Cousins Properties Inc (CUZ) 2004 Q2 法說會逐字稿

Good day and welcome to the Cousins Properties, Inc., conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Good morning, everyone.

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

With me are Dan DuPree, our Vice Chairman, Tom Charlesworth, our Executive Vice President and Chief Financial Officer, and Jim Fleming, Senior Vice President and General Counsel.

As you know, we've previously announced that Jim Fleming will take over the CFO function later this month, as Tom Charlesworth moves into a part-time status.

I'd like to welcome you to our second-quarter conference call.

At this time, I'd ask Tom to review our second-quarter 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 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 December 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 S.E.C..

For these items and comparable GAAP measures and related reconciliations may be found through the quarterly disclosures and supplemental S.E.C. 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 second quarter including some important subsequent events that have occurred since the end of the quarter.

Net income available per share was 91 cents in the second quarter of 2004, as compared to $2.92 in the second quarter of 2003.

FFO per share was 50 cents in the second quarter of 2004, as compared to 55 cents in the second quarter of 2003.

The decrease in FFO is primarily due to the loss of net revenues from sole properties partially offset by additional net revenues from recently developed and acquired properties.

Net income available was also affected by this and was further decreased because we had less gain on sale of depreciable investment properties in the second quarter of 2004 as compared to the second quarter of 2003.

In the second quarter of 2003, we sold two AT&T office building in Cerritos Corporate Center, as well as Mira Mesa Market Center.

The sale of these properties generated GAAP gains of $44 million in the second quarter of last year.

In conjunction with the sale of Mira Mesa we also recognized approximately $90 million of deferred gain in the same quarter.

This was related to the formation of the CP venture Mixing Bowl which had held this asset.

In May, 2004 could the company sold the wholly owned 333 John Carlisle, and 1900 Duke Street office buildings for a combined sales price of $80 million.

Generating a GAAP gain of $34.5 million.

The value creation on this transaction, that is the sales price less the GAAP cost before depreciation and after closing costs and related allocations was $26.1 million, or approximately 48% of our cost.

The approximate cap rate was 7.87%.

This is based upon the last four full quarters of operating property revenues, less operating property expenses from our published quarterly information package, removing termination fees and dividing by the sales price.

In June we entered into a contract to sell the wholly owned 101 Independence Center office building in Charlotte, North Carolina.

On July 29, we closed the sale for a price of $100 million.

The value creation on this project was $14.4 million, or 17% of our cost.

This is derived by deducting $21.4 million of accumulated depreciation and adjustments in the GAAP of $35.8 million.

The approximate cap rate calculated in the same manner as I described a moment ago for the two Alexandria buildings was 9.2%.

We also entered into a contract in July for the sale of Pinnacle and 2 Live Oak Center, two office buildings located in Atlanta, Georgia, that are owned by a joint venture in which the company has a 50% interest.

This sale closed late yesterday.

The sales price for both properties was $200 million.

The company share of value creation on its $100 million of sales price was approximately $26 million, or approximately 35% of our share of costs, $73 million.

The approximate allocation of sales price between the sale two buildings is $145 million for $343 per square foot for the 424,000-square-foot Pinnacle and $55 million on $197 per square foot for the 279,000-square-foot 2 Live Oak Center.

The Pinnacle's estimated $343 per square foot price is a record for the Atlanta market and reflects the exceptional quality of the property.

The approximate cap rate calculated in the same manner as for the other properties mentioned earlier was for the Pinnacle, 6.8%, and for 2 Live Oak Center, 7.1%.

The total square footage for the five buildings sold to date, the Pinnacle, 2 Live Oak Center, 101 Independent Center, 333 John Carlisle, and 1900 Duke Street is approximately 1.5 million square feet, with our pro-rated share being approximately 1.1 million square feet.

Our share of the gross sales prices was $280 million, our share of the value creation was $66.3 million, and our current estimate of the income tax gains on sale for all five is approximately $127 million.

The approximate overall estimated cap rate on all five buildings calculated in the manner I described a moment ago is approximately 7.98%.

All of these numbers are estimates at this time, and may change somewhat as we finalize the accounting in the third quarter.

I would also note by the way that we will continue to manage these properties.

Tom will talk more about our continuing asset sales activities in a few minutes.

In the second quarter of 2004, the retail division commenced construction of the Avenue Carriage Crossing, a 797 -- 797,000 square foot open-air retail center in Collierville, Tennessee, a suburb of Memphis.

