Cousins Properties Inc (CUZ) 2004 Q3 法說會逐字稿

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

Just a reminder today's call is being recorded.

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

Please go ahead, sir.

Thank you, and good afternoon everyone.

I am Tom Bell, President and Chief Executive Officer of Cousins.

And with me today are Dan DuPree, our Vice Chairman;

Tom Charlesworth, our Chief Investment Officer and Jim Fleming, our Chief Financial Officer.

Also with me are Craig Jones and Forest Robinson.

I would like to welcome you to our third-quarter conference call and at this time I'll ask Jim to review the third-quarter financial results.

Jim.

First let me point out that certain matters we will 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 SEC including our form 8-K filed December 10, 2003 for a discussion of the factors which may cause such material differences.

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

For these items and the comparable GAAP measures and related reconciliations may be found through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our Website at www.CousinsProperties.com.

As most of you know, we have been working hard to sell a number of our office buildings this year.

We are now, we've actually now finished this effort.

In the third quarter we and our partners sold Austin Research Park for 78.7 million, the 2500, 4100, 4200 and 4300 buildings in Wildwood Office Park for 172.5 million, our two San Francisco buildings 101 and 55 Second Street for 287 million and 101 Independent Center in Charlotte, North Carolina for 100 million.

In the fourth quarter we and our partners have also sold the 2300 and 3200 buildings in Wildwood, along with the retail ground leases at the front of the park for 247.5 million.

And we've sold the John Marshal 2 Building in Tysons Corner, Virginia for 59.3 million.

Yesterday the Northside/Alpharetta, one of two medical office buildings were purchased by the ground lessor of Northside Hospital for 41.4 million.

The 3301 Wildwood building was not sold as a part of the two recent Wildwood transactions, and it may or may not be sold in the near term.

At this point we've not identified a buyer or agreed on a sale price.

It seems appropriate at this point to recap the results of our overall asset sales program that we've undertaken this year.

Assuming that the 3301 building is not sold, and also subject to finalizing our accounting for the fourth-quarter transactions, here are our estimates for all of the asset sales.

We've sold 18 office buildings containing a total of 5.3 million square feet, and Cousin's share based on our percentage ownership of each Building is 3.6 million square feet.

This represents 39 percent of our office portfolio based on our percentage ownership and 34 percent of our total portfolio.

The total sales price of the buildings is $1.3 billion, and Cousin's share of the proceeds is $887 million.

The average sales price was $236 per square foot, and the average cap rate based on income in the trailing four quarters was 7.17 percent.

This is calculated by taking the last four full quarters of rental property revenues, less operating expenses from our published quarterly information package, removing termination fees and straight lined rents and dividing by the sales price.

We've added a schedule to our quarterly information package to show the details of this calculation.

You can find it on the Investor Relations page under quarterly disclosures.

Out of Cousins $887 million in proceeds we've incurred closing costs and minority interest payments of 29 million, and we've paid off or transferred $342 million in project debt, leaving net proceeds to Cousins of 572 million.

Cousin's gains are estimated as follows: GAAP gain of 346 million; tax gain of 399 million; and value creation of 194 million on a total undercoated cost of 693 million or 28 percent.

I would also like to note that Cousins will continue to manage 13 of the 18 buildings we have sold this year.

Because of the asset sales we think we've given a lot of consideration to our capital needs over the next several years.

We've concluded that a significant portion of the sales proceeds will not be needed even with our substantial development pipeline.

As a result last week we announced a special dividend of $7.15 per share.

This entire special dividend as well as a substantial portion of this year's ordinary dividends will be taxable to our shareholders as capital gains.

Although this is a preliminary estimate, we believe that about 23 percent of the capital gain will be taxed at the 25 percent federal recapture rate and remainder will be subject to a 15 percent federal rate.

Please note that due to the large size of this special dividend, the New York Stock Exchange has moved back the (indiscernible) dividend date to November 19, which is the day following the payment date.

Now I would like to briefly discuss the net income and FFO for the third quarter.

Net income available per share was $4.41 in the third quarter of 2004 compared to $1.19 in the third quarter of 2003.

FFO per share was 58 cents in the third quarter of 2004 compared with 51 cents in the third quarter of 2003.

The increase in FFO was due in part to additional net revenues from recently developed and acquired properties and reduced interest expense primarily from debt retirement associated with asset sales, partially offset by loss of net revenues from sold properties.

These items also affected net income available, which was further increased for more gains on sales in depreciable investment properties in the third quarter of 2004 as compared to the third quarter of 2003 and less depreciation expense as a result of the Sullivan (ph) held for sale properties.

I want to point out some accounting matters that had an effect on FFO, and net income available in the third quarter which will also have an affect in the fourth quarter.

In 1986 when we formed the Wildwood Associates 50-50 partnership, we contributed the land at an agreed-upon value which was higher than our basis.

This created a deferred gain, a portion of which was recognized when we sold the four Wildwood buildings in September.

One-half of the deferred gain for the portion attributable to the company's half interest in the land underlying the Wildwood office buildings, is included in net gain on sale of depreciable investment property and is excluded from FFO.

The other half of the deferred gain which relates to the half interest in the land that was transferred to our partner in 1986 is included in gain on sale of undepreciated investment properties and is included in FFO.

The impact on FFO was about $5.4 million in the third quarter and will be about $9.2 million in connection with the buildings sold in the fourth quarter.

There's another accounting matter that we expect to encounter in the fourth quarter.

Up until now when an asset encumbered by debt has been sold, the gain on the sale has not affected FFO.

This seems logical since FFO is designed to measure operating performance.

