Cousins Properties Inc (CUZ) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to this Cousins Properties Incorporated fourth quarter 2005 conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Good afternoon.

I'm Tom Bell, President and CEO of Cousins Properties and with me today are Dan DuPree, our Vice Chairman;

Jim Fleming, our CFO; and Tom Charlesworth, our Chief Investment Officer.

We very much appreciate you being with us for our fourth quarter conference call.

I'm sure it's probably your 14th call of the call, and we'll try to get through this as fast as we can.

Please feel free to ask any questions that you'd like to ask at the end of the call.

At this time, I'll turn it over to Jim Fleming 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 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 page of our website at www.cousinsproperties .com.

We ended the quarter with funds from operations of $0.44, which was $0.11 higher than the third quarter.

In a minute I'll discuss in more detail the components of FFO.

But this resulted in part from significant profit recognition on 50 Biscayne, our Miami condominium project and the receipt of a $5 million distribution from Deerfield Towne Center, a venture that developed a shopping center in Cincinnati, Ohio, partially offset by a $4.5 million charitable contribution expense which resulted from the creation of a private foundation through our subsidiary Cousins Real Estate Corporation.

FFO and net income are down compared to 2004 periods because of the sale of substantial assets and the payment of a large special dividend in 2004.

As can happen with an entrepreneurial development company, Cousins generated significant FFO last quarter from new sources. 50 Biscayne is one example.

Here, we completed the foundation as expected during the fourth quarter, which caused us to meet the GAAP requirements for beginning the recognition of revenues on the percentage of completion method for units under binding contracts with sufficient non-refundable deposits.

Because we do not consolidate the 50 Biscayne venture, we recorded our share of these net profits in the amount of $6.7 million in income from unconsolidated joint ventures on our income statement.

We have an agreement with another party to share in the amounts we receive from our interest in 50 Biscayne, so included in minority interest on the income statement is $800,000 for this party's share of the 6.7 million.

Thus, our net pre-tax profits from 50 Biscayne recognized in the fourth quarter were $5.9 million.

This amount is higher than the estimate we gave you last quarter because we received additional deposits on several units that would not have otherwise qualified for revenue recognition.

We are currently recognizing profits on 96% of the units and we are 26% complete with the project.

As I mentioned earlier, we also recognized $5 million from an interest we held in Deerfield Towne Center.

I'd like to take a minute to provide some further details on this.

In 2003, we decided not to pursue a proposed Avenue retail development in the Cincinnati market.

And we received an interest in the Deerfield venture, which had been formed by two competing developers in consideration for not going forward with our competing development and assisting the other developers in their leasing efforts.

Our interest allowed us to participate in 10% of the profits and positive cash flow with no obligation to make capital contributions, fund operations of the center, or provide any services on behalf of the entity.

The $5 million that we received was from proceeds related to the sale of the recently completed development.

Since we invested no capital in this venture, we had no involvement in the venture after it was formed and we did not view the real estate held by the venture as part of our portfolio, we have determined that these proceeds were more consistent with deferred leasing or development income than with gains on the sale of real estate.

And we have included it in FFO based on an analysis of the substance of the transaction.

This information is disclosed in our supplemental package on pages 6 and 42.

Another item of note on the income statement is our general and administrative expense for the quarter.

G&A was 14.9 million for the quarter compared with 8.9 million in the third quarter.

This increase was primarily related to the $4.5 million contribution I referred to earlier.

This contribution was made by CREC and thus reduced our taxable income and income tax expense for the quarter.

We expect that in the future this foundation will fund significant charitable contributions while the company will likely incur less contribution expense in the future.

The additional increase in G&A was the result of bonuses paid in the fourth quarter in excess of amounts accrued as well as an increase in legal and professional fees.

On the same property information schedule in the supplemental package, cash basis rental property revenues, less operating expenses, increased between the third and fourth quarters for both office and retail properties.

On the office side, this variance is the result of increased leasing and occupancy of Frost Bank Tower and Inforum.