The project will open in two phases.

The first phase consisting of 544,000 square feet, owned by the company.

And a 200,000 square-foot Dillard's, all opening in the fall of 2005.

Second phase consisting of 53,000 square feet will open in the fall of 2006. 50% of the square footage of phases one and two is either leased or sold.

And 70% of the total square footage at both phases is either committed to by tenants or sold.

Finally in July, we renewed and recast our revolving credit facility, increasing the size by $50 million from $275 million to $325 million.

The previous credit facility was set to expire in August of this year.

The new facility has a term through August of 2007.

The facility is expandable to $400 million under certain conditions.

We had very strong interest from our existing banks, from other banks, and we were able to admit three new banks to the facility.

We are also quite pleased with the improved terms of the agreement.

This is an important piece of our capital structure and coupled with our other capital sources, including mortgages, asset sales, and financing ventures, allows us to fund our expanding development activity and other cash needs as we move forward.

Those are the highlights for the quarter and to date.

Now I'll discuss other details of FFO and net income available describing changes between the first and second quarters of 2004, which you can follow beginning on page two of the net-income funds from operation supplemental detailed schedule.

And the office division, 555 Northpoint and the points at Waterview both decreased primarily because of termination fees of $1.6 million and $430,000 respectively, recognized in first quarter of 2004, with no corresponding fees received in the second quarter.

Sales of Carlisle and Duke mentioned earlier resulted in decreases in the contributions from these properties of $396,000 and $352,000 respectively.

Compared to the first quarter of 2004. 1Georgia Center decreased $404,000 as a result of the expiration of leases with South Trust and Burn Foreman in the second quarter of 2004.

These expirations also account for the decrease in the properties of leased percentage detailed on the portfolio listing in our quarterly supplemental information package.

Further weakness is expected at this building as Norfolk Southern's lease term has expired, and although it is now holding over at 150% of normal rent, it is expected to leave in the fourth quarter.

On the positive side, 55 Second Street increased $298,000 as a result of reduction in real estate taxes, partially offset by a portion of real estate tax savings being passed along to tenants.

Cross Bank Tower became partially operational in the first quarter, and a full quarter of operations is included in the second quarter results.

As of June 30, 2004, the property was 61% leased.

You will note that on our pipeline schedule we have moved the fully operational date from the first quarter of 2005 to the fourth quarter of 2006.

This reflects our recent decision to pull back on our leasing efforts and generally defer leasing until we have an approved market which does appear to be on the way.

Tom will cover this further in a few minutes.

The property is now showing positive net operating income.

That is rental property revenues, plus operating expenses.

And will continue to do so after the GAAP capitalization period ends in the fourth quarter of this year.

On the retail side, the Avenue of Peninsula increased $192,000, primarily due to the recovery of the legal expenses from our insurance carrier.

These costs were originally incurred and expensed in the second quarter of 2003 in conjunction with a lawsuit that was recently settled.

The expensing last year and the recovery in the same quarter this year resulted in a large drop in the expense component of the same property growth numbers for retail which are shown in the quarterly package.

The Avenue of Peachtree City decreased in the second quarter versus the first quarter as a result of a positive first-quarter adjustment related to tenant improvements that were originally classified as an expense item in the fourth quarter of 2003.

Discontinued operations include Northside Alpharetta one and two, which are under contract and expected to be sold this year, although the 101 Independence Building in Charlotte was also under contract at quarter end.

It is not included in discontinued operations as the company will continue to manage the building.

Net profit from track sales decreased $1.6 million.

In the second quarter we sold eight acres of land at Riddenhour and commercial development in suburban Atlanta compared 10 acres of land at Northpoint Westside in the first quarter of 2004.

None of the remaining Northpoint land was sold in the second quarter.

Also the profit percentage on the Riddenhour sale was less than the profit percentage recognized on the sales of land at Northpoint Westside that occurred in the first quarter.

As we have indicated to you in the past we have substantial land for sale at Northpoint Westside, but sales will not necessarily be even over time.

Quarter two had no Northpoint Westside sales, but we in fact have signed contracts for sales totaling about $7.5 million that are projected to close in the third and fourth quarters of 2004, although the exact timing is difficult to predict, and not all sales in fact close.

Profit margins on the Northpoint land sales are now expected to be in the 63% to 69% range, slightly down from the 65% to 75% ranging that I mentioned last quarter.