However, we've been told that the large accounting firms had some discussions with the FASB and that most of them believe that beginning in the fourth quarter of this year when an asset is sold and debt is transferred, the debt will be separately valued as either above market or below market, and the sales price for the real estate asset will be adjusted to take this into account.

The debt adjustment will affect FFO for the quarter in which the asset is sold notwithstanding the fact that it is related to a sale gain that is not reported in FFO.

This seems to be another situation in which the GAAP rules are causing some unanticipated and somewhat illogical results in FFO.

Although we are not sure how the mechanics will work on the mark-to-market calculations, we expect that this change will result in a decrease in our FFO in the fourth quarter.

Let me point out, however, that net income available will not be affected by this as the net gain on sale of the respective properties will be increased by a corresponding amount.

Those are the highlights for the quarter and to date.

Now I'll discuss other details of the FFO and net income available describing changes between the second and third quarters of 2004.

You can follow my discussion beginning on page two of the net income and funds from operations supplemental detail schedule.

Starting with the office division the sale of 101 Independent Center in the third quarter of '04 along with the sales of 333 (indiscernible) and 1900 Duke Street in the second quarter resulted in decreases in the contributions of those properties of 1.7 million, 463,300 and 392,000, respectively as compared to the second quarter of '04.

Decreases in contributions from other properties that were sold this quarter will appear in either discontinued operations or income from unconsolidated joint ventures which I'll discuss later.

615 Peachtree Street decreased $200,000 primarily as a result of the decrease in Wachovia's square footage from 50,000 square feet to 14,000 square feet.

Inforum decreased $428,000 as a result of Lockwood Green bankruptcy filing earlier this year and the early termination of their lease in May, 2004.

Frost Bank Tower increased 461,000 as the average economic occupancy of the property increased from 26 percent in the second quarter of '04 to 39 percent in the third quarter.

In the retail division Avenue of the Peninsula decreased $225,000 primarily due to recognition of percentage rent in the second quarter, with no corresponding income in the third quarter and recovery of legal expenses from our insurance carrier that also occurred in the second quarter of '04.

Discontinued operations reflect the operations at 101 Second Street and 55 Second Street, the two San Francisco properties that were sold in September '04.

Also included in discontinued operations are Northside/Alpharetta I 1 into which were sold in November.

Net profit from tract sales increased 8.4 million to 9.8 million for the third quarter.

As I mentioned previously, 5.4 million of this increase resulted from a deferred gain on the sale -- excuse me a deferred gain on the land under the four office buildings sold in Wildwood Office Park.

Also included in net profits from tract sales is a gain on the sale of 30 acres at North Point, our mixed-use development in Alpharetta, Georgia in the amount of 3.5 million.

The profit margin on this sale was 65 percent and is within the range of 63 percent to 69 percent that we mentioned last quarter.

I also want to point out that we are working on a number of tract sales that could very well close in the fourth quarter but we are not sure which deals will firm up and close quickly, so we can't give any specifics at this point.

Continuing with the quarter-over-quarter variances in the schedule, net profit from lot sales including our share of joint ventures decreased 444,000 from second quarter of '04 as the company's share of lots sold decreased from 117 in the second quarter to 104 in the third quarter.

Our land division does not see a downturn at this point though and we expect healthy lot sales in the fourth quarter.

Leasing and other fees increased 736,000 due to recognition of one-half of the disposition fee paid in connection with the sale of the Pinnacle and 2 Live Oak (ph).

Interest income and other increased primarily as a result of the change in the fair value of the AtheroGenics warrants, which is in part based on the AtheroGenics' stock price.

In October 2004 we exercised one-half of our 50,000 AtheroGenics warrants and subsequently sold the stock at an average gain of $27.50 per share.

The income recognized in the third quarter is primarily the result of marking-to-market the value of the warrants associated with this October sale.

General and administrative expenses decreased primarily as a result of an increase in capitalization of office and retail development staff.

Interest expense, including interest expense classified as a component of income from discontinued operations decreased mainly as a result of the sales of 101 Independent Center and 101 Second Street in the third quarter of '04 and the sales of 333 John Carlyle and 1900 Duke Street in the second quarter and the corresponding debt reduction as a result of the sales.

The income tax expense varies with fluctuations from taxable income as the company's taxable subsidiaries.

In the second quarter of '04 however we recognized a onetime reduction in our tax provision of approximately 370,000 as a result of the reversing taxes accrued in prior periods which have now been determined not to be payable.

The company's share of joint venture FFO decreased 3.4 million and a third quarter of '04 from the second quarter primarily due to a termination fee received from our share of the sale of a bankruptcy claim filed against Merit, (ph) the tenant in the 1155 perimeter center West Office Building that was recognized in the second quarter of '04.

The Company sold its share of the bankruptcy claim in the second quarter for 4.6 million.

Accounting rules required us to divide the claim into two components, recovery of lost rents from vacated space and recovery of lost rents from the restructured lease, which reduced Merit's rental rates and lease term on the remaining space.

We recognized 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 claim sale was 2.5 million consisting of the 2.2 million termination fee and 300,000 of amortization of the (indiscernible) portion related to the restructured lease.

In the third quarter we recognized 222,000 as amortization of the bankruptcy claim sale related to the restructured lease.

Mirant has exercised its right under the bankruptcy negotiated lease to give back some of the space in the building.

Of the 210,000 square feet they now have, they will be relinquishing one floor containing about 25,000 square fetes as of February 1, 2005 and another floor containing about 25,000 square feet as of February 1, 2006.

In addition to the decrease attributed to 285 venture the company's share of joint venture FFO decreased by 605,000 as a result of the sale of the Pinnacle and 2 Live Oak which were owned by Cousins Laurett (ph) venture for 198,000 upon the sale of Research Park 3 and 4 owned by CP/FSP1 and 158,000 as a result of the four office buildings sold by Wildwood Associates.

