Cousins Properties Inc (CUZ) 2005 Q3 法說會逐字稿

Good day, everyone 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.

Thank you, Debbie.

And Good afternoon, everyone.

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 CFO; and Tom Charlesworth, our Chief Investment Officer.

Thank you all for joining us for our third quarter conference call and at this time I will call on 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 that may cause such material differences.

Also certain items we may refer to today are nonGAAP 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 page of our website at www.cousinsproperties .com.

Funds from operation for the third quarter were essentially unchanged from the second quarter.

In a minute I will discuss the more detailed components of FFO, but overall land tract sales from the second quarter were replaced by residential lot sales in the third quarter.

However, as most of you are aware, our net income and FFO are down in the 3 and 9 months ended September 30, 2005, compared to last year's comparable periods, primarily because of the sale of substantial assets and the payment of a large special dividend in 2004.

During the third quarter we sold 649 residential lots compared with 388 in the second quarter.

This difference consists primarily of lots sold at our Summer Lakes project in Rosenberg, Texas.

We began this development in 2003, and closed 294 lots in the third quarter, which was our first quarter of selling activity at this project.

Other projects where we had significant activity during the quarter include Seven Hills, where we sold 79 lots and Summer Creek Ranch, where we sold 69 lots.

While actual closing of lots at our residential developments is difficult to predict and is dependent on a number of factors beyond our control, including weather, we believe that our total lot sales for 2005 will exceed sales of 2004.

You may have noticed on our income statement a new category entitled Multi Family Residential Unit Sales.

This line item and the related Cost of Sales line item currently relate to our 905 Juniper condominium project.

You may recall that we began recognizing profits on this project under the percentage of completion method in the second quarter.

However, in the second quarter we accounted for our investment in the 905 Juniper partnership under the equity method.

Upon our acquisition of the Gellerstedt Group at the end of the second quarter, we began consolidating the operations of this venture.

Therefore, we now record 100% of the sales and cost of sales in the respective categories on the income statement and record the remaining 28% in minority interest, which is included in Other Costs and Expenses on the income statement.

On our other condominium project, 50 Biscayne, we recently completed the foundation, and therefore we expect to begin recognizing profits in the fourth quarter on approximately 80% of the units on the percentage of completion method.

Although the amount of income we recognize in the fourth quarter will depend on the progress of construction up to the end of the year and the status of our contracts at that point, we are anticipating that our share of the pre tax profits on 50 Biscayne will be approximately $4 million in the fourth quarter of this year.

This estimate is less than the estimate we gave you in our last quarterly call due to slight delays in construction activities and a refining of our accounting methodologies and estimates.

Neither of these two factors will affect the ultimate profitability of the project, they merely push some of the profit recognition into future periods.

As a reminder, all condominium development occurs in Cousins Real Estate Corporation, our taxable REIT subsidiary.

So all profits from the sale of condominiums will be subject to income tax expense which we accrue at 38%.

We sold two income producing properties during the quarter.

One out of our office portfolio and one retail project.

We sold 1155 Parameter Center West, the 365, 000 square foot headquarters building from Merit Corporation in which we had a 50% interest.

Our share of the gain on this sale was $1.6 million.

We also sold Hanover Square, a 69,000 square foot recently developed shopping center in Richmond, Virginia shadow anchored by Target.

Hanover Square was developed and sold by Cousins Real Estate Corporation and the gain on the transaction was subject to tax.

We recorded an after tax gain on the sale of the shopping center of $1.1 million.

As part of the Hanover transaction, we also sold 10.8 acres of adjacent, undepreciated land and recognized an after tax gain of $340, 000.

The gain on the shopping center is not included in FFO for the quarter, but the gain on the undepreciated land is included in FFO.

In addition, we had several other land sales during the quarter.

A two acre out parcel adjacent to a previously developed shopping center in suburban Atlanta, two out parcels at our Avenue Viera shopping center, a 4 acre parcel at north Point, a 3 acre tract at our Ceder Grove Lakes development, two tracts of land at our Seven Hills project, a tract of land at our Summer Lakes project, and 78 acres of Tempco land in [Pauldon] County.

We recorded after tax gains on the sale of these land parcels of approximately 2.4 million, all of which is included in FFO.