This being the result of additional infrastructure improvements required by the local governing authority.

I would also add that we are working on contracts for land tracks at Wildwood with the possibility that some of these could close in the fourth quarter.

Continuing with the quarter-over-quarter variances in the schedule, net profit from lot sales including our share of joint ventures decreased $545,000 from the first quarter of 2004, to $2.6million in the second quarter of 2004.

As the overall profit percentage was lower for the second-quarter sales due to the mix of sales within the residential developments.

Our share of lots sold, however, remained relatively constant.

Development income increased $533,000, approximately $240,000 of this related to increases in fee development activity.

Remainder is due to a one-time adjustment for fees that were previously eliminated.

This adjustment was partially offset by a related adjustment that increased G&A costs.

Interest income and others decreased primarily as a result of the change in fair value of the AtheroGenincs warrants, which is in part based upon the AtheroGenincs stock price.

There is no way to predict future stock or warrant value movements, and as I noted in the previous quarter, the warrant values can in fact decline as they did in fact do in this quarter resulting in the reduction in this line item.

G&A at general and administrative expenses increased primarily as a result of a decrease in capitalization of office development staff, additional personnel related to increases retail development activities, and the offset to development fees mentioned earlier.

Interest expense decreased primarily as a result of the sale of Carlisle and Duke, and the corresponding debt reduction from the assumption of the debt by the buyer.

Income taxes are a function of taxable income levels at the company's various taxable entities.

So tax expense varies with fluctuation in taxable income of these entities.

In the second quarter, however, we recognized a one-time reduction in our tax provision of approximately $370,000, as a result of reversing taxes accrued in prior periods which have now been determined to not be payable.

The company's share of joint venture FFO increased $1.5 million primarily due to a termination fee received from our share of the sale of a bankruptcy claim filed against Mirant, a tenant at the 1155 Perimeter Center West office building.

The company's share of proceeds from the bankruptcy claim sale in the second quarter totaled $4.6 million.

Because the claim consisted of two components, recovery of lost rents from vacated space and recovery of lost rents from the restructured lease which reduced Mirant's rental rates and lease term on the remaining space, the county rules required us to recognize the portion related to the vacated space of $2.2 million in income immediately.

While the remaining $2.4 million, the portion related to the restructured lease, will be recognized in income evenly over the three-year term of the restructured lease.

As a result, the total amount recognized in the second quarter related to the bankruptcy claimed sale was $2.5 million, consisting of the $2.2 million termination fee and $300,000 of amortization for the portion related to the restructured lease.

The increase in joint venture FFO for the second quarter was partially offset by a one-time benefit from the final distribution of a German joint venture that was recognized in the previous quarter with no corresponding amounts being received and recognized in the second quarter.

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

Gain on sale of depreciated investment properties includes the gain on sale of Carlisle and Duke in the second quarter of 2004, and deferred gains resulting from the reversal for income tax provision originally recorded on an asset sale, but which has now been determined to not be payable.

In the first quarter, we sold our interest in small retail property in Macon, Georgia.

Total depreciation and amortization of real estate decreased $2.1 million from the first quarter of 2004, primarily due to writing off tenant improvements in the first quarter.

Tenants who terminated their leases early, and from stopping depreciation on properties that were sold or held for sale.

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

One other point to mention with respect to the quarterly package.

We have added a schedule entitled Summary of Gains on Sales of Investment Properties, which summarizes estimated book and tax gains and value creation for the assets sold this year.

We will update the schedule quarterly to reflect new asset sales and any refined estimates.

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

Thanks, Tom.

While the economic recovery continues, we are experiencing some softness as we have seen in recent statistical data such as the lower GDP in consumer spending growth, slower job growth, and some mediocre production numbers.

Though they seemed to have improved a little bit in July.

In addition, housing starts fell somewhat in June, although the annual rate of 1.8 million starts is still quite respectable.

As a result of this softness, inflation expectations remain moderate and interest rates have fallen a bit, and this has been positive for our asset sales program since lower rates tend to help support higher sales prices.

At least that's been our experience to date.

Tom has mentioned the asset sales we have closed today.

We also have a number of assets that are being actively marketed or at that point in the sales process where the potential buyer and the sales price are identified, and we are negotiating final sales agreement.

Properties in these categories included the Wildwood Office Park.