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 gains on the 11 property sales that I mentioned earlier, along with one-half of the deferred gain recognized on the land associated with the Wildwood Office Building sales.

Total depreciation and amortization of real estate decreased 2.4 million from the second quarter of '04 primarily due to (indiscernible) depreciation on properties that were sold or held for sale.

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

With that I will close my remarks and turn it back over to Tom.

Thank you, Jim.

Given recent events I thought this might be an opportune time to once again review Cousins' overall strategy.

As most of you know, the primary benchmark we set for ourselves is total return to shareholders.

And the main driver of this total return is our ability to create value through the development of real estate, and we've done this throughout the history of our company by finding good development opportunities, using our 45 years of experience to minimize the risks inherent in the development process and then executing well on our plans.

Of course this requires capital and we strive to maintain a sufficient capital base to provide stability and support for our growth. \

We try to use capital efficiently, and we have learned that by limiting the size of our capital base we can generate better returns for our shareholders over time.

Ideally we do not want to be any bigger from a capital standpoint than the size we need to maintain our growth objectives.

As I look back on these last two years, I feel our team is executing quite well on several of the most critical elements of our strategy, capturing the value we've created, managing our capital base to achieve optimal size, and generating and executing on new development opportunities.

Let me first comment in more detail on capturing or harvesting the value we have created.

Jim gave you the facts on our unusually high level of asset sales these years, this year I mean.

These sales have indeed reflected great value creation for Cousins and our partners.

A total of about almost $1.3 billion of sales with average value created being 28 percent of undepreciated costs.

These high returns are partly due to today's very favorable pricing environment.

And although it is quite possible asset values could drop going forward, we are not necessarily predicting they will.

What we are saying with these sales is this.

We believe we have maximized our value creation on these assets, and we feel the pricing environment is exceptionally good.

Therefore capturing the value we've created putting some of it into new development, distributing the rest to our shareholders thus downsizing our capital base makes a lot of sense to us.

The second element of our strategy is managing the size of our capital base.

By declaring a large special dividend we have in effect lowered our capital base.

After careful review we have determined we can fund our development program and meet our other cash needs without retaining this cash.

Therefore since we can run our business and execute our strategy without these funds, we believe they should be distributed to our shareholders who can put them to work elsewhere.

If any of our shareholders are disappointed that they have less of an investment in the Company, I would note that stock can be bought in the market.

As stated in prior calls, I see no reason why our current dividend should not be maintained given the strength of our development pipeline and the likely increases to FFO these developments will contribute in future years.

Ultimately of course this decision would be made by our Board, beginning at its regular meeting later this month.

The third key element of our strategy is the pursuit of new development opportunities and I feel we're making good progress here as well.

We have talked about our strong retail development pipeline and shadow pipeline, and I will comment on some specific retail projects in a minute.

But first I would like to talk to you about some other aspects of our development program.

Our land group continues to generate strong results under the direction of Bruce Smith and his terrific team.

And the first three quarters of 2004 we and our joint venture have sold 1000 lots versus 761 lots for all of 2003.

We now have over 900 developed lots in inventory.

We started one new project in the third quarter, which makes four new projects for the year.

We also have a very exciting new office development opportunity here in Atlanta.

We recently announced we are pursuing a 550,000 square foot class A (indiscernible) development Piedmont and Peachtree in the Buckhead submarket of Atlanta, which will include 50,000 feet of retail space.

Buckhead is the strongest submarket in Atlanta from both a leasing and investment perspective.

The rents in this submarket are the highest in town and the vacancy is the lowest.

Many of the businesses who demand premium space are in this submarket.

We recently sold the Pinnacle Office building in Buckhead for a metro Atlanta record of 343, that's $343 per square foot, which demonstrated how much quality buildings in this submarket are valued by the investment community.

We also are very excited about the location of this new building.

Those of you familiar with Atlanta know that Peachtree and Piedmont is very likely the best development location in the market.

We hope to start this project in mid 2005.

So far preleasing is going very well, and we plan to make a final decision on whether to proceed by year's end.

Consistent with the culture and history of the Company, we are constantly on the lookout for new development opportunities and other real estate sectors with Dan DuPree taking the lead on this effort.

By way of example, we recently started an industrial division led by Forrest Robinson which is pursuing high-quality industrial deals with our partner, Ray Weeks.

We now have control over land in Henry County south of Atlanta that will allow us to build almost 2.9 million square feet of warehouse and distribution facilities.

This project received unanimous approval from the Henry County planning board last month and we expect to receive final zoning later this month.

If the economy continues to improve and we see continued positive absorption in the Atlanta industrial market we will likely move forward with the first building on this property in 2005.

We have also invested in a for sale residential project with a joint venture partner in Miami, and that project our partner the Related Group of Florida has started to presell condominium units.

To date, 66 percent of the condominium units are under contract with non refundable deposits of 10 percent and additional contracts are under negotiation that would bring the project to more than 80 percent presold.

We are also taking some measured steps to evaluate for sale residential opportunities in the Atlanta market.

Towards this end we have purchased a tract of land on Juniper Street in midtown Atlanta with our partner Larry Geller Stat.

This is a great location and we are currently evaluating the feasibility of a project with approximately 120 units.

If we decide to go forward with this investment it will give us the opportunity to evaluate the Atlanta condominium market by pursuing a modest size project with a very knowledgeable development partner.

This brings me to retail.

To our retail development.

Our existing pipeline, by which I mean projects under construction is coming along very well.

Despite being hit by three hurricanes in the immediate vicinity, the Avenue Viera will open on November 19th, only three weeks later than reported last quarter.