As you may have noted on our same property information schedule in the supplemental package, our rental property revenues, less rental property operating expenses decreased for certain periods.

The year over year declines in office primarily have to do with the loss of a number of tenants which we have mentioned in previous calls, including South Trust, Norfolk Southern, Lockwood Green and Infinity Insurance.

As we have said before, we are making steady progress toward replacing these tenants.

I would like to review the sequential quarter results because these results reflect more recent activity.

On a cash basis, which excludes straight line rips on recent leases, our results showed a decline between the second and third quarters for both office and retail properties.

On the office side, most of the decline is attributable to the loss of Infinity Insurance as a tenant at our Lakeshore Plaza property.

This loss brought the occupancy rate down from 96% to 39% at this property.

For your information, we have leases out for signature at Lakeshore which will bring the lease percentage to 54%, and these leases are at higher rates than the Infinity Insurance rental rate.

Leasing is moving reasonably well at Lakeshore and we expect to lease a substantial amount of additional space at this property next year.

In addition, we had some expense increase at 1 Georgia Center and we signed a renewal of the 58,000 square foot Turner lease at the Inforum in July that extended the term of this lease, but provided for a free rent period beginning in July.

As a result of this cash basis rental property revenues, less operating expenses, decreased, while GAAP rental property revenues, less operating expenses, actually increased.

On the retail side, the decrease is primarily related to second quarter adjustments that increased revenues at Avenue of the Peninsula having to do with receivables recovery that did not recur in the third quarter.

I want to point out we have two executed leases at Avenue of the Peninsula totaling 35,000 square feet that had not started to generate rent in the third quarter.

One of these tenants is now open for business and the other one is expected to open in the next two weeks.

As we said last quarter, our sample set for same property operations is small, especially for retail properties and is therefore subject to periodic fluctuations because of relatively minor items.

We do not believe that any of these variances that's I have discussed are significant or indicate any trend.

I'd now like to discuss the components of FFO in more detail by describing the changes between the second quarter of 2005 and the third quarter of 2005.

You can follow my discussion beginning on page 9 of our supplemental packet.

I begin with the office division where rental property revenues less rental property operating expenses remain consistent at $9.1 million between quarters.

However, there were several properties with fluctuations that I will highlight. 200 North Point Center East increased $128,000 as a result of an increase in average occupancy between quarters.

Lakeshore Park Plaza decreased by 184,000 as a result of the expiration in the second quarter of the Infinity Insurance Company lease for 100,000 square feet.

Inforum increased 153,000 as a result of the renewal of Turner Broadcasting's 58,000 square foot lease at a higher effective lease rate. 1 Georgia Center decreased 153,000 as a result of an increase of nonrecoverable expenses.

Turning now to the retail division, overall FFO generated from rental operations decreased 163,000 between the second and third quarters of 2005.

This resulted from changes at the following properties -- Avenue of the Peninsula and Avenue Peach Tree City decreased 433,000 in the aggregate, as a result of lease termination fees recognized and tenant reserve adjustments recorded in the second quarter that did not recur in the third quarter.

And Avenue Viera increased 194,000 between quarters as a result of continued lease up of this recently opened center.

Rental property revenues, less rental properties operating expenses for discontinued operations, increased $296,000 during the quarter as a result of the lease stop of the newly developed Hanover Square before it was sold, and as a result of a true up of certain items of income and expense on properties sold in previous periods.

As I noted earlier, the Land division had a great quarter in closing lot sales and net gains from lot sales increased by $2.9 million.

But I want to take a minute to talk about tract sales since they are lumpy from quarter to quarter.

Gains on tract sales decreased from $5.5 million in the second quarter to 2.2 million in the third quarter.

In last quarter's call I explained that we did not have visibility of any significant tract sales in the third quarter.

In fact, we did have some tract sales, although at a lower level than the previous two quarters.

In the fourth quarter we may have one or two significant tract sales which could each contribute between 2 and $2.5 million dollars to FFO after taxes.

But, neither of these is under contract at this point, and if the closings are delayed into 2006 then our fourth quarter tract sales should be less than our third quarter number.

We recognized leasing and other fees of $2 million during the third quarter, a $1 million increase from the second quarter.

