Cousins Properties Inc (CUZ) 2005 Q1 法說會逐字稿

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

Today's call is being recorded.

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

Please go ahead, sir.

Good afternoon everyone, and thank you for joining us.

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

At this time, I will turn the call over to Jim to review the financial results for the quarter.

Jim.

Thank you, Tom.

Good afternoon, thanks for your interest in Cousins Properties.

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 SEC, including our Form 8-K filed December 10, 2003 for a discussion of the factors which may cause such material differences.

Also, certain items we may refer to today are considered non-GAAP financial measures within the meaning of Reg G, as promulgated by the SEC.

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

As a result of the recapitalization of our Company in 2003 and 2004, which included selling assets, issuing preferred stock, increasing the size of our line of credit, and paying large special dividends to our shareholders, we began the year with fewer income-producing properties than we had in the past.

And our FFO and net income decreased in the first quarter of 2005 compared to the fourth and first quarters of 2004.

Rental property revenues less rental property operating expenses for consolidated properties, properties included in discontinued operations, and joint venture properties, decreased $16.1 million between the first quarter of '04 and the first quarter of '05 as a result of these sales.

Rental property revenues less revenue property operating expenses also decreased in the first quarter of '05 compared to the fourth quarter of '04 by approximately $806,000 as a result of our sales.

I'll get into a more detailed discussion of changes in FFO later, but I wanted to put the impact of the sales activities in perspective at the outset of my comments.

On the properties that we still own and operate, we realized improvement in occupancy and leasing during the quarter.

On a same-property basis, adjusted rental property revenues less operating expenses increased 2.1% for office properties, and 7.2% for retail properties between the fourth quarter of '04 and the first quarter of '05.

Occupancy at our office properties increased from 82% to 83% during the first quarter of '05, primarily as a result of leasing activity at Frost Bank Tower and 1155 Perimeter Center West.

Retail occupancy improved by 3% to 95% during the quarter, due to the leasing of vacant space at the Avenue of the Peninsula, and the Avenue West Cobb.

As you can see in our press release and supplemental package, development activities increased considerably during the quarter.

During the quarter we began our King Mill industrial project and purchased land for our Buckhead office project, and on April 1st, we began our San Jose market Center retail project.

In addition as Tom will discuss further in a moment we are in various stages of pre-development on a number of office and retail projects, and on some of the land parcels we own that are included in our land held for investment or future development schedule.

Our development activities will require a significant amount of capital over the next few years, but our balance sheet is very strong, and we are well positioned to fund these projects from our line of credit, construction and permanent project financings, and joint ventures.

I'd now like to discuss the components of FFO in more detail by describing the changes between the fourth quarter of '04 and the first quarter of '05.

You can follow my discussion beginning on page 2 of the section in our supplemental package, entitled net income and funds from operations, supplemental detail.

I'll begin with the Office Division.

Where rental property revenues less rental property operating expenses were overall consistent with last quarter.

There were, however, some fluctuations within properties worth noting. 555 North Point Center East increased $169,000, due to higher average occupancy during the first quarter.

In forum increased $163,000 as a result of the rental commencement of a new tenant in the first quarter.

One Georgia Center decreased $246,000 as a result of the decline in average occupancy during the quarter.

Frost Bank Tower decreased $271,000, as a result of an increase in property taxes due to a higher tax value on the building, that is not recoverable as a result of vacancy, and an increase in operating expenses as a result of certain expenses that were capitalized during the fourth quarter of '04.

Turning now to the retail division, overall FFO generated from rental operations increased $567,000 between the fourth quarter of '04 and the first quarter of '05.

This resulted primarily from increases at three properties.

Avenue of the Peninsula added $107,000, as a result of an increase in average occupancy during the quarter.

The Avenue Peachtree City increased $108,000 during the quarter, due to higher occupancy in the expansion space, and due to an increase in recoveries from tenants.

And third Avenue Viera increased $232,000 due to tenant openings in the lease-up phase of this project.

Moving to the land division, gains on tract sales decreased $10.9 million during the quarter.

Most of this difference relates to the recognition of a $9.3 million deferred gain on Wildwood properties in the fourth quarter of 2004.

As noted in our earnings release, in the first quarter of '05 we recognized gains on sales of tracts at Wildwood and North Point.

Gains on life sales decreased by 1.5 million during the quarter due to a decrease in the number of lots sold in the first quarter of 2005.