This is the result of a truly great effort by our retail development team under very difficult circumstances.

This center is now 78 percent leased or sold and 83 percent committed.

The Avenue of Paris (ph) Crossing in suburban Memphis is now well underway with a scheduled opening date of October 2005, just over a year, about a year from now.

Our leasing efforts are going as anticipated and construction is on budget and on schedule.

This project is now 59 percent leased or sold and 71 percent committed.

We have also had a busy quarter advancing some of the deals in our retail shadow pipeline; last week we obtained unanimous zoning approval on a 350,000 square foot project The Avenue Web Gen (ph)in an affluent suburban area of Atlanta.

We still have work to do on preleasing and other governmental approvals but this was an important step in the process.

In addition, we've received a unanimous approval of a 365,000 square foot target (ph) anchored in San Jose, California power center from the San Jose Planning Commission and this will be heard by the San Jose City Council next month.

Like the Avenue Web Gen project we have additional work to do in San Jose before committing to build this project but we have excellent momentum for both of these and we feel these zoning approvals constitute important steps along the way.

I also want to briefly comment on our office leasing efforts.

In September we announced that we had reached an agreement with Troutman Sanders lawfirm to extend its 307,000 square foot lease at Bank of America Plaza in midtown Atlanta for 13 years.

This is an important than tenant in one of our key buildings.

We are beginning to see more leasing activity in Atlanta and Austin and we believe with the market starting to firm up and with our very talented leasing team we will continue to make progress towards our leasing goals.

Before I close I want to briefly acknowledge the current tenuous nature of the economic recovery, with high oil prices, continuing problems in Iraq, slow job growth and potential pressure on the consumer.

And who knows what the impact of today's elections might be.

From an office leasing perspective uncertainty is a major hindrance to recovery.

And while we see some improvement in most of our markets, they still have a long way to go.

And we feel the office recovery will be slower than normal.

Notwithstanding this, we still have the strongest and most viable economy in the world, and we believe we are likely to see decent growth over the next couple of years.

We also believe our Sunbelt markets, including Atlanta, will lead this growth.

Our major challenge over the next two years will be moving our development opportunities from our shadow pipeline to starts and then executing these projects flawlessly.

I believe we are well positioned to meet these challenges and continue to perform for our shareholders.

I will now open the floor to any questions.

(OPERATOR INSTRUCTIONS) Greg Whyte (ph) with Morgan Stanley.

Good afternoon, guys.

Just a couple of questions.

Tom, could you comment a little on the same-store NOI, which I suspect is driven by the weakness on the office side?

I'll let Dan take that one since he's been studying up for your question.

Yes.

Greg, when we go to harvest the value we create through development, we're naturally going to market the buildings that are most fully leased.

Those are the buildings, as Tom mentioned earlier, that we can't add much more value to.

So it makes it the right time to sell them.

And when we're trying to decide which building to sell and to capture the value, we ask a fundamental question which is, are we a buyer or a seller of those assets.

So it just kind of follows that the assets that we would be left with are the ones that we still have the opportunity to add additional value to.

It's a funny thing.

Three or 4 years ago when we'd have these kinds of calls, the question was really posed as a negative; you have no upside in your portfolio.

Well, we still have some work to do on some of the projects, but specifically year-to-date we are down 5.1 percent or about $4.7 million same-store of the assets that we have.

And I would tell you that of that $4.7 million, really 3 different deals give us an insight into the entirety of that amount.

Mirant is $2.7 million.

And I will tell you the Mirant building is one that were it on the market today, we would absolutely be a buyer of that asset.

It is extremely well-located.

It is in the Perimeter Center submarket, which has probably been the most hard-hit.

But at the same time, it is a submarket that has absorbed the most square footage in the last year, over 3 million feet.

We may be a little bit -- we may have held the line a little bit too hard on some of the 00 on the rental rate because we believe so strongly in that particular building.

But it is right there on the MARTA line in the largest and most active market, so a high-quality building.

The other 2 deals that comprise the balance of that slippage in same-store growth are both at Northpoint, Alltel (ph) and Regis.

All together there are 8 floors in I guess 3 buildings.

I can tell you there the activity has picked up.

We actually have signed a lease with Kids II to take two of the floors.

Regis is retaining one of the floors.

So we don't begin contributing to FFO with Kids II until January of next year, but progress is being made.

And our basis is very low.

Our basis is extremely low in that, on top of which we have a very measured amount of rollover.

So kind of in a perverse way, one of the opportunities we have is less square footage, less vacant square footage to focus on going forward.

Does that answer your question, Greg?

That is very helpful.

Just I appreciate the disclosure you gave on the asset sales, but if I could just talk to you to flip it a little bit, have you any indication of what the cap rate is on 4 full quarters as opposed to the, what did you get, 7 7, I think, on trailing?

This is Jim.

For those of you that haven't noticed we added a schedule to our quarterly package that will show you how to calculate, how to do one way to calculate the cap rate.

And that is to take the trailing 4 quarters as we reported them in our quarterly packages and use those to calculate the cap rate.

We take out termination fees and we take out straight line rents.

You could look at a forward 4 quarters.

The problem with that is that if you had a number of people do it, you would have a number of people come up with different calculations and the reason is you got to make a number of assumptions about what you're going to do to lease vacant space, about what you're going to do with rollover and that sort of thing.

So the answer is we really have not tried to calculate that really don't know how to give you any guidance on that.

Tom, you gave some data on the condo development in Miami; what is the timing of construction (indiscernible)?

I think their plan is to start midyear next year, April May.

A little bit earlier, probably March, probably March they think of next year, provided sales continue to go at their present rate.

And so when might we start -- is this one of these things were you have to see the whole thing complete before you book any gains or.