We and our joint venture partner are marketing our completed office buildings and ground releases in the Wildwood office park with the exception of 3100 Wendy Hill Road.

Attractive bid have been received and we have we are proceeding to receive best and final offers.

The total square footage is being marketed at approximately 2.262 million feet with our share based upon our ownership percentage being approximately 1.184,000 square feet.

Our two San Francisco office buildings comprising 776,000 square feet are also on the market.

We have received bids in the first round and are close to obtaining the best and final offer for our San Francisco building.

Our buildings in Tyson's Corner -- our building in Tyson's Corner totaling 224,000 square feet which is a 50/50 partnership with another REIT is also being marketed.

This process has just started with a broker having been selected in mid July.

Our wholly owned Northside Alpharetta one and two medical office buildings totaling 301,000 square feet are in the process of being sold to the ground leasor pursuant to of their right of first offer.

We expect lease transactions to close in the third quarter, early fourth quarter this year.

Our 50% research owned research park buildings in Austin totaling 358,000 square feet have proceeded to the point of having identified the buyer and agreed upon the price, with the sales contract now being negotiated.

And we expect that contract to be signed any day now.

I feel it's premature to give any information on sales prices for assets that have not actually closed.

And as we've said before, it's quite possible that some assets will not be sold for various reasons including not reaching our target prices.

However, I would like to note that the total square footage sold under contract for sale or being marketed is approximately 5,450,000 square feet W.our share based on our ownership percentage of these assets being approximately 3,730,000 square feet.

Now clearly this is a substantial portion of our office assets and if sold at our estimated prices, we will have delivered great value creation to our shareholders through the development of these assets.

Since I know you will ask, let me preempt by saying a large special dividend may result from these asset sales.

We have the ability to find fine tune the distribution, but generally the distribution is geared to the overall level of taxable income, less our regular dividend.

Of course, taxable income includes the tax gain on asset sales.

In deciding on the amount of any distribution, the board will consider the level of tax gains, the overall level of taxable income in 2004 and 2005, the level of regular dividends, and our cash needs taking into account other sources of cash and financing.

My guess at this point is we may distribute a substantial portion of the tax gains from the sales, but this has not yet been decided.

Also as stated in prior calls, I see no reason at this time why our current dividend would not be maintained given the strength of our development pipeline from the likely increases to FFO.

These developments will contribute to future years.

But ultimately, this decision will also be made at the by the board at a later date.

Softness in the economy I referred to earlier continues to be reflected in our office markets.

There are some encouraging net absorption statistics in some of our markets such as Atlanta, but to date, we have not seen any positive momentum in leasing activity or pricing.

Indeed, we have lost some occupancy in our office portfolio because of our reluctance to lease at today's low rates.

As Tom mentioned, the ongoing softness in the Austin market has resulted in our decision to hold back on further leasing for the time being.

We will probably hold at our around our 61% lease level or slightly above that for a while longer.

We still expect that upon completion of leasing this asset will have a respectable return.

Similarly in Atlanta, we are not rushing to conclude deals at the current low prices.

Although the current office market environment is soft, we do see the overall economy improving, and we believe the office markets will soon begin to recover, as well.

As the Fed chairman recently said, he doesn't recall a recovery in which there weren't several soft patches.

We share this view and accordingly, we look forward to improving lease terms over time.

Some of the encouraging signs include the Fed is still very accommodated, corporate sectors' earnings and other measures of health look good, despite recent consumer spending weakness, the consumer is still experiencing good income growth, and spending growth should follow.

In from this.

And the state and local government finances seem to have significantly improved over the last self months.

Overall, the expansion seems to be self-sustaining and broad based.

And all of this will help improve the office market fundamentals, and we expect to see this begin before too long.

In particular, we expect to see healthy job growth and office vacancy absorptions at some of our major markets over the next several years.

Hence our decision in Austin to defer leasing at this time and our measured pace of office leasing in general.

The stable and improving economy and underlying consumer strengths were also very good for our retail business.

In our existing portfolio, sales are generally quite good.

We were receiving significant overage rents from tenants at all of our avenue projects.

And many of our leases, market rents exceed in-place rents, creating the opportunity to increase NOI with renewals and second-generation deals.

Also, business conditions have resulted in a lower than anticipated rate of tenant failures in our retail centers, and we have been able to quickly replace the few tenants that have failed.

As we have mentioned before, our retail team led by Joel Murphy, has a lot of excitement sighting development works in the business.