On the retail side, the increase is primarily related to higher economic occupancy at the Avenue of the Peninsula, the Avenue East Cobb, and the Avenue Peachtree City.

In addition, we collected previously reserved accounts receivable at the Avenue of the Peninsula which positively affected same property growth.

The large increase this quarter for retail offset the decrease last quarter and highlights the volatility in the same property information as a result of the small number of properties included in the same store calculations.

For the year, retail recognized a 3.5% increase in adjusted rental property revenues less operating expenses and a 2.5% increase in cash basis comparison.

These amounts are more in line with our long term internal expectations for the retail portfolio than the quarterly changes we reported this quarter and last quarter.

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

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

I'll begin with the office division, where rental property revenues less rental property operating expenses increased from 9.1 million to 9.2 million between quarters.

Significant changes within the office properties were as follows. 615 Peachtree decreased 194,000 because we are terminating leases and relocating tenants in anticipation of redevelopment activities that we expect to begin in the first half of 2006.

Inforum increased $56,000 as a result of a tenant expansion in the fourth quarter and Prospect Tower increased 248,000 as a result of continued lease up of the building.

Turning now to the retail division, overall FFO generated from rental operations increased $1.6 million between the third and fourth quarters of 2005, 891,000 of this increase relates to the commencement of operations during the quarter at the Avenue Carriage Crossing and Viera MarketCenter.

The improvements I mentioned before at the Avenue of the Peninsula, Avenue East Cobb and Avenue Peachtree City contributed 361,000 to the increase.

And the Avenue West Cobb increased 196,000 as a result of lease termination fees received in the fourth quarter.

Rental property revenues less rental property operating expenses for discontinued operations increased $475,000 during the quarter as a result of the sale of Hanover Square in the third quarter and a true up in the third quarter of certain items of income and expense on properties sold in previous periods.

Gains on out parcel sales decreased $1.4 million since we had no out parcel sales in the fourth quarter.

And gains on tract sales increased 2.1 million primarily as a result of the sale of 12 acres in Wildwood Office Park.

Lot sales decreased 428,000 due to a reduction in lots sold from 649 to 577.

While the number of lots decreased compared to the third quarter, the activity was still quite strong and brought the total number of lots sold for the year to 1,941, which is a 15% increase over 2004.

Multi-family profits increased 7.1 million.

As I mentioned earlier, 6.7 million related to 50 Biscayne, while 403,000 related to an increase at our 905 Juniper project.

The increase at 905 Juniper was the result of an increase in profit margin from the third quarter in addition to more progress in percentage of completion during the quarter.

In 2005, we recognized a total pretax profit on 905 Juniper of $1.7 million.

We are currently recognizing profits on 40% of the units, and we are 74% complete with the project.

Development fees increased in the fourth quarter by $629,000 as a result of fees recognized from projects at Temco and 50 Biscayne.

Leasing fees increased $2 million during the fourth quarter as a result of commissions received from land sales that closed prior to year-end at the Los Colinas development.

Interest expense increased $860,000 during the quarter because we ceased capitalizing interest on most of our investments in the Avenue Carriage Crossing when it commenced operation and because we incurred additional interest on our credit facility related to investments in land on which we cannot capitalize interest.

Minority expense -- minority interest expense increased $1.1 million because of the activities of 50 Biscayne and 905 Juniper.

Income Tax expense increased 1.7 million during the quarter as a result of income from 50 Biscayne, an increase in income from 905 Juniper and an increase in leasing fees, offset by the $4.5 million charitable foundation contribution.

Other joint venture FFO increased $4.9 million due primarily to the $5 million received from the Deerfield transaction that I discussed above.

That's it for the details on the current quarter.

As I mentioned, the Avenue Carriage Crossing and Viera MarketCenter are now operational.

And as you can see on our development pipeline schedule, we have a number of projects that will become up operational later this year.

Of course, we will start to receive real income from these properties as they come online.

But at the same time, we will be required to stop capitalizing the interest on our investment in them.