Fourth quarter of each year typically results in a higher number of lot closings, but part of of the decrease relates to weather delays during the first quarter in the Houston and Tampa markets.

We expect to make up for these delays in the second quarter, and we expect sales for the second quarter to exceed those recognized in the first quarter.

Development income increased -- excuse me, decreased $632,000 during the quarter, as a result of a decrease in construction management fees recognized at the recently completed Frost Bank Tower, and on properties sold in 2004.

In addition, development fees earned on lot sales at Seven Hills decreased, as 80 lots were sold in the fourth quarter of '04, while only 35 lots were sold in the first quarter of '05.

Leasing and other fees decreased $472,000 during the quarter due primarily to income recognized in the fourth quarter of '04 on a lease-renewal at the Bank of America Plaza.

Interest and other income decreased 574,000 during the quarter, due to lower levels of excess cash on hand earning interest, as well as a $288,000 non-cash loss resulting from a decrease in value of the outstanding the AtheroGenics and Inhibitex warrants.

Within other expenses, continuing operations free development expenses resulted in a favorable FFO variance of $377,000.

This variance is primarily the result of a reimbursement of $500,000 in predevelopment expenses from a development partner received in the first quarter in the form of a note receivable.

Favorable FFO variance in income tax expense is the result of the lower level of lot sales in [Creck], our taxable reach subsidiary.

Finally joint venture FFO increased by $3.2 million during the quarter, primarily as a result of the mark-to-market adjustment of debt transferred or repaid on certain Joint Venture properties sold in the fourth quarter of 2004.

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

Thanks, Jim.

In 2003 and 2004 we sold a large number of operating properties and paid out $9.22 in special dividends to our shareholders.

And this along with two offerings of preferred stock and a renewal of our revolving credit facility, changed the capital structure of our Company.

These changes have left us well positioned to take advantage of development opportunities over the next few years, and should make the value that we create through these future developments more meaningful to our shareholders.

At this point, our primary focus is threefold.

Lease existing assets, execute perfectly the development projects underway, and move new development projects from the shadow pipeline to active projects.

Our business strategy, as most of you know, is fairly straightforward.

Create value through the development and operation of high-quality assets, recycle capital from these assets when fully valued, and reinvest this capital in new development.

The key to our success will be our execution.

On the whole, I would say we had a solid first quarter and we made progress towards these objectives.

A significant portion of our development pipeline is in the retail area.

We now have 1.3 million square feet of company-owned space under development and retail projects, which will involve a total Cousins investment of approximately $261 million.

We're very excited about our latest addition to this pipeline, the 364,000 square-foot San Jose MarketCenter.

Target has purchased a pad for its 143,000 square-foot store, and we will own the remaining 221,000 square feet of this project.

We have leases or commitments for all of the large spaces from Marshalls, Cost Plus, Michaels, PetsMart, and Office Depot, and including Target the center is now 64% under binding agreement, and 80% committed.

This project is in a very desirable location adjacent to downtown San Jose.

At $81 million, it's projected cost is significantly more expensive than a typical power center, but it also has significantly higher rental rates.

San Jose is an excellent example of the type of development opportunity we want to undertake here at Cousins.

It features a high barrier to entry location, in a dense and underserved market.

The two other large projects in our retail development pipeline are the Avenue Viera, and the Avenue Carriage Crossing.

Phase I of the Avenue Viera which opened last November is now 86% under binding agreement, and 87% committed.

And Phase I of our Viera MarketCenter anchored by Kohls, and adjacent to the Avenue is 94% under binding agreement, and 100% committed.

It is now underway and is scheduled to open this October.

The first phase of the Avenue Carriage Crossing, which is scheduled to open in the fourth quarter of this year, is 73% under binding agreement and 87% committed.

In previous calls we've mentioned the Avenue Webb Gen, a proposed retail development in Metro Atlanta's [Wynette] County.

We are very close to final approval on this project, and hope to be in a position to begin this 375,000 square-foot development later this year.

It has an estimated cost of $82 million.

This year we also anticipate beginning a 45,000 square-foot expansion of our very successful Avenue West Cobb development.

We have several other retail projects in our shadow pipeline, some of which should mature in future years.

This year we have completed a couple of new projects.

In the first quarter we opened our Hanover Square South, 193,000 square-foot target shadow anchored retail center in suburban Richmond.

And that center is 93% under binding agreement, and 97% committed.