At this time we have several retail development opportunities in our development pipeline that appear very promising.

But let me just review a few of these.

The avenue Vierra in Brevard County, Florida, on I-95 is on schedule and will open in October.

We have either signed leases or sold pad sites for 66% of the square footage at the center and 79% of the center is now committed.

The Avenue Carriage Crossing in Memphis is also proceeding very well and will open in October of 2005.

Including Dillard's, 70% of the space in the center is now committed.

The Avenue East comp and Avenue Peach Tree City are both being expanded, and we expect to begin an expansion in the avenue west com in the next months.

Our San Jose power center project in San Jose, California, is a predevelopment project that is also proceeding very well.

Target is -- Tarry has approved its store in four of the five remaining anchor spots.

Our economy approved and then leased negotiations.

The project is continued to move through the entitlement process with the local government authorities.

We have several other retail projects, both avenues and market centers, in preleasing.

Which as of now look to be very good candidates for future development.

The improving economy and low interest rate environment also helps our residential lot development business and our land track sales.

Although as we have said in the past, we do expect some slowing for the single-family lot business if interest rates rise significantly.

To date, we have not seen a slowdown in our residential lot sales.

Year to date, track sales have also been quite respectable.

Although track sales in the second quarter were at a lower level, we do expect significant track sale closing at Northpoint and Wildwood in the second half of the year, as Tom previously mentioned.

We also expect the economic rebound will help our industrial condition.

Forrest Robertson joined us in May in developing our overall business plan and working on prospective deals.

As we said we expect it will take some time to crank up this group and begin to see substantial results.

However, I'm very encouraged by the early progress Forrest is making and by the seasoned judgment and input we are getting from our partner Ray Weeks in this endeavor.

I would also like to bring you up to date on our progress in Miami, as we previously reported we closed on a tract of land in Miami's central business district.

We've indicated in prior calls we were exploring the highest and best use of the land and the timing of any development.

Also previously mentioned that this is a great piece of land and we have no problem holding it especially as we exit other mature tracts such as Northpoint and Wildwood.

With that being said we have recently come to the conclusion that the best use of the site at this time would be for a highrise, residential condominium development.

Since we do not develop this type of product, we have entered interest an agreement with the related group of Florida, the premiere condominium developer in south Florida pursue this opportunity.

Under terms of our agreement related to predevelopment efforts, we'll soon commence the presale of condominium units within the project.

If related is successful in preselling at least 70% of the units we will proceed with the development of the project.

With presales at this level, we would have less than $10 million of equity in the project.

As an investor in the project, we would have no other exposure beyond this initial equity.

If at least 70% presales are not achieved, we have the right to and we would expect to unwind the deal, and we will continue to hold land for future development.

Of course, the highrise residential for-sale business is not a primary business of ours, but the related group headed by George Perez is an outstanding developer.

George is a terrific partner.

And we very much look forward to watching their progress.

I have a couple of comments on the financial side of our business before I close.

I've outlined substantial potential assets sales.

As we have said before, when we sell these assets, we will lose the NOIs from the properties as well as any mortgage interest.

The net proceeds will initially be distributed used to pay down our line of credit or held in cash.

Under any scenario near-term FFO after the sale will be lower than FFO before the sale.

This is the delusion from asset sales that we consistently refer to.

We believe we will build back FFO over time through our development programs and of course to the extent capital is distributed to shareholders, FFO earned on the remaining capital should in fact be lower.

My point is that delusion of FFO is clearly coming, and your FFO estimate for 2004 and 2005 need to take this into account.

Since we disclosed property NOI's it is easier to calculate dissolution for us than for any other company.

I encourage you to look at this.

While I'm confident that our plant asset sales and today's high prices and the return of unneeded capital to our shareholders will ultimately improve our total returns, there will be changes in our metrics such as FFO that will result from these sales.

And these changes should be recognized as you consider the near-term performance of our company.

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

Do you have any questions?

Thank you, today's question-and-answer session will be conducted electronically.

If you would like to signal to ask a question at this time, please press the star key followed by the digit one on your touchtone telephone.

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

Once again, that is star-one to signal for a question.

We'll pause for just a moment to give everyone a chance to signal.

We'll take a first question from David Shulman from Lehman Brother.

Please go ahead.

Good morning, everybody.

First question for Tom Charlesworth.

Yes.

Tom, you have who to help with us our arithmetic here.