Assuming we continue to finance our development projects with debt, this will cause our interest expense to increase in 2006.

I want to make sure you are aware of that as you think about our FFO for this year.

I want to mention a couple of financing matters.

In December we closed an $18.5 million non-recourse loan secured by the Points at Waterview.

This loan is now shown on our debt schedule and it carries a fixed interest rate of 5.66% and matures in 10 years.

Second, we have initiated discussions with our bank lenders about possible modifications to our credit facility.

These changes would give us more favorable terms, and if we are able to make the changes, we expect they will take effect this quarter.

We will of course announce these changes once they are in place.

I also want to mention that World Golf Village, one of our smaller retail projects, is now under contract.

And we expect the sale to close later this quarter.

We will give more details once the sale closes.

Also, I want to make a note about the taxability of our dividends.

We believe that most REIT dividends are taxed mostly at ordinary income rates.

That has not been the case for our dividends over the past couple of year because our dividends have included significant capital gains from asset sales as well as dividend income from Cousins Real Estate Corporation, which is taxed at 15% and also nontaxable return of capital.

As a result, the blended Federal tax rate for our dividends based on a 35% ordinary income rate was approximately 18% in 2004 and 19% in 2005.

This is important to our taxable investors.

And it is a significant difference from other companies.

Finally, I think it's helpful to take a look at one of our projects to gain some perspective on value creation.

Tom said last quarter that we believe US accounting standards will converge in the next few years with the international standards, and as a result, US companies will be required to report their investment properties at fair value.

Part of this reporting will involve recognition of value created upon completion of development of an investment property.

Our Avenue Viera Project opened in 2004 and is now substantially leased with completion essentially occurring in the fourth quarter.

Based on indications of current value we have received from two different outside sources, we believe the total value of The Avenue Viera and the adjacent Viera MarketCenter on a combined basis, exceeds our total anticipated development costs of these projects, including capitalized interest and personnel costs by 33 to $41 million which is between 40 and 50% of our total anticipated development costs.

This is true economic gain that has never been reportable under traditional accounting.

Yet, it is at the heart of what we do and is very important to our investors.

We are, of course, quite pleased with these results.

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

Thank you, Jim.

Creating value through development is one of our key goals at Cousins Properties because it has the greatest impact on the shareholder value.

And from a development perspective, I'd have to say that '05 was indeed a very good year.

The Avenue Viera and the Viera MarketCenter are good examples of the successful execution of our strategy.

And the numbers that Jim gave you earlier should give you a feel for the exceptional value of these projects have delivered to our shareholders.

Now, we can't guarantee all of our development projects will produce this level of return.

But it is a good example of what we do.

We're very proud of the work our retail team did to achieve this result.

And you may rest assured we will continue to focus our development -- all of our development divisions to ensure that we can constantly build value for our investors through the development process.

Once again, I will remind our investors that our long-term goal is to maximize shareholder value, over time which we accomplished through development activities, recycling capital at appropriate times and controlling the size of our company, so that development remains a meaningful part of our business.

Even though we had a good fourth quarter from an FFO perspective, I would again, urge our investors not to place too much emphasis on FFO because our FFO will invariably fluctuate as we continue to develop new assets and continue to sell mature assets.

In 2005, we worked throughout the year to build projects that would create value -- substantial value for the future.

We began over $400 million of new projects spread across all of our divisions.

And we and our joint venture partners finished the year with over 670 million in our active development pipeline.

In particular, retail development continues at a high level.

We began over $200 million of retail projects in '05 and although we're not ready to announce any additional projects at this point, we do have a good and growing pipeline of projects, some of which we expect to begin later this year and in '07.

Our current retail development projects are also moving along well.

I mentioned Avenue Viera and Viera MarketCenter.

This Avenue project, including the expansions that we have under way, is now 90% leased or sold and 95% committed, with the expansion on schedule for spring openings of A .C.

Moore and Cost Plus World Market.

The expanded market center is now 86% leased overall with the expansion on schedule to open this fall anchored by Office Depot and Sports Authority.