That is an accounting question we've been wrestling with.

I don't know what the latest version is.

What have we discovered, Jim?

Greg, the accounting treatment seems to be that we will take a pro rata share based on what the percentage of completion of the building is assuming that we've got sufficient deposits, which we think we will.

So that is called a percentage of completion method, and that appears to be the method that we're going to need (inaudible).

The way that market is working down there, Greg, is you get 10 percent non refundable when you sign your contract.

And then you give another 10 percent non refundable when construction starts.

And so I think the guidance we are getting from our auditors is that they will use the percentage of completion method and will begin to take those profits as the building is underway.

: Two other quick ones here.

At The Avenue of the Peninsula, is that, I think I read something about Sax moving out, is that correct?

Sax is not moving out, what Sax has decided to do is to close all of their small stores, of which I -- don't hold me to this, I think there were 11 or 12.

They are not closing our store because they have an operating covenant which requires them to operate through December of '09, I think early December of '09.

So that store is continuing to operate and will continue to operate well into the future.

But we are working with Sax and trying to find alternative uses for that space.

And if we were able to find alternative uses, which were equal to or better than Sax in terms of its impact on the Center then we would move forward on that.

But at this time Sax continues to operate as they have before and will continue to do so well into the future.

And Tom, I think we are correct in seeing you have gone on to the Board at KTR Private REIT.

Can you comment on that and just give us some comfort that there aren't any conflicts involved there?

KTR Private REIT is basically a mortgage REIT.

Its real estate activities are focused on commercial paper.

And then within their non-REIT sub I think they are going to have other investment criteria.

But they are not going to invest in or any development or assets of the type that Cousins is involved in.

And if they were to do that, I would resign from the Board.

That's very helpful.

Thanks.

Tim Sullivan with Greenstreet Advisers.

Question regarding the office building sales strategy.

Tom, you said that all the sales activity is not necessarily a reflection of your opinion that prices are going down.

I'm curious about the prospect or you're thinking with respect to the prices going up.

And the foundation for the question relates to a transaction you did last year.

Last year you developed and leased and then sold a building in our backyard here in southern California to Maguire.

You sold it for 80 million bucks, which I guess represented a good price.

It represented a maximization of value from your standpoint, and now just a year and a half later Maguire is in the market.

If they get the price they want it will represent $100 million, that is 25 percent more than they paid you just a year and a half ago.

What is the prospect, what is the possibility that a year and a half from now you'll look back on all the sales in the third quarter of '04 and say gee, we sold too soon?

Well, we are really not market timers.

We think its a very robust market out there.

As I said in my comments I can't predict whether its going to get better or whether it's going to get worse.

I think history would suggest that its more likely to get worse than it is to get better, but you just don't know.

What we felt, was if you took the individual assets that we sold and we sit around the table that we are sitting around right now which we did as a group, and we tried to concoct scenarios where we would create more value out of those assets, we couldn't come up with any that were realistic.

And that is an exercise that we go through on a constant basis.

And once we come to the conclusion that we maximized the value of an asset, then we are going to take -- we are hopefully going to sell that asset, take that value and put it into our development process or give it back to our shareholders.

And therefore create more value in the future.

That is our basic business.

We are a development REIT.

We are in the development business.

And I think most of our investors realize that we are a little different in that respect.

I can't speak specifically to the Maguire asset, but I was delighted to sell it at the price that we sold it.

And I think if Maguire can make money on it, more power to them.

Time will tell whether we could have held on and created more value in the future.

There's really no way to know, but an average of the 717 cap rate on trailing 4 quarters, you can make your own predictions as to whether you think that's going to go up or down in the future.

I think we did well with the sales, and I am pleased with where we ended up.

Okay.

Thanks for that perspective.

That's helpful.

More specific question.

After some of the dust has settled on the sales, IBM is now your second biggest tenant, the average lease term of what they have left is relatively short.

Can you provide an update on IBM and where that is, what it is and what the prospects are for keeping them around?

We have a great relationship with IBM which I think has just been made better because we put a lot of money in their pockets with this partnership.

Some have suggested it is there, not here that its the best real estate partnership that they've been involved in or one of the best.

We have one IBM asset which is their training center here in the Wildwood Office Park, which comes up relatively shortly.

They have not yet told us what their intentions are with regard to that asset, so I can't really answer that question.

I think their other leases we have not heard anything with regard to their other leases that would indicate that they have any plans to change anything in the future.

But I have to say that I've not specifically talked to them about it.

Okay.

Thank you.

David Toti (ph) with Lehman Brothers.

Couple quick questions.

Can you provide any updates on three other developments in your shadow pipeline.

Those being The Avenue La Frontera, Windrock (ph) MarketCenter and the Los Altos (ph) MarketCenter?

The Windrock MarketCenter is a project we are pursuing with Prudential.

It is a mall today, with a Dillard anchored mall.

The idea is to reconfigure that into about one million square foot, sort of hybrid power center, and I think we have the city's necessary entitlements now, and I will let Dan speak to what he thinks the timing of the project is if we move forward.

Well, there are a lot of moving pieces in that deal, which is one of the nice things about having a really deep pipeline because you don't know exactly what to expect.

But I think currently we are hopeful that if that deal goes forward it would go forward in probably the third or fourth quarter of next year.

And as it relates to Los Altos, Los Altos is -- unless we are miscommunicating on deals, that was a project that we completed five or six years ago and sold.

So you must be thinking of another project.

La Frontera is another deal like Windrock that we're making great progress on in Texas.

And we have high hopes for, but the way it kind of works out on the pipeline is that you work as hard as you can on as many different projects as you can and move them all forward but you understand that not everyone of them is going to make.