I heard you say you had -- on the sales thus far this year reported.

This is what we have, and I think you had a higher number.

For GAAP gain, for the John Carlisle, the 1900 Duke, we have $34.5 million, consistent with your supplemental.

And then we have GAAP gain on the Independence Center of $35.8 million.

Yeah.

And then we have the GAAP gain on the Live Oak Pinnacle of $46.1 million.

Is that right?

Hold on just a minute on that one here.

GAAP gain, let's see.

I think -- David, I believe that's correct.

You add that up, you get $116.4 -- You cited $127 million number I think on --

No.

No.

Okay, let me clarify one thing.

You may be trying to get to the $127 million.

The problem, that is not GAAP.

That is tax, and tax has very different depreciation --

The tax is 127, fine.

I wanted to get --

I gave you the separate GAAP gains.

What I was trying to do was to give you an overall single number as an estimate of current tax gains --

Okay.

On these five properties.

Because that is related to distribution obligations.

Exactly.

Okay.

So the overalls, the GAAP is 116 and the tax -- estimated tax gain, we know it's an estimate is 127 million?

You know, tax typically has higher depreciation, so that makes sense --

Yes, I understand.

That's what I thought it was.

I just wanted to be clear -- but I just wanted to be clear because we have our own mixing bowl between GAAP and tax.

It gets confusing.

I would say these are estimates, too.

We think they're pretty close.

As we finish the accounting in the third quarter we'll update.

Okay.

If you run that through, that's something like $2.50 a share in round numbers?

In tax gains.

In tax gain, right, in round numbers.

Okay.

Now my question is, okay, that clarifies that.

Now my next question is, is for Tom.

Tom Bell.

With your little [inaudible] about asset sales, are you telling us to assume that basically what's on your plate for sale this year will probably be closed by the end of the year and adjust numbers for '05 accordingly to reflect all those asset sales, or should we wait for you to announce them?

David, I think that, you know, there's never a guarantee that a sale will close, but it appears to us with the level of investment or interest and the fact that in most cases we have picked the buyer and agreed upon a price that we are negotiating contracts, that those contracts will be subject to some due diligence period before closing.

We just want to remind our investors that as we sell these assets, NOI will decline and future FFO will therefore decline and should be adjusted.

As they look forward.

Okay.

We have that, you know, what your current sales are.

We do have that on a spreadsheet right now.

It's just sort of a question of the timing on the remaining assets, which are obviously -- quite substantial.

Any assets that we have presently marketed for sale will be most of which will be closed by the third quarter, it's possible that some will fall into the 40s quarter.

Most it will be closed by the third quarter.

And some will probably be closed in the fourth quarter.

Okay.

But they would all be closed -- if we sell them, they'll all be closed before year end.

Okay.

Clearly the '05 number should be affected.

The bulk of the -- the bulk of the proposed sales should clearly affect '05 numbers, forgetting about the inner-quarter timing of when they occur in -- when they occur in Q3 or Q4 and when in the quarter they occur.

Right.

Okay.

So that -- what you're telling us is -- is in order to get your FFO back to where it's been, is -- is the shadow pipeline that we discussed [inaudible] and the releasing of the several projects that we discussed at the meeting, a lot of those will have to become live over the next six months or so to get delivery say in '06 and the year 2007?

That's correct.

Okay.

Thank you very much.

You're welcome.

We'll next go to David Tody from Lehman Brothers.

Please go ahead.

Just sort of a big picture idea.

Could you elaborate a little bit on your strategy for developing the Avenue Brand.

I'm going to -- yes, we will.

We will.

I'm going to ask Dan to comment on that, and then I'll follow up.

Dan DuPree.

Yeah.

The -- the Avenue Brand is -- is kind of one of the legs on our stool, development stool in the retail group.

A very important one.

And one that we've been focused on to a large extent over the last two or three years.

And, you know, by virtue of the pipeline that we discussed in the comments earlier, we have major projects under construction in Florida, Avenue Vierra, Memphis, Tennessee, with Carriage Crossing, the expansion of -- of two of the -- the previously developed projects in Atlanta and soon likely a third.

You know, it's a product type that's -- it's really interesting because it allows us to continue to grow earnings over time.

There seems to be more upside in those projects, and a good bit of our retail groups dedicated to it.

Having said that, we have more traditional big box retail projects that well -- that are working their way through the shadow pipeline, and -- and actually in Richmond, we started one earlier this year.