Phase one of the Avenue Carriage Crossing in suburban Memphis opened on October the 19th of last year.

With 80% of the stores open, it is now 90% leased or sold and 94% committed.

San Jose MarketCenter is now 78% leased or sold and 86% committed and Target is on schedule to open on March '06 or shortly by Cost Plus World Market, Marshall's, Office Depot and PetSmart.

Phase I of our Avenue Webb Gin project in suburban Atlanta is 28% leased and 56% committed with construction on schedule for an August opening of the south side and an October opening of the north side.

And finally, our expansion of the Avenue West Cobb is on schedule for an October opening this year and is now 80% leased and 94% committed.

Now some investors wonder why we are so development focused.

And we are often asked about our value creation on our development projects.

While we can't predict value creation in the future, I think it's helpful to note that we have reviewed the last five retail properties we have sold and the total value we have created as a percentage of our development cost was in excess of the numbers Jim reported for the Viera properties.

And as of now, it appears assuming today's property values continue that we can expect to continue to achieve similar returns on recent projects like the Avenue Carriage Crossing, San Jose MarketCenter and the Avenue Webb Gin.

This represents significant value creation for a company of our size, and it demonstrates why we are so development-focused and what we expect to achieve through high quality well executed developments.

It is an appropriate time of the year, I guess, to discuss holiday sales.

Accordingly, with regard to published reports, chain-store retail sales industry-wide were up approximately 3.5% during the 2005 holiday season.

Now, we carefully track sales at our Avenue projects and -- as it's an important metric that reflects merchandising strength and impacts market rents.

And while we do not disclose either individual tenant sales or shopping center sales per square foot, sales at our Avenue properties in both November and December were in line or better than industry trends.

Our office and multi-family division also had a productive year in '05 starting the initial office building, at Terminus and making great progress on our two active condominium projects.

Based upon leasing activity in the Buckhead market, we made the decision during the third quarter of '05 to add two additional floors to the Terminus 100 building, increasing office square footage to 561,000 square feet.

Leasing has continued to progress well at Terminus.

During the fourth quarter, we signed over 128,000 square feet of new leases, including Citigroup for 57,000 feet, Synovus for 24,000 feet, Premiere Global for 47,000 square feet.

We also have letters of intent for three restaurants totaling 25,000 square feet, which we'll announce once the leases are completed and signed.

The total committed square footage, including letters of intent is now 57%.

And we have several other leases under serious discussion with completion still 15 months in the future.

We are very excited about our Terminus project where we are creating a true mixed-use development, which will ultimately include casual and fine dining restaurants, extensive retail and residential development.

I'm pleased to report that we are making steady progress filling the leasing gaps in our existing office portfolio.

In Atlanta, One Georgia Center was 36% leased at year-end, up from 15% at year-end '04.

In Birmingham, Alabama, Lakeshore Park Plaza was 55% leased at year-end, up from 39% into the third quarter.

In Austin, Texas, we signed six new leases at Frost Bank Tower during the quarter, boosting occupancy to over 78% at year-end compared to 61% at year-end '04.

Overall, our existing office portfolio improved from 85% leased at the end of the third quarter to 88% leased at the end of the year.

This is up from 81% at year-end 2004.

In 2006, we will continue to focus on leasing space in our existing portfolio, while being mindful of trends and rental rates and market conditions.

In our for sale multi-family business, both of our current developments remain under construction.

In Atlanta, 905 Juniper is scheduled for completion at the end of the first quarter of '06 and all but one of the original 117 units are under contract with closing set to begin in April.

We expect full move-in by early third quarter '06.

All 529 units and the 50 Biscayne condominium project in Miami, Florida, are also under contract with over 42 million in non-refundable earnest money deposits.

We also expect to have several future opportunities in the multi-family area, including the possible development of multi-family components of our mixed-use project at Terminus and Buckhead and at 615 Peachtree Street in Midtown Atlanta.

Our land division had a strong year in 2005 with over 1,940 lot sales combined with a record level of tract sale profits.