For the third quarter we recognize leasing commissions from several third party properties including Wildwood, 1155 Perimeter Center West, Williams Square and Las Colinas.

Interest in other income increased $326,000 as a result of additional interest received on the partial prepayment of a note receivable during the quarter.

General and administrative expenses increased $726, 000 during the quarter. $350,000 of this increase was from a one time accrual for a future funding obligation under the Company's retirement plans.

Most of the remaining increase of $376, 000 was from costs associated with the addition of the Gellerstedt Group.

This increase was partially offset by the recognition of $264,000 in development fees during the quarter from the contracts we acquire from the Gellerstedt Group.

Interest expense decreased $428,000 during the quarter due primarily to an increase in capitalized interest on development properties during the quarter.

As a result of the continued increase in our development activities, capitalized increase -- capitalized interest increased at a faster rate than incremental interest occurred on our borrowings.

The minority interest expense increased $163,000 because, as noted above, we consolidated 905 Juniper at the beginning of the third quarter and allocated our partner share of 905 Juniper operations to minority interest.

Income tax expense increased $1 million during the quarter as a result of increased income from lot sales, condominium profits, and leasing fees recognized during the quarter.

These activities are conducted through Cousins Real Estate Corporation, our taxable REIT subsidiary.

Finally, we recorded other joint venture FFO's $310,000 from a distribution we received from Deerfield, a retail joint venture in which we own a small interest.

Before I close I want to make you aware of some additional changes to our supplemental package.

On our Same Property Growth schedule, we began presenting more summarized information, while listing out all of the properties included in our Same Property Portfolio.

In both our Inventory of Land Held for Investment or Future Development schedule and our Inventory of Residential Lots Under Development schedule, we began disclosing GAAP cost basis information.

We hope these changes add to an understanding of our Company, and we hope to continue to make changes in the future that are helpful.

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

Well, thanks, Jim.

As most of you know, Cousins has a growing development pipeline which includes projects from each of our four divisions.

Now, over time these new projects and other that's will follow will replace the assets we sold in the last few years.

Consistent with our long-term strategy, we are once again using our development expertise to increase the net asset value of our Company, and over time our return to shareholders.

Today I'd like to take just a few minutes to review where we are with our development projects and to discuss our progress in each of our four divisions.

First, our retail division currently has the most development activity with 5 projects in various stages of construction at a total cost of $330 million.

The largest of these is the Avenue Carriage Crossing in suburban Memphis, which we recently opened October the 19th.

The first phase of this project, which totals 390,000 square feet, is about 90% under binding agreement and 92.5% committed.

At last month's grand opening 80% of the center was open for business and we expect will be over 90% open by the end of this year.

Carriage Crossing is our largest Avenue project to date and it includes several customers for Cousins retail portfolio including Dillards and Parisian.

We are excited about how this project is turning out, and our initial sales reports from our merchants there are very encouraging.

In the third quarter we announced our Avenue Webb Gin project in Atlanta.

This center is already almost 20% under binding agreement and 46% committed with strong leasing momentum.

Construction on this 390,000 square foot project is progressing well and the first phase of the project will open next August.

Cousins is excited to be starting another project in Gwinnett County, which has a very strong trade area and strong growth and terrific demographics.

At the Avenue Viera in Florida, retailers are doing quite well and leasing is moving ahead with good momentum.

Last quarter we started the plan 46,000 square foot phase 2 of Viera, which was -- which will be completed in the second quarter of 2006.

Cost Plus World Market and A .C.

Moore will anchor this expansion.

On a combined basis, the two phases are now about 89% under binding agreement and 91% committed.

In our adjacent Viera Market Center Kohl's opened in October, and the early reports indicate this store will be extremely successful.

We are also pleased to report we obtained a final entitlement and have started construction on a 46,400 square foot expansion to our successful Avenue West Cobb project here in Atlanta.

There was significant demand from key Avenue retailers to be in the project and we were unable to find space for them initially.

This expansion will now include Ann Taylor, Gap, Gap Kids, Baby Gap, Gap body, Eddie Bower, Panera Bread, and Banana Republic, all have committed to open stores in our expansion in the fall of 2006.

We previously reported we were working on a project in Murfreesboro, Tennessee south of Nashville.