And in April we finished the development of our 51,000 square-foot office building for Inhibitex and North Point.

Both of these properties are now income producing, although it will take a few quarters for the income stream at Hanover to reach a mature level as retailers continue to open their stores.

Our retail division also had a good quarter on the leasing front.

The Avenue of Peninsula is now 91% leased and thanks to this progress, and some additional leasing and a number of other centers our operation retail portfolio is now 95% leased overall.

We feel good about our leasing velocity based on the number of leases executed and tenants opened during the first quarter.

Our Office division is also working on some very promising development opportunities.

In March we purchased the land for our Buckhead head office building.

This land is fully entitled and the first building is now designed for 550,000 square feet of office space, plus 60,000 square feet of retail and restaurants.

We're very excited that our office and retail divisions are collaborating to bring these two product types together in one development.

The all-in costs for this first building are estimated to be between 155 and $160 million.

At this time, we have signed leases for 150,000 square feet, we're in advanced negotiations for another 75,000 square feet, and we continue to experience good leasing momentum for this project.

Although we don't have specific plans at this point for future buildings, this property is entitled for approximately 800,000 square feet of additional office and nearly 1,000 residential units, which we would expect to develop, or joint venture over the next several years.

On the industrial side in our last conference call we announced that we had purchased 182 acres in Henry county south of Atlanta for the development of the Kings Mill Distribution Park, which is projected to contain a total of 2.9 million square feet.

With 10 million square feet of absorption in 2004 and strong leasing activity, Atlanta's industrial market is continuing to improve.

And Henry County appears to be fairing well as one of Atlanta's key submarkets with several large leases signed this year.

Cousins Weeks has now begun the development of the first phase of the King Mill project, a 416,000 square-foot building that can be expanded to 790,000 square feet.

As is fairly typical for warehouse and distribution facilities, we made the decision to build this first phase on a speculative basis.

In order to be able to react quickly to demand from users, we will attempt to have some space under development at all times, which will give us the ability to attract users who need space quickly.

Our industrial division is also working on other opportunities in Atlanta.

We're looking for strategic land positions in other key submarkets and we're pursuing several build-to-suit opportunities.

Although it will take a couple of years for our industrial division to have a meaningful impact on our Company's financial performance, I believe this new division will make a substantial contribution over time.

Our land division also had a solid first quarter, lot sales were somewhat slower than we had experienced in recent quarters, but this was due to weather influences in our Houston and Tampa markets.

To date we don't see any downward trend in lot sales and in the first quarter we began the 1,100 lot Southern Trails development in suburban Houston, and we begin land planning on a large lot development in North Fulton Cherokee County, both through our CO Realty venture.

We expect to begin selling lots in these projects in the second quarter of 2005 and in early 2006 respectively.

During the first quarter, our land division also sold two tracts at Wildwood, and one at North Point.

We decided in 2004 to begin to carefully examine the for-sale multifamily development business.

So far experience has been quite positive, and we are very pleased with the progress of our first two projects.

Our 905 Juniper development in mid-town Atlanta is now underway, and we expect to finish construction in February of 2006.

Although we didn't expect significant presales in the Atlanta market for this 117-unit project, we now have binding contracts for 45 units, and rescindable contracts for an additional 35 units, and sales continue to go quite well.

The average deposit under these contracts is 3.5% of the contract price.

At 50 Biscayne in Miami, we expect to break ground this month and to complete the project in the third quarter of 2007.

We have presold 99% of the 529 residence units with nonrefundable deposits collected approaching $20 million.

The sales price of both of these projects have been higher than our pro forma estimates and both of these projects are being done in partnership with experienced condominium developers.

In general, I am pleased with our development activity.

If we commence the projects I have discussed in the second quarter, and at this point it appears that we will, our pipeline of development projects under construction will exceed $600 million.

Our challenge is to execute these projects well, and to bring along additional quality deals in our shadow pipeline.

Our people are very dedicated to this task, and I believe we are well positioned to execute this strategy effectively.

Before I close, I want to discuss the work we are doing to lease space in our office portfolio.

Leasing is a critical activity for us, we believe our office markets are slowly improving.

We are definitely seeing more activity, although rental rates have remained relatively flat in most of our submarkets.

At the Merritt headquarters building in the central perimeter area of Atlanta, we signed a 25,000 square foot lease with Siemens, bringing the building to 63% leased.