Our markets continue to have good activity, especially in Houston, Atlanta and Tampa.

At this point, the slowest sales are in the Dallas/Fort Worth market, which we are monitoring very carefully.

But at this point we have experienced no significant problems at any of our Dallas/Fort Worth projects.

One of the core competencies of our company is the acquisition, entitlement and development of land.

In many cases we use this land ourselves, but in other situations we improve it and entitle the land and sell it to other developers.

Land sales have generated good income for us in many places including the residential portions of Wildwood, our mixed used west side project at North Point and various tracts we have controlled to our Temco and CL Realty 50/50 joint-venture with Temple Inland.

As an example, in January, Temco sold approximately 850 acres of its Seven Hills property in Paulding County for total proceeds of $18.8 million.

We expect -- at this point, we have sold much of the land at Wildwood in North Point, but we expect land acquisition, entitlement and sales to continue to be an important part of our company going forward.

Toward this end, the Temco venture acquired 6,300 acres of land in Paulding County, Georgia, which we had held under option for several years.

We intend to continue to develop portions of this land and to sell others portions as opportunities arise over the next several years.

Our per acre cost for this acquisition was $2,126.

Our industrial division continues to make progress as we work to establish a significant presence in our home market of Atlanta.

The Metro Atlanta industrial market had an exceptional year in '05 with approximately 12 million square feet of positive absorption.

We're now working to complete and lease the 416,000 square foot initial building at our King Mill project in Henry County, which we plan to expand to 794,000 square feet once the first portion is substantially leased.

We're now in serious lease negotiations with a perspective tenant that we believe will take most if not all of the 416,000 square feet.

We also purchased an additional 304 acres in the northeast sub market in January for our Jefferson Mill project, which we plan to develop over time with 3.1 square million feet of industrial space.

With this new project, we have now secured significant industrial development opportunities in Atlanta's two largest industrial sub markets.

I'd like to make a brief comment about construction costs.

As many of you are aware, we and others in the development business have seen an increase in these costs recently.

The magnitude of the increase is varied among product types and locations, but overall, we believe construction costs have probably risen 12 to 20% over the last year.

We work hard to control our risk at the project level through guaranteed maximum price contracts with reliable contractors plus pre-ordering of critical materials.

However, we are actively monitoring overall pricing trends to anticipate the effect they may have on our new projects.

Ultimately, any increases should be reflected in rental rates and asset values.

But we are paying close attention to construction costs as we evaluate new projects.

One of the strengths of our company is our diversification, which allows us to pursue development in one or more real estate segments, even as other segments are not offering good opportunity.

For many years we had strong teams in the office and retail areas, but we've been working to broaden our capabilities over the last few years, including adding significant talent in the retail area, starting an industrial division and adding key talent in our land division.

All of this has allowed our residential business to grow substantially in recent years as we have grown also our retail business.

In 2005, we added key talent to all of our divisions.

As a result of these efforts, we now have our best team ever at Cousins.

And I feel we are very well very well positioned to continue to execute against our development strategy for many years to come.

Our outlook on the economy is cautiously optimistic.

Most economists now believe the current low inflation environment will continue for the near term with good prospects for economic growth.

Our office markets are improving slowly but steadily, and this trend seems likely to continue throughout the year.

We will keep monitoring the consumer side of the economy for signs of weaknesses, and we are watching the reports about negative saving rates.

But income growth continues to look good, and at this point, retail demand remains strong so we don't predict the demise of the consumer anytime soon.

Single-family housing also continues to be in high demand in our Sunbelt markets, and demographics suggest that this trend is likely to continue for a number of years.

Our residential strategy focuses on markets with significant population growth in household formation and by and large, ignores the bubble markets that have received so much attention recently.

Industrial absorption has been very high in Metro Atlanta and we plan to further grow our industrial division in '06 and beyond.

We also expect to see additional opportunities for our new multi-family business in '06, most likely on land that we already own in the Atlanta area.