Now, we don't typically comment on specific pre development opportunities, but we can confirm that the Murfreesboro project is progressing quite well on both a pre leasing and a pre development fronts.

We are in active negotiation with a number of key tenants for this project and we are very pleased with the progress of these negotiations thus far.

The project is located on 100 acres and could grow to be as large as 800,000 square feet.

We will be developing this center in a joint venture between Cousins and Faisons Associates out of Charlotte.

We previously discussed a possible Avenue project in suburban Austin, Texas called the Avenue La Fontera.

We have had a 45 acre tract of land under contract for several months as we evaluated this opportunity.

We feel it is an exceptional piece of real estate just off the Mopack Expressway near the Dell campus at Round Rock.

Significant road improvements near this property will be completed in the next 18 months, which will make this an outstanding site for development.

And we believe it has the potential for a substantial mixed use project.

Although we haven't made a final decision on exactly how to develop this site, we did close on this tract of land last week.

And we're continuing to evaluate various opportunities.

Our other retail developments appear to be on track.

San Jose market center is now 74% under binding agreement and about 86% committed.

This project is on schedule for a March '06 opening.

And we expect strong value creation from this property.

We also have a number of retail development deals in our shadow pipeline.

These projects include both power centers and Avenue projects.

The pipeline is geographically diversified with potential opportunities in the Sun Belt states of California, Texas, Tennessee, Mexico, Georgia and Florida.

On June 30th we closed on the acquisition of the Gellerstedt Group.

Larry Gellerstedt and his colleagues have strengthened our team adding leadership depth, depth in construction expertise as well as experience in the multi family business.

We have reorganized our office and multi family operations into a single division.

The office multi family division under Larry's leadership.

The combination of our office and multi family businesses under common leadership has increased our ability to pursue mixed use development opportunities.

In our for sale multi family business we now have two developments well underway.

The first is the 50 Biscayne condominium project in Miami, Florida where all 529 condominium units are under contract with $42.8 million of nonrefundable deposits.

In midtown Atlanta, 905 Juniper has all but three of the 117 units under contract with approximately 1.5 million held in non refundable ernest money deposits.

We were pleased with the early sales success of these projects, particularly our project in Atlanta, which is not normally a pre sale market.

Larry and his team are evaluating future pipeline opportunities in the multi family business including the profitable development of land that we now own in midtown and the Buckhead sections of Atlanta.

While we will continue to take a measured approach to the condominium market, we expect to pursue several opportunities in this area over the next couple of years.

Based on strong leasing momentum, we decided to add a two floors or 47,000 square feet to our Terminus office building in Buckhead, increasing its total size to 582,000 square feet of class A office space and 79,000 square feet of restaurant and retail space.

We continue to see strong demand for space in the Buckhead market.

And we have recently signed one new lease and are about to sign two more -- which will bring executed leasing to 46% of the expanded building and total committed space to over 54%.

We still have 18 months remaining until this building is complete.

We're excited about the amenities that Terminus100 will offer, and the market seems to be responding very well.

These amenities include a large covered cafe area, several casual and fine dining restaurants and retail shops throughout the main level and along the prime street frontage.

Buckhead is definitely the strongest office market in Atlanta today.

And it appears that Terminus will join our previous Cousin projects like the Pinnacle Building as one of the premier locations in Atlanta.

We continue to make steady progress in filling leasing gaps in our existing office portfolio.

Our 4 North Point buildings are now over 80% leased on a combined basis, up from 57% at the beginning of last year.

Our 1 Georgia Center is now at 31% leased, which is up from 15% 9 months ago.

In Austin we were in serious negotiation with two tenants for our Frost Bank Tower.

And in Birmingham, Alabama we have two new signed leases -- or two new leases out for signature at Lakeshore Plaza, an additional 28,000 square feet.

With the leases signed in the third quarter, our overall office portfolio moved from 84 to 85% leased.

And with current activity overall occupancy has improved further since quarter end.

While we are pleased with these improvements we still have a ways to go.

Leasing our existing portfolio remains one of our top priorities.

Our land division had a very strong third quarter.

We and our joint venture partners closed 649 lots for a year-end total of 1,000 -- a year to date total of 1,364.