And I can't tell you what a La Frontera or Windrock either one of them will make.

But the fact that we have two of them encourages me that one or both of them will make it.

Let me speak to it for just a second because I think there is some confusion.

I noticed in one of the reports there was a list of pipeline projects which was not a list that we had published but a list that has been published by someone else.

The way the process works is we identify a good piece of real estate where we think that it has all the attributes that we are looking for from our research.

We try to get that piece of real estate under control, which is usually through an auction process or a partnership or a JV with the landowner in some occasions.

We then go to the market, and we examine whether we can lease this space up.

And in predevelopment we look at what it's going to cost to develop it and can we get the entitlements we need to development?

And can we get the density we need to have it make money, and can we get the retailers to come there.

And that is a process that can take anywhere from six months to two years.

And so at any given time as Dan said we might have a dozen or two dozen projects at some point in that process and we have many in that process right now.

And I guess our general hope is that 25 percent or 30 percent of those make it all the way through the process.

We get the land under control.

We get the entitlements, we get the density we need, we can build it at the price we think we can make -- where we can still make a good economic return, and the retailers want to go.

And so the good news is there are many in the process.

The bad news is they don't all come to fruition.

But the good news for our investors is they are fully tested so by the time we pull the trigger, we've done it because we've met all those criteria in the predevelopment process and we have some significant leasing interest and leasing momentum.

And if we don't have that we don't pull the trigger, we don't take the land down and we don't involve ourselves in the project.

So just to help people understand exactly how the shadow pipeline to pipeline process works.

My next question is more related to lease expirations in '05; you published a number of 1620.

What is your sense of market conditions at the time rolled down, rolled up percentages?

I think the Atlanta market is showing more activity.

And I hear that the Austin market is finally showing more activity.

If you mean rolled down or rolled up from today's rates, I think rates have largely stabilized in our key markets and are beginning to inch back up.

The tenant improvement allowances are stabilizing, and the other accoutrements seem to be have stabilized and maybe going down a little bit.

And I think we made a good decision early this year when we decided we were going to hold for a little while and see if the market didn't come back now.

Now that is what we see happening in the marketplace.

Now we have to deliver actual leases to either maintain the tenants that we have or put new tenants into our existing assets.

We are seeing more activity there.

We have quite a few things in the works.

I think we are a little more optimistic.

But this is still a very tough leasing market.

And many of the leases that the companies like Cousins have out there in the market have bumps in them.

So you have a 5 or 10-yar lease that has a 2 to 3 percent bump in it every year.

And when those leases come off, you have to expect that they are going to roll to the market, whatever the market is at the time.

And I think that is something that is sometimes left out of calculations.

(OPERATOR INSTRUCTIONS) Jessica Tully with Credit Suisse First Boston.

Greg I think I have a question for you.

I wanted to ask about the Birmingham market and then also about some of your older projects in midtown Atlanta.

I think several of these projects have lease expiration either this year or next year and I just wondered how things looked.

You know, Jessica now that Greg is the chief administrative officer in the Company I think it is better that Dan answer those, is that okay with you?

First of all, midtown we just had a market report, midtown Buckhead and surprisingly Northwest are the three markets in the metropolitan area that we think will be at equilibrium particularly for class A space by 2007.

And in midtown, as you probably know, is exploding.

It is the most exciting single market that I have seen since I've been in real estate.

And that is residential, as well as office.

So what I would tell you in terms of our older projects in midtown, we've got decision that we need to make as to what the highest and best use for those properties are long term.

Some of those, one particular I think we actually acquired 10 years ago with the notion that it had a different highest and best use.

And we're exploring that.

But we are very enthusiastic about midtown right now.

And what about Birmingham?

Well, Birmingham you know is an interesting market.

It is consistently got low vacancy.

But it has also got a limited amount of activity.

So when we first went into that market I think it was a 95, 96 percent occupied market.

But there were only absorbing net 15 to 20,000 square feet of class A space a year, which is one of the reasons why we have been less active -- I'm sorry?

Well, we've been -- Craig is saying 5 to 600,000 square feet a year.

I think I am remembering one particular year, which was a bad year.

But the fact is there's not a lot of activity in the market regardless of what the number is.

And as a consequence, we have two buildings left in one venture and another building in another.

Not a lot of rollover except at Lakeshore Plaza.

What I'm being told by our partner who is doing the leasing there is there's a considerable amount of activity on that.

The good news is that deal particularly had very low going in rents to begin with.

So going back to the earlier question about rollup or rolldown frankly most of the leases that we've got rolling in '05 and '06 remaining our at historically very low rental rates which gives us an excellent opportunity to at the very least maintain the status quo and hopefully to experience some upside opportunity.

I have a quick accounting question.

In terms of the predevelopment pipeline, how are things moving along in terms of the decision process when you start capitalizing things like for example the one in Gwinnett County that you are hopeful to start soon or next year?

Would you be starting to capitalize some of your costs yet, or is it premature to do that?

On that one the Avenue Webb Gin we have determined that it is probable.

We do have the zoning as we've reported.

And so we have started capitalizing against that project.

And that's the only one we've added recently to our probable projects.

A project needs to be probable before you start?

Right.

Chris Haley with Wachovia.

Congratulations on that big fat dividend.

When does the project go on your construction pipeline, when you start capitalizing or when you start moving dirt?

When we start moving dirt.

Generally when we've actually closed on the land and have committed the money to the land and to the deal itself, the construction.

Okay.

Going back to Jim's earlier initial comments to make sure I understand, make sure I have these numbers correct, the contribution to Wildwood was 5, 5.4 in terms of millions.

And you will have another $9.2 million gain to hit the fourth-quarter.

Is that correct?

