)).

You know, we'll build to hold, but when we see great sales opportunities to - and where we think we can capture the value that - and we won't see that value again in the near to mid-term, we'll sell them.

What does - what does the Weeks Group currently have under development outside of industrial right now that you will not be retaining or not taking ahold of, that you're aware of?

We'll have to talk to Ray about the Weeks Group, I think.

Right.

OK.

In terms of industrial development, we're - our partnership - all the industrials that we do and that he does will be added to our joint venture.

Yes.

OK.

So what does - knowing the reputation of - as a public entity and the history of his organization in the private market and his likely access to capital today, what does he get out of this venture that he doesn't get out of the private market right now?

Great company, you know, he's lonely and - no, it's - no, the cultures of our organizations are so similar.

And this isn't the first time that, you know, we've have conversations with Ray going back, you know, when it was Weeks.

And I think, I won't speak for Ray.

You could talk to him directly.

I'm sure he'd be delighted to talk to you.

But I think that, you know, Ray has a very successful - he and Forrest had a very successful strategy in industrial development.

He's just finished his non-compete.

He does not want to create another big company, you know, with all the headaches that go along with that.

We already have a big company with all the headaches that go along with that, which he can partner with.

And, you know, that can provide all the services that are required, the people and the underwriting capability and capital and expertise.

And he has his set of relationships and we have ours.

Together, they're a broader set of relationships than we are individually.

So I just think it's a nice fit for Ray, at this point, in his career.

And it's certainly a great fit for us.

And Forrest is a very welcomed member of the team.

Great to have Forrest back in Atlanta from Miami.

And putting Forrest and Ray back together, I think, makes a lot of sense.

And combining their talents with Cousins makes a lot of sense.

That's how we got to where we are today.

Last question.

Any update on the Miami - downtown Miami, the ((Brickell)) Avenue development?

Well, we were cruising right along on ((Brickell)) Avenue as a purely office development until other developers in the area kept - started coming and talking to us about - maybe we ought to make it mixed use because the site there has become so hot since we originally got control of it.

There's so much development activity going on around the site, which is significantly changing the nature of that neighborhood.

It was, as you know, or may know this, traditionally, purely a, you know, a office neighborhood.

And now there's a lot of residential being added.

There's more retail being added.

So that's caused our guys to sort of stop and say wait a minute.

You know, maybe we're being too narrowly focused.

Maybe we ought to look at a broader set of opportunities here.

And we're in the process of doing that right now.

Just to clarify one thing.

That site is actually on ((Biscayne)) Boulevard ...

I'm sorry.

OK.

And that instructive because I'm one of about nine people on the planet that is a native of Miami.

And everybody talks about it being Main and Main. ((Biscayne)) Boulevard and ((Flaggler)) is literally Main and First and an absolutely unequalled site in south Florida.

But it's ((Biscayne)) Boulevard, which is distinct and different from ((Brickell)) Avenue.

OK.

Thank you.

It's right next to your building there.

Yes.

Yes.

Yes.

Our next question comes from Ralph Block (ph) of Vey Isle Financial (ph).

Good morning.

Could you give us a little bit more of you thought on this concept of fair value or current value accounting and what the advantages might be?

Well, normally, I would expound on that with deep accounting background, but I think I'll give it to Tom Charlesworth to ...

Yes.

The - I guess the impetus to talk about it is that current net income doesn't really work and FFO now with what's going on with impairments and so forth doesn't really work either.

And so, the question is what might be done about it?

What works best?

For investors.

For investors and other statement users.

And there is no perfect system.

Every system has its issues, but the advantages of fair value accounting are that you basically do away with depreciation for the real estate, which is an investment asset.

And depreciation is fundamentally not really made for investment assets.

And that's what the international standards recognize.

The International Standard 40 is for investment property.

There's no depreciation.

International Standard 16 is for depreciable property.

If you have factory equipment and it's actually declining in value, you depreciate it.

And that's IAS 16.

But the distinction between investment property and depreciable property is a helpful distinction.

And, you know, there's something to be said for the periodic valuation, which is being done in the international arena and also in some of the institutional arenas here in this country.

And, you know, the fair value balance sheet and recognition of, for example, for us, value creation, when we create that value, I think, is meaningful to you as an investor.

I think it's meaningful to the company and its board and employees.

And it's reflecting what we're doing.

So there's some advantages to it.

The disadvantages are that valuation is not necessarily easy, although it's being done, as I say, elsewhere. ((Rouse)) Company did it for, I think, almost 20 years and made it work.

So it's possible to do it.

It's one alternative that has some attractiveness to it and I think we all need to try to figure out is can we do better than this net income?

That makes sense.

Do you have any idea as to how the properties would be valued under that kind of a scenario?

I think the - part of the challenge would be for the trade organizations - ((Nayreed)) and so forth - to dig into it and look at how it's done in different accounting jurisdictions and accounting situations like institutional funds.

And if you go back, you can actually pull - I think you can still pull some of ((Rouse)) reports.

They stopped doing the fair value balance sheet, I think, in the late 90s, but you can find some of the SEC filings.

And basically, they did go through a valuation process and it was examined by an outside appraiser and they issued a report and they said, publicly, they thought they were within 10% of the right answer.

And you know, in my mind, being within 10% is better than being way off with net income and depreciation.

OK.

Great.

And one other question.

What's your assessment for the downtown San Francisco market for the next couple of quarters?

This is Tom, again.

I think what we're hearing from our leasing people is there is some improvement there.

It's a tough market, but, you know, we seem to be seeing slight increases in rent maybe.

So, you know, it's going to be awhile for recovery, but, you know, that's a - that's a positive.

So, in other words, we're essentially at a bottom there?

Well, hopefully, moving off the bottom.

OK.

Thanks.

And, Mr. Bell, there are no further questions.

At this time, I'll turn the call back over to you for any additional or closing remarks.

Thank you, everybody, for joining us for our first quarter report.

If you have any further questions or declarifications, you know that Mark Russell and his team are always available.

Don't hesitate to give us a call and we'll talk to you next quarter.

This concludes today's teleconference.

Thank you all for your participation.

You may now disconnect.