I want to finish with a comment today about the real estate market and the effect it has on REITs.

As many of you are aware, we and other REITs have been the beneficiaries of rising property valuations over the last few years.

During this period, simply owning real estate has generally resulted in good returns, and the advantage of creating value through development has been muted.

Of course, no one knows where valuation levels will go from here, but I think it's safe to assume that values may decline over time and any substantial additional increases are highly unlikely.

In this environment, the ability to create value through development provides us with the opportunity to not only differentiate ourselves, but to provide superior performance for our shareholders.

We look forward to this opportunity as we move forward into '06.

As always, we will be mindful of the risks of the real estate development, and we will be attentive to the need -- our needs to execute our business plans well, and we will be opportunistic in responding to the opportunities the market provides us.

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

Do you have any questions, please.

[OPERATOR INSTRUCTIONS] We'll move first to Greg Whyte with Morgan Stanley.

Hi.

Good afternoon, guys.

Tom, you talked a little bit about the commitments at the Terminus development.

Can you give us some indication of where current rental rates are versus what your pro formas were pre-development?

At or above pro forma.

Okay.

I mean, it sounds as though you are pleasantly surprised at the level of interest.

I mean would that [indicate] potential hikes in new negotiations?

.

I mean, Greg, we are pleased.

The building is leasing up very quickly.

I'm not one for predictions, but I'm fairly certain the building will be fully leased before we occupy it.

We're struggling now with the decision as to whether we'll start the second building, Terminus 200.

It's a good market.

Most of the tenants that we have signed thus far, not all but most have come from other Class A properties in the Buckhead market.

And we feel that there's more to be done.

That's why we added -- obviously, added the two floors.

Tom, when you guys started this, there was talk by a number of other developers that had sites in and around the markets about starting.

Can you give us any color on where those stand and how that may impact the next phase of Terminus?

Well, we've heard the stories, of course, and we follow them closely.

To our knowledge and to-date no other buildings have been started and no other leases have been secured.

Okay.

On the Temco JV, the Seven Hills sale, what precipitated the sale of that acreage, I mean, beyond price?

That's pretty much it, price

Okay.

And when we did our initial underwriting on the sale I mean, on the development of Seven Hills, we obviously had a pro forma target for that piece of property which is at the south end of the development, farthest from the infrastructure.

And at the price we were offered for that property, we basically were able to make the vast majority of our expected return without taking any of the risk.

So, we decided that it would be a good thing to do.

Do you want to add to that, Jim?

And we received it much quicker.

Yes.

Okay.

I mean, just, you alluded to some multi-family or potential multi-family starts from some of the mixed use even the Terminus.

Is that coming out of the Gellerstedt Group?

That's correct.

Okay.

I mean, the Gellerstedt Group has been merged into the Office Division, so there's now one entity which is the Cousins Office Multi-Family Division, which includes the former Gellerstedt employees.

And they are the ones that are pursuing the multi-family for sale aspects of these mixed use projects.

Okay.

Thanks a lot, guys.

You're welcome.

We'll hear next from Jim Sullivan with Green Street Advisors.

Thanks.

Hey.

Tom, when I look at total return over the last year, Cousins has trailed the office REIT average by nearly 20 percentage points.

You talked at length about the advances that you made on the retail side of your business, on the residential side of your business.

You just made a comment with respect to an office development that sounds like it's going to be value creating.

What would you cite as the reasons for Cousins' material under performance versus the peer group?

Well, I'd say three things.

One is that I think the property REITs have benefited quite significantly in '05 by the adjustment and cap rates that Green Street and other analysts have made.

So as they adjust these cap rates downward the overall value of these companies goes up.

And I think that's been reflected in their share price.

Since we had sold a significant number of assets in '04 -- '03 and '04 and some in '05, I think it had a little less effect on us than others -- that's one thing.

The second thing is as we said in our talk previously I don't think the -- it's just recently that the development aspects, of not just our business, but some of the other major developers are sort of being appreciated.

Asset prices are very high.

And to get a good return now, development is considered an attractive alternative.