Yes, we sold the 8 ground leases and 2 large buildings in the fourth quarter.

Okay, and then there is some other and then you will have -- there is other, there is another deferred gain still involved because you haven't sold all of it yet, correct?

We have sold all of the buildings that are in Wildwood Associates at this point.

So there is some additional land that is owned by Wildwood Associates that would potentially contribute at some point.

But that could very well be way down the road because we don't have any buildings to sell on that land at this point.

Regarding this debt adjustment, I apologize for -- having make you walk through this again, but can you go through this again, whether or not you will actually modify your gain adjustments for this debt?

Chris, sure.

Absolutely.

At this point we don't know definitely, but we are told that its very likely that we and everybody else starting in the fourth quarter will have to separate the debt from the asset when there is a -- from real estate when an asset is sold.

So what you have to do is if you sell a building for a certain price you got to determine whether the debt is above or below market and attributes some positive or negative value to that debt and then adjust the sales price for the real estate asset.

Can you give me an example?

Say you sold a building for $100 million.

And you had an interest rate on your loan at 8 percent and you determined that is above market.

You quantify that, and we're not sure the methodology you use to quantify that, but let's assume that you would use some kind of discounted cash flow to come up with a comparison to that loan to a loan you could get today.

So let's say you determine that you get $5 million of negative value in that loan.

Then what you would do is you would book the sale as a sale of a building for $105 million, and a loss on debt extinguishment of $5 million to get you back to the $100 million sales price for the transaction.

That would wash into earnings?

Net income would not be affected but what would happen is of course the 105 million is not in FFO, and yet the 5 million loss on debt extinguishment would be a negative to FFO.

Another ridiculous GAAP accounting theory.

I'm assuming you're going to help us with that if in fact you do follow (multiple speakers)--.

Unfortunately we can't quantify it now because we don't know the methodology but we do think it will be a negative.

Yes, we will help you when and if it happens.

In terms of the pipeline your comments, Tom, you started out by saying ideally we don't want to be any bigger than the size needed to maintain our growth objectives.

Can you give us a little bit more color in terms of what are the growth objectives?

Given that mathematically '05 versus '04 and '04 versus '03 have not been growth periods, but what is the longer-term growth objectives?

By growth we mean dividends plus share appreciation.

So total return to shareholders, that is a key measurement for us here.

And I spent three years avoiding answering that question.

I'm going to try to do it again.

But I think if you look back and sort of to the history of Cousins, you will find that we constantly strive to outgrow the competition, if you will.

And we've done a pretty good job of doing that.

And so through the cycle if you figure that through the cycle we would like to see or you just assume you will see dividends around the 5 percent, historically around the 5 percent level, then we want to create share appreciation significantly above that so that our investors get a bigger bang for their buck.

Otherwise it shouldn't take the risk that you have to take by developing -- I mean by investing in a development REIT.

And we understand that.

We're very cognizant of that fact.

So we try to keep our capital base at a number which when we put the new development starts and development activities on top of it if we get the value creation we've traditionally got, it gives a higher return to our shareholders.

I think history will tell, we might even -- I think we still have a schedule that sort of demonstrates where we've invested our monies over the last ten years or so.

I think we've proven over time that we can do that quite successfully.

And I know it is a different strategy, it's very simple and straightforward.

But it has worked for us and I think it has worked for our shareholders.

What do you think the optimal leverage is for your company over the intermediate-term (multiple speakers) prefer to have you about low 20 percent leverage.

You know, it's going to change, Chris, quite significantly depending on where we are in the development process.

But I think we feel generally that we should keep our leverage somewhere between 40 and 60 percent, to maximize our value.

With preferred, (inaudible) preferred as debt?

No, I don't think of preferred as debt but yes, I would include it in that ratio.

Okay.

Numerical question.

In the third quarter your tenant improvement costs were up notably yet I didn't particularly interested in about $11 million in the quarter that I think was assigned to First Generation leasing.

But I didn't see any corresponding First Generation leasing.

It had to do with the sales and I will let, who wants to address that, Jim?

This is Tom Charlesworth.

There is a large chunk of that over $8 million related to projects that were sold in connection with effecting the sale we had to add some cost to it at that point which is included in the cost that Jim used to reconcile the various gains in value creation.

And that related to sales of the Austin Research Park building and the 55 Second Street building in San Francisco.

These are kind of cleanup costs?

Well, at the time it had to be funded in connection with those projects before we could finish the sale.

Okay.

Great.

Thanks.

Chris Shulman with Lehman Brothers.

David Shulman.

You know, it's a tough name.

First question is, but the question, the answer you just gave on TIs, that was first generation.

Was also a big increase in second generation TIs?

Was that also, was that moving with the buildings, to?

Yes, David.

Tom again.

Over half of that was related to buildings sold as well.

So half of that was related and the other half is what, the Troutman Sanders lease?

You know, there was some at Wildwood; there were some Wildwood leasing commission, there were some at Waterview and there were smaller amounts elsewhere.

But more than half related to 101 Independence in San Francisco.

If you look at that quarter to quarter you'll see a big jump but if you look back over the last year you'll see that its fairly volatile and really the number is not that out of line with what it has been in some previous quarters.

So an average is probably an appropriate run rate, if we average all the numbers by 4 quarters and that's a reasonable run rate?

David, I would think that would probably be high given the sales that have happened.

Given the sales, so less than the four quarter average?

Right.

Next question is on the Wildwood assets, to go back to this accounting stuff, what is the debt on the assets that were sold this quarter?

In Wildwood?

David, we've got the 2300 and the 3200 hundred building.

Okay.

57 million is Cousins; share of the debt.

57 million and what is the maturity of that?

Actually one was maturing fairly soon, and one was several years out.