And -- and that will continue to be a focus for us, as well, in retail.

So right now, retail sales in our projects are -- are strong and increasing.

The percentage rent is a factor in our Avenue projects.

Our shadow pipeline is robust and growing.

And we're encouraged by retail in general.

Is -- is the avenue portfolio something that you see as a potential spin, or a long-term hold, or is it sort of too early to tell?

Well, you know our view is always that if we have developed an asset, we fully developed an asset and we think that we have maximized the value of the asset as we do in the office assets that we have for sale today, then over time we'll turn those assets and reinvest that capital in future development.

One of the unique characteristics, as Dan mentioned, about the Avenue is that we've experienced thus far is that the way that the retail market is responding to the Avenue, has been allowing us to not only increase our overage rents, but also to increase our level of NOI as tenants are replaced.

So as long as that continues, then we're creating additional value.

Um, just -- just one last followup question.

Have you had any sense of any impact due to increasing construction costs?

We have not seen it yet.

You know, the Memphis project that we've just bid out, we saw a little increase there in steel and cement.

But it was less than the reserves that we had built into the pro forma, so it didn't change the numbers.

That's all we've seen so far.

Okay, so minor.

Great.

Thank you very much.

You're welcome.

Next we'll go to Chris Haley from Wachovia Securities.

Go ahead, please.

Hey Tom.

Congratulations on great pricing and willingness to take advantage of the activity in the marketplace.

Thanks, Chris.

Good morning to you.

Good morning.

Do you think any of the assets you sold -- let's look out over the next 12 to 24 months, and assuming we might get rent increases, do you think any of the assets that you have sold or that you have under contract were below replacement cost?

Well, Chris, you know, I think one of the things that is important to remember about these -- our assets in general is that we usually have long-term leases, and those leases usually have bumps between 2.5% to 3%.

And so by the time a client has, you know, run through his 10-year lease, he's got a pretty hefty lease rate, particularly compared to today's market.

Now, you can't predict what -- you know, future office markets are going to look like.

I think they'll be slightly better as we've said in our prepared remarks, slightly better than they are now and improving over time.

But you know, in many cases, as these leases roll off we think there might be some significant adjustments.

Now that's a matter of debate within the marketplace.

So we feel good about the pricing that we've received so far.

We believe that we've -- as we have said before, maximized our value creation and we want to capture that value creation and either return it to our shareholder or reinvest it or acquire our stock.

Whatever appears to be the best opportunity at the time.

So maybe to -- to ask a question a different way, to be able to reproduce those assets, any of them -- any of the assets that you've sold at a price close to which you would replace them at or replace a like asset in that same submarket today?

Now let's take the Pinnacle, for instance, which had a $340-plus selling price.

And if we were to build another asset of similar quality in a like location, you know, it would be probably in the low twos per square foot.

How about Charlotte?

Probably same thing, $190 a foot in Charlotte.

I'd say probably $15, $20 above its replacement cost.

Okay.

Tom Charlesworth, just invert kind of your yield on capital, those assets that you're selling.

I should take your -- I think you said your forward -- pardon me, your trailing 12 month NOI yield was 7.3 -- What was --

Yeah, what I was trying to do was to give you a way to get out an estimate of the capital rates which is fairly easy to do with our disclosure that it's property by property.

Yeah.

So if you take the last four full quarters for a property and remove the termination fees that were there and divide it by the price, that's where I was going with you.

I'm sorry, and that number was --

For all of the -- all of the five properties that we sold, it was 7.98%.

7.98.

And so I could invert that by the effective gain, the economic gain adjusting for depreciation and that would give me your yield on your capital investment the last 12 months, correct?

Well, you can get our yield just by looking at the supplemental disclosure for the asset and looking at the NOI right there.

But you can get to it -- yes, you can do that.

All right.

Great.

Thank you.

Chris?

Yeah?

On the -- on that Charlotte asset just to make a point that we didn't make earlier, AFRT, which is the buyer, in their release that they put out included all of the costs associated with the sale including the cost of renegotiating their lease and extending their lease with the Bank of America.

They put the cap rate in at 8.3, I believe it was.

Which gives you some indication of what I was talking about.

Yeah.

And Chris, I point out in Alexandria, those are fairly recently built buildings.

The all end cost after we do all the GAAP-type allocations for sale and such is about $53 million something, so clearly, and that was just a few years ago.