Our 29,000 square-foot lease at Prospect Tower with the University of Texas system brings us to 69% leased in that building.

And with some small gains at several other buildings our office portfolio has moved to 83% leased overall.

While we are making progress we still have a long way to go.

The largest vacancy is at One Georgia Center, but we're also working hard on a number of other buildings including the Merritt Building in Forum North Point, and two of our buildings in Birmingham.

As we said before, leasing vacant space in a downmarket involves trade-offs.

While it may be tempting to sign leases to fill vacant space, we need to be mindful that today's lease rates, a long-term lease may hurt us in the future.

For that reason, we're approaching our lease-up cautiously, while still trying hard to make every smart deal that we see in the marketplace.

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

Do you have any questions?

Thank you. [OPERATOR INSTRUCTIONS] we'll go first to Greg Whyte at Morgan Stanley.

Hi.

Good afternoon, guys.

Tom, the last point you touched on was the office leasing side.

I just wanted to get a little more color on that.

We saw TI on leasing commissions come down pretty dramatically in first quarter versus fourth quarter, and I'm wondering, is that partly due to the sort of -- the combination of leases you were signing, as well as your intent to pull back a little bit on concession?

It's leasing volume, Greg, and specifics of some of the leases that we -- we signed.

Greg, this is Jim Fleming.

If you look at the fourth quarter we had one very large lease with Troutman Sanders, which involved a pretty high level of commission and buildout.

And then there were a number of other leases that we had, some of them related to the properties we sold in the fourth quarter.

But Tom's exactly right, we do have a lot of leasing to do, and the volume of the leasing each quarter will dictate what the CapEx number will be.

Okay.

And then just on the industrial JV, Tom you said you've gone ahead obviously, or starting construction on Phase 1.

What levels of interest are you seeing, or discussions?

I mean, can you give us any anecdotal comments on the activity?

There's a lot of activity in the Henry County market -- submarket right now, Greg.

I'll let Dan speak to it more specifically.

Okay.

Well, I -- there's really not much to add to that.

I mean, one of the reasons why we need to go on a more speculative basis than industrial, is that the lead time of most of these -- of most of these prospective tenants, is much shorter than we're accustomed to.

There's a great deal of build-to-suit activity out there, that we're competing very hard for.

But the non-build to suit space generally is looking at lead times of six months or less.

And you've got to have space in order to compete.

We just lost -- or missed out on one 400,000 square-foot opportunity because we couldn't deliver space fast enough.

And so they're going to go into existing space.

But what our friends at Weeks, and Forrest Robinson who runs the division for us tells us, is that you always need to have stuff on the drawing board permitted and ready to build, or underway, because a lot of times, particularly in markets that are improving, there will be a pretty short timeframe on demand for space.

Okay.

On the San Jose development, the Power Center, I mean we recognize obviously it's a much more expensive market to construction and higher land costs.

Has that impacted your expected sort of initial returns or yields at all?

No.

Yields are good and -- you know, we -- we have basically leased all the big space.

We've got shop space left to lease, and quite a few out parcels.

There's quite a bit of demand, and this is a project that should -- should meet our traditional underwriting guidelines.

And just one last question.

Lease expirations into into '06, on the office side, are pretty meaningful.

I'm pretty -- you know, I'm sure you guys are talking in advance to tenancy spaces coming up, but can you give us any color on -- on where you are on that?

Greg, this is Dan.

Actually, on -- on the non-venture, I mean if you take our share of the -- of the portfolio, it's 6% rollover this year and 10% next year.

And, you know, they represent three or four transactions that we're working on but I mean that's -- those numbers are pretty consistent with year-in, year-out rollover numbers that frankly I think reflect a pretty well leased long-term portfolio.

I don't know if that answers your question.

That's fine.

I mean, it's a little high when you take the JV stuff, but that's fine.

Thanks a lot, guys.

Thanks.

We'll go next to Jim Sullivan at Green Street Advisors.

Thanks.

The office portfolio represents about 70% of your total assets, at least the way we value the portfolio.

Can you talk a little bit about the composition of the portfolio in light of the asset sales that you've completed within the office group.

Are you in the markets that you want to be?

Are there markets where you perhaps have a third-party management presence but no direct ownership presence, where you might be in the future?

Is Birmingham, for example, a market that you see staying in for the long term?

Can you just help us understand the composition of the portfolio, and the markets that you want to be in?