We now expect to close over 1900 lots this year which is an increase from the 1800 we mentioned in last quarter's call.

In addition to this, the land division began 1 new residential community in metropolitan Atlanta last quarter and another one already this quarter.

Fortunately none of our residential developments were affected by the recent hurricanes.

Metro Atlanta's industrial market continues to improve with approximately 2.5 million square feet of positive net absorption resulting in the lowest availability rate since 2001.

Last quarter marks the 9th consecutive quarter with positive net absorption in the Atlanta market.

Glad to see this progress in the market and we continue to move forward with our industrial development plans.

Our 416,000 square foot industrial building at King Mill remains on schedule for completion early next year and we are working with a major companies to lease the entire building.

Under our joint venture agreement with Ray Weeks we will have a 75% interest in this project and Ray will have a 25% interest.

As we have discussed before, our strategy in the industrial area is to gain control of landing key sub markets.

In addition to the 155 acres of land remaining in our King Mill development in Henry County, we have also been looking for land in the northwest market of metro Atlanta.

We now have 305 acres under contract in Jackson County along I-85 which we expect to close early next year.

Having this second land position will enable us to pursue additional prospects since we will be able to develop in Atlanta's two most significant industrial sub markets.

Our industrial division is making good strides under the leadership of Forest Robinson and we're doing quite well in carrying out our business plans for the Atlanta market.

We expect to start seeing a positive financial contribution from the division in 2006.

As we finish out the year, we will continue to focus on the same things we have concentrated on all year, working to make the development we have underway successful, identifying and qualifying new development opportunities for the future, and managing and leasing our existing portfolio, all to our traditional high standards.

I'm excited about where we are at this point in the year and each division is making a significant contribution to the Company, and we're finding new opportunities in every division to pursue in the future.

As I said before, I would caution you against using FFO or FFO growth to evaluate our Company's performance in that I am concerned that it will lead you down the wrong path.

While our core portfolio continues to improve, and while we have a number of new project that's will contribute to FFO growth as they become operational, our FFO is still going to be inherently lumpy because of a number of factors including tract sales, lot sales, condominium profit recognition, property sales, and other capital recycling activities.

As we said before, we manage our Company to maximize total shareholder return.

A portion of this comes from FFO, but another very significant portion comes from the value we create in the development process, something that is not reflected in FFO calculations.

Our Company is not one that will have a predictable FFO or FFO growth rate.

Which leads me to a comment about accounting.

There is a significant -- there is significant momentum in both the U.S. and international accounting communities toward a worldwide convergence of accounting standards.

This includes fair value accounting for investment purposes.

Although it has not yet been decided upon, on in my view, fair value accounting seems to be inevitable.

And many in the real estate industry are now focusing on how it will be implemented.

What this will mean for real estate companies is the periodic mark to market of our investments including evaluation, development properties upon stabilization.

The periodic change in value as well as the value of creation from the development will become part of our reported income and our balance sheet will essentially be at net asset value.

All in all we think this is a good thing and in line with the strategy we have been following at Cousins for decades.

FFO ignores the value created from development even when properties are sold for substantial gains as we have done repeatedly for many years.

The value we create in the development process is a critical component of our on going business results.

But it is not measured or reported under the current FFO metric.

Fair value accounting will take this value creation into account along with other components of income and will look at our overall profitability as a Company.

Because we believe fair value accounting will provide useful information to investors we may consider supplying some of this information sooner than the accounting rules require.

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

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

Good afternoon, guys.

Just a couple of questions.

On the condo recognitions, I think you did just over 700,000 on Juniper in the third quarter.

Can you give us a little more color as to the extent that you continue on the project, can you help us understand where you expect the project to be on a completion basis over the next couple of quarters?

And if you can do the same thing on the Biscayne one that would be helpful.

Well, Greg, the accounting rules for revenue recognition in these condominium projects are sort of arcane.

So if you don't mind, I am going to ask Jim to respond to that one.

Okay, great, thanks.

Greg, I'm going to try to do what I can.

We have been getting some estimates for the recognition on 50 Biscayne for the fourth quarter because we realize that it is a significant number and it is going to be hard for folks to figure out until we get there.