Versus a $90 million sale price.

Great.

Thank you.

You're welcome.

And just a reminder, to ask a question, please press the star key followed by the digit one on your touch-tone telephone.

We'll take our next question from David Cohen from Morgan Stanley.

Please go ahead.

Hi, this is David Cohen for Greg Whyte.

A couple of quick questions, and sorry if I missed some of this.

I joined the call a little late.

With regards to a special dividend, now that the asset sales seem a little bit more certain, just wondering if you've had any thoughts about the cash versus stock split on -- on the special distribution.

This is Tom Charlesworth.

You know, I think to follow up on Tom Bell's comments that we -- our best guesstimate at this point is that we would distribute a large part of the gain, I think it's fair to say that although this is subject to further review and board decision, that we're not contemplating a stock component of that at this time.

Okay.

Great.

And in terms of some of the occupancy declines and sale of the assets such as like when Georgia Center, and 615 Peachtree Street.

Just wondering what happened there.

Well, you know, I -- you probably missed this, but we have a very depressed leasing market in Atlanta right now.

A lot of vacancy.

Huge amount of vacancy in the submarket that those buildings are in.

And they're good buildings, they are in great locations, and I'm just not anxious to lease them at today's rates.

We run the pro formas as to what we think the rates will do in the future, when we look at holding the buildings for a little while, and being a little more particular about our leasing until rates respond a little bit, you know, the numbers get better.

We're being, you know, cautious about our leasing right now.

Understanding that, you know, it's going to cause a little reduction in our occupancy rates, but I think in the long term, we'll be able to negotiate for better rates as the economy recovers and absorption continues here in this market.

And that will provide better benefits to our -- to our shareholders.

Okay.

And one final question.

And I'll go back to the transcript, if you've already reviewed it.

But in regards to the industrial JV's, in terms of the timing of potential purchases and development starts, could you just give me some color on that.

Well, we have put a contract in on a piece of land.

One piece of land in the Atlanta metro region.

We're in our due diligence period on that, we may or may not close that.

If we did I would guess that we probably would hope to have our first project under way in '05.

That piece of land I think would accommodate what, then, 33,800,000 feet. 2.8 million.

That would be a be a series of building over time.

It's gotten started a little faster than I think we thought it would.

And we're seeing some decent opportunities out there.

But as we said from the beginning, we really see this as two years of the investing before we begin to see it as accretive to earnings.

Okay.

Great.

Thank you.

You're welcome.

We'll next go to Chris Haley from Wachovia Securities.

Tom, sorry.

What did you -- in distribution to your last special dividend, what were some of the -- if any drawbacks or feedback from investors about whether or not they wanted cash or whether or not they wanted additional stock through a stock dividend, what -- what -- what can you draw from the last occurrence?

Chris, you know, that -- I think when we made that special dividend the last time it of the first one that had been made in recent memory.

And I have to tell you we got nothing but thank you letters from our shareholder.

I don't remember any complaints.

I got some complaints from other REIT CEO's but I didn't get any complaints from shareholder.

And maybe that was because it was so new and they haven't -- they hadn't really thought about it.

We haven't heard from shareholders this time as to whether they would prefer cash or stock.

But having had this conversation today, maybe we will hear from some.

But we really -- we really haven't heard from anybody on that subject.

Okay, great.

Thanks.

Chris, this is Tom.

One of the really important things to remember is that we are still going to do the same amount of development activities, that's looking very good right now.

And to the extent we can grow FFO and create value on a smaller capital base, we just think that's good for the shareholders.

I'm sorry, could you provide your best guess as to what the portfolio, the distribution, regional distribution of office income would look like.

Well, we really don't know what actually is going to close.

So --

How about today?

Or as of next week, whenever everything -- when the deals that are closed close?

I think it -- I mean, I haven't actually done the numbers per se.

But I think my reaction is it would probably put little more concentration in Atlanta, selling the D.C. house in San Francisco and so forth.

No doubt.

That would definitely put more office concentration in the Atlanta market.

Great.

Thanks.

And it appears there are no further questions.

Therefore, I'd like to turn the call back to Mr. Bell for any additional or closing remarks.

Well, I just appreciate everyone's support, and your conditioned -- continuing involvement with our company, and we'll look forward to speaking with you in the third quarter if not before.

Thank you very much.

And ladies and gentlemen, this does conclude our conference today.

We do thank you for your participation.

You may now disconnect.