I doubt we'll be expanding our presence in Birmingham, though, you know, we're -- always opportunistic.

So if a great opportunity presented itself, but it's not something that we're working on at the moment.

We are working hard to keep our space leased there.

As you know, most of the office assets are concentrated in the Greater Atlanta, Metro region.

It's a growing region with good job creation and good household formation and we feel good about Atlanta.

Long term though it's certainly had its difficulties over the last three years from a leasing perspective, as we mentioned we see that leasing getting a little bit better.

We're seeing a little bit of rate improvement in some of the submarkets in Atlanta.

We feel pretty good.

In fact, very good about the Buckhead submarket right now.

We do have significant capacity -- leasing capacity and presence in management capacity in the Dallas -- the Greater Dallas market.

And if we saw opportunities there for either acquisitions or developments, we would probably pursue them in that market.

We're not actively looking at other office opportunities in markets where we have not previously developed at this time.

But once again, we take a pretty opportunistic view on our development opportunities, and generally if the sun shines, and the population is growing, that's a place that we'll look at developing.

Sometimes with partners and sometimes on our own.

And with respect to One Georgia Center.

Given the age of the building, its location, how big a challenge is that going to be to improve the occupancy from the current level?

Well, it's a significant challenge, but that building sort of borders the mid-town downtown market in Atlanta.

It's a very good building, well-positioned geographically, excellent parking.

You're right, it is a little older, it's not a Class A building.

We can be pretty competitive on rates there.

That submarket has had a lot of space that had to be absorbed over the last several months, but we see quite a bit of activity on -- it's mostly smaller tenants, you know, 10,000 square-foot type tenants.

And we have several of those, that we're negotiating with at this time, and we're keeping the -- the top floor to the building open, in the hopes that we'll find a big fish to land.

But it's a challenge, no doubt about it.

And looking at the portfolio, the office portfolio overall, the cash NOI decline of close to 10% for the first quarter, is that a reasonable expectation for the year and what might that number look like going into '06 based on the leasing activity you're pursuing?

Jim, I'm not sure what you've looked at there.

The -- whether you are looking at back to first quarter or looking at fourth quarter.

But in either case, it's hard to do that without looking at properties that we've sold.

We had some even late in the year that we sold.

So I don't think it's indicative.

I think our -- our percentage occupancy is moving up.

I think we could have some rolldown in rental rates with some of the -- with some of the rollovers that we have this -- coming up this year.

I don't think those are very large, as Dan pointed out.

And if you look on the rollover schedule, I think the average rate on our rollovers is somewhere around $15.

And so I don't think that would be a significant negative for us.

So I think the main thing is lease up.

Jim, this is Dan Dupree.

Let me kind of characterize the Atlanta market.

In virtually all of the submarkets in Atlanta, there's positive absorption.

And in some of them, central perimeter, for example, they were close to 2 million feet absorbed last year.

It had the highest vacancy level, and the vacancy level hasn't gone down to a point where -- where rates are moving much.

But the concessions are getting reduced.

The free rent, the TI.

So it's -- it's definitely a firming process.

So what I would tell you in terms of our portfolio, at least -- at least for my part is we look at the 83% number as a -- as a big opportunity going forward, whether that manifests itself in 2005 or -- or later, we had the other side of the coin for a number of years where we were 99.5% leased and -- and we were chided for not having any room in our portfolio for growth.

Now we have some -- some space to lease and we have a firming up marketplace that -- that over the next couple years ought to -- ought to put us in good stead.

Now, I'll tell you.

We're seeing that kind of activity now.

I mean, we're having the opportunity to compete for deals and we're having the opportunity to make choices.

As to whether we want to lease space in some of the buildings at current market rates, or whether we want to pass and wait and let rates firm up.

In some cases, we're going one way and in other buildings we might go a different.

I guess the only other thing I'd add is we do have a couple properties which we are -- our office properties which we own for future development purposes.

And in those cases, you know, we're not necessarily trying to fill those properties up and in some cases we're only signing short-term leases.

So that affects the gross occupancy numbers a bit as well.

What would some examples of those be?

615 Peachtree would be one.

Galleria 75 would be another.

Okay.

And then my final question.

You show on your schedule of your office holdings the joint venture interests that you have.

Do you have any situations where your effective ownership is significantly greater or less than what you show as your nominal interest?

I'm not smart enough to understand the question.