One is several years out, okay.

One was, and you can look at our schedule that is in the 10-K.

It is in the 10-K?

Okay, I will check it and it has the maturity date and it has the interest rate and all of that stuff?

Yes, it does.

I will guess at that accounting adjustment.

Next question is what do you perceive street level rents to be in Buckhead since there will be 57,000 square feet of retail in your project on Buckhead?

A ballpark kind of number -- I am not going to hold you to the penny.

Well, the issue depends on the tenant.

Restaurants, what kind of TI, but I think we are -- I think we are by and large in the $30 to $35 foot range.

Okay, so it will be higher than office rents but not radically higher than office rents then that we see in other cities?

Right, I think that's right.

Thank you very much.

Mr. Shulman, I do apologize for that.

We will go back to Lehman Brothers and David Toti.

Is there anything you can disclose on the size of the first building you are thinking about at the industrial park?

400,000 square feet, approximately 400,000 feet.

400,000 great.

Thank you.

Chris Haley with Wachovia.

Tom, I was looking at your tenant schedule the other day and I looked at the one today after the earnings.

I don't mean to disparage any of these customers on here, but looks like some of the perceived higher credit customers have move down as a percent of your portfolio and some of the other ones that I am not entirely familiar with have moved up.

So that's obviously because of the sales activity.

Could you provide any observations in terms of your credit quality in your office business today versus where it was a quarter ago, a year ago?

We do a credit review every quarter, Chris.

We have not done the credit review since the disposition of these last assets.

So I can't give you an immediate response because I just don't know the answer.

Does anyone else around the table here?

Hang on a second.

Let us look for just a minute to see how we can answer this.

I think the answer is clearly the assets we have sold have been the ones that we have done the most work on and created value on and have I think by and large very fine tenants.

The buildings that are left arguably based on the schedule you are looking at there don't have quite the same credit quality.

But I think we are confident that those assets are strong assets and over time we will build back both vacancy -- do away with vacancy filling back occupancies as Dan had suggested earlier and bringing the tenancy up.

So it is another situation where we are doing what we do best, develop and lease and a lot of that being in our strongest market, Atlanta.

So we will do our value creation work on those and move forward.

Tom Bell" Chris, its not directly related but sort of a slightly related comment is that has amazed me is if you look at the three biggest leasing issues that we have had since I've been here, they are Mirant, Cable and Wireless and Arthur Andersen, and all three of which would have been considered great credits and we're considered great credits when we in fact I think Mirant and Wireless were both A credits when we made the deals with them and they went bust.

And other ones that have been on our list for a year are still cooking along paying their rent on time.

So it is -- you never know what is going to hit you on a leasing transaction.

Last question if just strip out, and obviously fourth quarter is going to have some noise, you say your sales are going to be done, so kind of the run rate going into '05 is probably going to look cleanest in the first quarter, second quarter.

What would you say the mix of cash flow between your retail business, your office business and your land business might be going into '05 or '05?

Do you have any color on that?

Obviously it is going to move.

Office is going to be lower percentage and then retail and land are going to increase.

I think looking at next year's forecast it looks like the land is going to have another good year in our residential land development business.

It looks like retail will continue to build.

The retail guys are experiencing very good rollover results as leases roll within their centers and of course we have more properties coming online, which will have an impact.

So I would guess it is going to be more, and I am just guessing that because I have not run the numbers but more of a 50-50 break between office and retail and land.

I think we will get there, I think it may take a while for some of the retail projects to come on line to get us to that point.

For the year, you are talking about. (multiple speakers)

50 percent office, maybe 20 percent land, 30 percent retail?

By the end of the year that is probably not a bad guess but we will try to be more specific on that in the future after we work those numbers up.

Okay, and those are just guesses.

If you want to we do give building by building NOI numbers in our supplemental, and you could take out the buildings we sold (multiple speakers) and we are doing a more precise calculation right now because we're in the middle of our budget process.

And so we will know some more soon and we will come back.

And then on the retail projects I think you can look in the supplemental materials at the NOI on those retail projects and assume fairly well I think, that the new projects will look a lot like the old projects in terms of their yield and you can probably get pretty close.

Thanks, and congratulations on getting all the sales before Election Day.

(OPERATOR INSTRUCTIONS) Jessica Tully.

I just wanted to just be a little bit of follow up on that accounting rule that you were talking about that might require into FFO to take any hits from selling above market rate debt.

Is that -- you said it would start in the fourth quarter, and I wasn't sure if there was any chance that it would look back through the whole year or just start by October first?

We believe that that, if it does happen will be a prospective thing looking forward going into the fourth quarter.

We do think it will affect everybody.

It's an issue that has come up through the accounting firm, so you can never be sure of anything, Jessica, but we do think it will just be looking forward starting at the beginning of the fourth quarter.

Like this, Jessica.

We've asked everybody that we can find to ask that question, including our auditors, and they have talked to others.

And that's what they are telling us that it will be prospective.

Because I have asked that same question that you've asked around this table half a dozen times over the last couple of months.

That's what they are told and they are telling us that with some authority in their voice.

So, so far we are believing them.

Thank you.

I appreciate that.

David Shulman.

One more question.

Are there any residual obligations trailing those buildings to cause this back to Cousins aside from funding those TI's that have been specified?

No.

Okay.

Thank you.

Gentlemen, there are no further questions at this time.

I will turn it back over to you for any additional or concluding remarks.

Thank you everyone.

We very much appreciate your following our company and your involvement and your investment.

And if we can ever answer any questions or provide you with any additional information or explanation, please don't hesitate to give us a call.

Thank you for being with us today.

We will talk to you next quarter.

That does conclude today's conference.

I would like to thank everyone for joining us today.