Probably not appropriate to give estimates going forward -- not about Juniper because it is a smaller project and you do have some track record now to look at for the past couple quarters.

I will say if you look at the development pipeline schedule and see that we -- we project that we will have the construction completed on 905 Juniper the first quarter of '06 and we project we will be fully sold by the third quarter of '06.

We have been recognizing profit only on 30% of the properties under contract.

Substantially all the units are now under contract, but only 30% of those have qualified for percentage of completion accounting.

So the remaining ones will have their profit recognition when the units are sold, when the closing occurs, which should happen some in the first quarter and some in the second and some in the third quarter '06.

I think you can probably take the results you have seen so far and come up with some reasonable estimate about what will happen with that project over the next several quarters.

I will tell you in the consolidated results, this quarter we did have a question about the profit margin and I think the profit margin you could calculate just from looking at our income statement this quarter would be a bit lower than what we really have experienced on an average basis.

And the reason is there was some catch up expense items in the third quarter that are showing up -- that are skewing the numbers just a little bit.

If you look at 50 Biscayne we are recognizing profits on substantially more of the units.

I think we have given you the numbers in the speeches.

There, it's going to be -- it is going to take a longer period of time.

We projected we will finish construction in the fourth quarter of next year and finish selling the units closing on the sales of the units in the third quarter of '07.

Is that get you headed in the right direction?

That is helpful.

I am scratching in my notes to find the number.

I know what you gave what you thought would be in the fourth quarter.

Is that 4 million?

That would be our --

That's your share?

Correct.

Okay.

Tom, you mentioned had adding a couple of floors to the Terminus Building.

Right.

Can you help us understand what prompted you guys to do that and just -- what does that do to the economics?

Well, obviously it improves the economics somewhat.

The reason we did it, Greg, we're leasing the building up very quickly.

We have a lot of demand.

It is the only project that's been started in the Buckhead market over the last six months or so or much longer than that.

There were other buildings rumored to be started which haven't started.

And we felt like we were going to just have more demand than we had space.

We had originally designed the building so we could increase it if we chose to and we -- That's the decision that we made and we're pretty confident we will have it mostly leased up before move in date.

And, Tom, I mean, I'm assuming that your return may go up disproportionately, is that correct?

Well, yeah.

It improves the return, but it is 47,000 feet on 580 something thousand feet.

Even though the return on that 47,000 feet would be better, you still have to spread it across the whole building.

It doesn't make that big a difference.

Is that it much as you can add?

We can add up to four floors structurally, but it would have required us to put in another elevator bank, and that hurt the return, so we decided to just go with two.

Okay.

Now just one final question, I recognize that you guys have got -- your office portfolio is both geographically diverse and diverse in terms of various events occurring at the assets.

But when I look at the results, they're sort of a little slow to come back.

Can you make a subjective comment on what you're seeing in the office market right now?

I think our markets -- most of this office space is in Atlanta, we have a building in Austin, obviously and one in Dallas, but most of the office space -- vacant office space is in Atlanta.

I think the Atlanta market is generally improving.

Some markets like Buckhead are improving much more quickly than others.

You know, we have -- when we sold those properties in 2004 we sold the properties that were most fully leased and we maintained the properties where we felt like we had some challenges in front of us and some opportunities.

And the 1 Georgia Building in the central business district went almost empty.

I think it went down to 15% and that's been a real challenge in re-leasing that building and as the market has improved we have been able to do some additional leasing.

We have done some more leasing this quarter.

We have additional leases that we think we will sign in '06, so we're feeling better about that building, but it's been a real challenge and we worked hard on the Merit Building.

We got the Merit building completely leased because our partner wanted to sell that building.

So we had a commitment to try to get it leased up prior to sale.

So we put a lot of attention there.

It was very successful.

I think it was 97% leased when we finally sold that building.

We have a few other leasing challenges, but someone mentioned that we had a 13% roll over next year.

We really don't have a 13% rollover.

It is more like 8%.

And most of that is in one building in Wildwood which is in the IBM Building.

I think it is in the fourth quarter of '06 that comes up.

I think you'll start to see it.

And the rates we're getting are improving as well and the inducements are going down.

So I think you'll begin to see in future quarters some significant improvement in our occupancy rates and our NOI on office.