Who can answer that question?

Do you have any preferred positions or do your partners have preferred positions where they -- they own more or less than what you would show as their prorata interest in these office buildings?

This is Tom Charlesworth.

I'm familiar with a lot of the JVs, having done a number of them.

Virtually all the JVs are straight-up deals.

The percentage -- the percentage.

Occasionally you'll have a deal where there might be some kind of a preference.

In fact, in the case of the Miami condo we had some preference based on our land contribution.

In addition, the Bank of America building in Charlotte is a little different from the ordinary deal.

And our return there is based on our capital investment as such and geared to a percentage return on that, as opposed to more of a straight-up percentage ownership.

But by and large, the bulk of our investments I think economically are straight-up.

And in the case of Charlotte, is that to your favor or against you?

Well, I mean I don't -- I think it's fairly neutral what it's going to mean is at the end of the day if we get a nice return on the capital we have invested, and that is a very long-term lease of Bank of America, so it's not going to be sold any time soon.

And it's -- in the scheme of things not a very big investment.

Okay.

Thank you.

And again as a reminder if you do have a question, please press star one now.

We'll go next to David [Toti], Lehman Brothers.

Good afternoon, everyone.

David.

A couple questions, sort of focused on your development pipeline.

Given the success you're seeing in both of your condominium joint ventures, do you foresee more of that happening, do you foresee doing any future work independently?

I think that we will probably see a third condominium development or maybe even a fourth, particularly if the first two turn out as well as we expect.

We don't have, you know, fully developed expertise in for-sale multifamily here internally at Cousins, so in all likelihood we would pursue those projects with -- with a partner.

Okay.

That sort of leads into my next question, and that would be with regard to your development teams.

Do you feel aside, from the res, that you're fully round out with a development platform, in terms of the management team?

Well, you know, I hate to make completely declarative statements but I guess yes, we feel very good about the team that we have in place.

It is fully engaged and if we were to go from the likely 600 million to 800 or 900, we would probably have to add additional personnel.

Not at the senior management -- not in the senior management area, but in support of those people.

Uh-huh.

But we feel pretty good.

The -- always asked question is why is your G&A higher than everybody else's, and the answer is because we just sold a lot of assets on a percentage basis it's higher, and we developed 4 product types, or 4.5 if you want to include for-sale multifamily, and it requires us to carry more talent, but it also allows us to consistently develop through the cycle when -- you know, we might not have an office market, but we have a good retail market to develop in.

Uh-huh.

So it's a bit of a trade-off but it's one that we're comfortable with.

Great.

And then you touched upon another subject that I wanted to explore a bit, and that would be at what point do you feel your development pipeline is sort of maxed out, like what would -- do you feel like there's a ceiling, or is this sort of an infinite growth potential?

Because you have consistently showing growth in the pipeline for a couple of quarters now.

I think we have a ways to go.

It is not infinite, obviously, there's only so much that we can do.

And even with additional staff, you know, we wouldn't -- we wouldn't want to staff beyond what we see as being a consistent level of development.

So just for instance, let's say that we were -- we were able to maintain 600 or $700 million of projects underway and we looked into the future and said, well, we can probably continue to maintain that level of development out the next several years, at least as far as we can see, then we would want to support a staff, or want to maintain a staff that could support that development level.

Uh-huh.

We wouldn't want to see it spike up to a significantly higher amount and then drop down, because that makes it very tough from an overhead standpoint and on our people.

But we have staffed up significantly, as most of you know, over the last year and a half.

We have increased our development activity during that period of time.

As of this time, we think that it's sustainable.

In fact, we think that we can increase it some more.

And that's sort of where we are today.

Great.

And just one last question with regard to your -- the pace of your leasing activity.

And you've spoken several times about doing this deliberately, and at a measured pace that could capture future values.

At what point do you lose that option to sort of keep that at a measured pace, at what point do you feel that you'd have to start leasing, despite soft market conditions, or if there is a point at all?

Well, Dan will speak to this.

But don't get the idea that we don't look very hard at every deal that is in the market because we do, we have ferocious debates around this very table about whether to do, or not to do a transaction.

We -- we review at the highest levels of the Company, every proposed leasing transaction above 10,000 feet, and so we spend a lot of time.

And we are aggressively trying to fill up our space.

And our Office division has very aggressive goals for the year.

Having said that, at some point you have to lease your space.

Right now, we think we have an improving market, and so therefore we're willing to be a little choosey.

Uh-huh.

Add to that, Dan.

No, again, I don't want to -- I don't want to overstate that either.

But if you have a -- if you have a market where -- where current rents were $13 a foot and it's an improving market, absorption is -- is -- or vacancy rates are decreasing by 2 or 3 percentage points per year.

That's 13 net.

13 net.

Do you want to go out and do -- compete against somebody that does a ten-year $13 net fixed deal for 10 years?

And -- and, yeah, that makes it pretty hard to do.

Because -- because 10 years is a long time out, and it's probably a couple of real estate cycles, and you're giving up your upside when you do it.

So I can't think of -- I can't think of more than a couple of instances where -- where we've opted out of a competitive situation for those kinds of reasons.

But I also think it's fair to say that we take that into account, and we're not willing to mortgage the future for the present.

We make -- we preform every one of these deals, and we make assumptions about future lease rates, and what the return is waiting, versus the return is leasing now, and we try to make good economic decisions.

Great.

Thank you very much.

Our next question comes from Jessica Tully at CS First Boston.

Good afternoon.

Hi, Jessica.

Hi.

I had a couple questions.

Tom, you were talking about the retail potential new developments, and you mentioned the Avenue Webb Ge,n and then you also mentioned later in the year Avenue West Cobb, and then you said there were also some shadow properties that would mature in future years.

By that, do you mean the other ones in the shadow retail pipeline, if they start are likely to start in 2006 or later?

Well, Jessica, I think you started this.

ICFC review process where everything that we're marketing, you know, suddenly goes on a list, and I just can't tell you.

Right.

It's possible that we might have another one pop this year, but I frankly don't think it's all that likely but it's possible, we haven't taken them all off the '05 list.

So I think you have to think about most of them, as '06 and beyond.

Okay.

Great.

And then I wanted to ask for some more color on the G&A.

It's been fairly flat for the last four quarters.

As the pipeline is ramping up some more, do you think it's going to come down, or stay at this level?

Well, one of the problems we have and I'll let Jim speak to this more fully, is that we cannot capitalize all -- under the accounting rules, we can't capitalize all our predevelopment expense.

So the more predevelopment we have, the deeper the pipeline gets, the more predevelopment expense we have that we can't capitalize that goes into G&A.

And you can never get it back.

Right.

So -- and we're pretty -- now, we have people -- we have hired people from other companies, I'll put it like that, who say why don't you just make all of these probable?

You're spending money, obviously it's probable.

That's just not the way we do it.

It's not probable until we think it's actually probable, so we probably -- you know, maybe waste a few dollars, or at least don't capitalize a few dollars in that process.

But much of it is -- is to us even though it's frustrating, is good news.

It means that we have deals out there that we're willing to spend money on in the predevelopment cycle that are -- you know, they're not ripe enough to call probable, but we think they're good enough to spend money on.

Okay.

And then I just had a final question, and that is about One Ninety One Peachtree, which I think you have an interest in, but it's not really material but I just wondered because that obviously has a lot of vacancy, and it's a nice building.

If that's starting to have any impact on mid-town rents or anything, or do you expect it to, or do you expect it to stay entirely different?

Well, it's downtown rents and yeah I think it's had an impact.

It's not having an impact on us because our interest is a preference that's so far behind so many other things, that it's not something we think about very much, but that building is -- is pretty stressed right now.

They are now being very aggressive in the market.

And I think that is having an impact on downtown rates.

Great.

Thanks very much.

Next we will go to Chris Haley at Wachovia Securities.

Good afternoon.

Hi, Chris.

Good choice of words on the word stressed.

The yields -- obviously you mentioned that your yields on your development activity are a couple of the new ads are in-line with your -- with your historical past.

How would you compare your investment returns versus market returns as development has picked up in many more markets today?

I don't know.

I can talk about ours, but I really -- I never compare them to the competition.

You know, we have consistently underwritten to a -- you know, what we feel is a -- is a value-creating stabilized yield, and a value-creating IRR.

We try not to vary for that.

Vary very much from that.

We try not to chase cap rates, so we pretty much use historical cap rates in our underwriting, as opposed to current cap rates.

Just everybody agrees this is a little conservative.

Tom Charlesworth makes us use a ridiculously high cost of capital in all of our pro forma.

So some people say that's a little conservative.

I can't really say how we compare to others.