Okay.

Thanks a lot, guys.

And ladies and gentlemen, just a reminder it is star 1 for your questions.

We'll go next to Chris Haley at Wachovia.

Good afternoon.

We'll go through maybe a little conference call fatigue here.

Could you give me a sense as to what type of margin expectations are more realistic going forward for the residential, for the multi family segments?

Chris, this is Jim.

I assume that's directed to me.

I don't know that it really would be appropriate for us to try to project the profit margin.

I think I have had seen something today that showed a 14.7% profit margin, which was a calculation based on just the raw numbers that are in our income statement for this quarter.

My comment is that there are some expense items in there that are -- that don't really -- that really wouldn't match up on a steady state run rate basis with the income items for the particular quarter, so it is skewing the number down somewhat.

You know, it is going to be maybe in the high teens would be more what you would expect to see.

But I think that it is going to vary from quarter to quarter and it will vary from project to project.

Chris, every project is going to be different, but I can say that when we underwrite the projects we generally are shooting at 20%.

Okay.

On the cost side looking at your development pipeline, whether it be it retail or office projects, in terms of the existing projects as well as new projects how are you structuring?

Just labor material, potential cost increases, and are you seeing any movement or risks there?

All our projects to date we have gross maximum or g-max contracts.

We try to take that price escalation risk out of the -- out of the project by negotiating a fixed contract with the contractor.

Now, we are seeing price increases and so our future projects we are being very vigorous in our underwriting take into account the fact that the construction pricing has gone up.

And some markets have gone up quite a bit and others its more modest.

But, the projects that we have underway, you won't see cost increase in those projects, I don't believe.

The sale of Hanover square, the pricing on that asset based upon your disclosures, how would you qualify the comparability of that asset to the other retail projects?

It is really a real odd ball.

We -- it is a very long story and I won't bore you with it, but several years ago -- 7 or 8 years ago we got cross wise with our friends at Target and over a project in California and we wanted to work -- we worked very hard to get back into Target's good graces and that was a project that Target wanted to do, and it was the first one we had been able to do with them in a very long time.

So we pursued it vigorously, always with the intention of building and leasing it up and moving on and since then we've had a couple other Target opportunities, so that strategy worked.

But our return there is not indicative -- our value creation is not indicative of what we would normally do on a retail project.

A question, looking sequentially, Jim, if I try to look at a run rate going forward and look at the nonresidential businesses, I strip out the profits from multi family and single family it would appear to me that we backtracked a little bit sequentially.

And I wanted to kind of get your sense as to -- recognizing that there will be some quarterly volatility from the residential businesses as well as the condo, not including the condo.

What would you say the run rate is kind of on the core business, the commercial retail and office business?

Chris, let me make a comment on that.

I'm not sure that I can answer that question very well.

But, if you look -- yes, if you look at our same property numbers on a GAAP basis, we increased 0.4% in office and we decreased 5.2% in retail on a sequential quarterly basis.

Now, the retail was a much smaller pool and we explained there was an anomaly from the second quarter to the third quarter.

We do have a number of leases that either have been signed or are being signed.

We highlighted a number of those both in the office and the retail area.

Some at Avenue of the Peninsula as well as in a number of our office projects.

I would say that -- and we've got some that are going to start contributing to FFO where we have fine leases in the past, but they haven't been rent producing yet.

For instance, at Avenue of the Peninsula, if you look at that at 93% leased what you need to realize is that there are some leases that are in the 93% where we are in in the process of building up the space, but the tenant hasn't taken occupancy.

I think we're on an uptick.

I can't really give you a run rate going forward, but I do think that our leasing activity on the core -- the older portfolio will start having some affect as early as this next quarter, and I think we will have continued increases at Viera and Carriage Crossing and various other places that are coming on-line or are stabilizing.

All right.

Thank you.

[OPERATOR INSTRUCTIONS] Gentlemen, we have no other signals in the cue.

I'll turn it back to management for closing remarks.

Well, thank you, everyone for participating.

I know it has been a long day for all of you and we were the last call today, I think.

So I appreciate your patience and look forward to speaking with you again soon.

Ladies and gentlemen, thank you for your participation, this does conclude the conference and you may now disconnect.