I can only say that I guess we do pretty well, because when it comes time to sell them, they go for a very high price.

So I think the market out there thinks that they're high-quality products with good yields and good long-term value, which, as you know, is fundamentally what we're trying to do.

What we're trying to do is increase NAV through the development process.

And recycle that capital, and either return it to our shareholders or put it into additional value-creation development.

So far, we've not had to budge very much within our -- within our limits on either our stabilized yield numbers, or our IRR numbers.

And there's probably 50 basis points difference between various projects and product types on the yield and probably about 50 to 70 on the IRR, depending on the project.

Right.

Jim, you had mentioned you had gone through some helpful property comparisons, sequentially obviously year-over-year numbers store down, but the sequential numbers showed positive trends.

If you strip out the land business, the land piece, do you feel as though we're now back on an upcycle?

Have we reached a bottom from an NOI basis from commercial property?

Well, I think it gets back to the -- to the issue of vacancy and the point Dan was making, Chris, about the fact that we're at 83% occupied on the office market -- office portfolio, we think we have -- an overall market that has some positive momentum in it, and we think that our opportunity there is to lease that space up.

And as we do, it will improve the NOIs of those property.

The NOIs did improve on the office properties from fourth quarter on the same-store basis from fourth quarter -- to first quarter.

And I think that trend will continue as we lease up the space.

Chris, this is Tom Charlesworth.

In addition, our leasing guys have a sense that not only are tenant allowances improving, -- and that's helpful, but, also, they have a sense that we're going to be able to push rates on some of our properties in Atlanta before too long, -- Dan may want to comment on that more.

So we do have a sense there is some improvement in the offing.

I think -- and Chris that's the overall picture, let me add one more footnote Dan just kicked me on something.

If you focus on the rollover schedule.

A rollover's not that large a number, and we feel good about the rental rates we're rolling from, in general.

But we do have 107,000 square-foot rollover in Birmingham at Lake Shore Park Plaza, where the tenant has already vacated and so that's a real -- another issue, a leasing challenge that we've got right now, that you don't see when you look at the end of the quarter numbers.

So to kind of sum all that up.

There may be -- there may be some near-term issues to deal with, but the longer-term picture's much healthier.

So Dan on the office side, how are we going to know whether or not you guys are waiting too long to sign deals?

No, no.

Maybe -- maybe we over -- maybe we overstated that.

There is nobody in this market that I know of, who is more aggressively pursuing smart business.

But the emphasis, rather than have the emphasis be that we're waiting, and waiting and waiting, the emphasis should be on smart deals.

And the good -- the good tenants represented by good brokers are going to say, okay, there has been weakness in the market for some time.

It is -- it is winding down, it is now time to strike and try to get long-term leases at very attractive rates.

And so the pressure on us is just to evaluate these deals in a -- in as smart a manner as we can, and do the things that are -- that are right for our shareholder long term.

Again, we're not -- I don't know.

We signed -- we've got a number of transactions in-process right now.

We've got a number of deals we've signed that we've talked about, at the Merritt Building and otherwise.

So we're not sitting on our hands, but we also don't want to give away the future.

Okay.

Last question to do with the land business.

By my calculations, your revenue per lot was relatively low in the first quarter, that may be because of mix, even though the volumes were a little lower, the mix -- can you comment on mix, and whether or not anything specific to the first quarter.

I just don't think you can look at it quarter-to-quarter, Chris, because it's a -- it's -- you know, it varies so significantly depending on what products we're selling and what quarter.

Are we selling a lot of Wildwood, which has huge margins in it, or are we selling a lot of the lower end of the Georgian, which has lesser margins in it.

You have to look at it over a little longer period of time, I think.

It can be quite deceiving if you just look at it on a quarterly basis.

Chris, to try to answer your question, we don't see any negative -- any downturn in terms of profitability of the lot sales, or -- over a longer time horizon over the number of lot sales.

Either -- our lot sales were a bit lower in the first quarter, we think we'll make that up in the second quarter.

Okay.

And that's in terms of volume of lots and margin, both.

Both.

Yeah.

Thank you.

And there are no further questions at this time, Mr. Bell I'll turn the conference back over to you.

Well, thank you, everyone for joining us, and we look forward to talking to you next quarter.

As always, don't hesitate to call us if you want a fuller explanation on any of the things that we've disclosed.

And that does conclude today's conference.

Again, thank you for your participation