So hopefully after today and into the future, that will be more recognized in the Cousins share price.

Now the third reason is the same reason that you and I have discussed before.

And pretty much everyone on the phone and I have discussed before, or we have discussed before is that Cousins is not your typical REIT.

I mean we're a development company.

We're diversified.

We're very total value focused, not size oriented.

And we don't fit easily into the model.

We're not well understood by a large portion of the REIT investment community.

And I think for those reasons, our stock has lagged a little bit as the run-up in the property companies over the last couple of years.

That's our best guess.

I mean, hell, we don't know what the markets -- why the markets do what they do.

I don't know why it went up $2 in the last week and down $2 in the last week or close to it - it makes no sense to us.

We just focus on creating net asset value.

We figure if we can consistently create net asset value ultimately it'll be reflected in the share price and over the last 30 years or so that's proven to be correct.

And a question for a Jim.

Jim, you cited several reasons why FFO is a poor measure of performance for Cousins and I agree.

You also talked about the prospective implementation of current value accounting.

And then finally you cited the value creation at Avenue Viera, why not broaden that, why just give one anecdote?

Why not help investors understand the value creation embedded in the portfolio more broadly?

Jim that's a great question and that's something we are seriously considering right now.

And it may take us a while before we develop a methodology but we may well wind up doing that over time.

Right now, Avenue Viera is the one that stabilized in the fourth quarter and so we point that out and we happen to have had some pretty good estimates of value and we thought it would be useful information and it also, even though it is anecdotal, it does kind of show you where the markets are right now.

But I think that's a great question.

Thanks.

We'll move next to David Toti with Lehman Brothers.

Good afternoon, everyone.

Two questions more sort of related to leasing on a granular level.

First of all can you give us some update on progress at the North Point assets?

Yes, this is Dan DuPree.

On those four buildings, actually the activity is quite good.

We are up overall to 81, 82%.

One of the buildings, I think 100 is at 91%.

We have a couple of strong prospects right now.

Over the course of the year, we expect to make -- continue to make good progress.

We had a good year in '05.

It's just steady as you go and we have historically focused more on whole floor users.

I think, increasingly we're looking at dividing up some floors, which I think will give us a little bit more velocity as well.

But we're pretty happy with the way things are going.

And candidly not just there, but across the portfolio.

We had some significant vacancies.

The Infinity space at Lakeshore Plaza in Birmingham was 109,000 feet in I think a 180,000 foot building.

So a big hit that we took towards I guess the middle of last year.

But we acquired that building thinking that we had an opportunity to add value through the re-leasing of that space that we anticipated that we'd get back last year.

In a perfect world, we might have received that space back at a more robust time in the market.

But we've already leased 35,000 square feet of that space at a handsome roll up in rent and we have a significant number of advanced prospects for much of the remainder of that space also at considerable roll up.

So, you take that One Georgia Center, we were at 15% when we started last year.

We ended up at 36%.

That may not seem like a huge increase, but it's coming in 5,000 and 10,000 square foot increments and that momentum of 6,000 or 7,000 square feet a month or better continues today.

So going from 85 to 88% leased across the office portfolio may not seem like a lot, but it's backed up by significant positive momentum going forward.

Great.

My second question is more related to the leasing velocity.

Can you give us, without, obviously naming specific tenants, give us a typical package that was signed relative to the lease rate range and the tenant concessions that might be attached to those typical leases?

I know there's some variety, but it would be good to have some sense of scale.

I mean, David, it varies all over the board.

I mean, one of the problems in our market is how you categorize assets -- what's an A building, what's a B building, what's a C building.

What you get in a true class A building is materially different than what you might get in a different building.

So it's kind of hard to generalize, but I will tell you that I think across product type, concessions are down.

Rental rates are - they're not leaping forward, but they're edging up.

And it varies by sub-market, depending on vacancy levels in that sub-market in the product type that we have.

But the general comment would be that the market is firming up -- is firming up.

Great.

Thank you very much.

We'll hear next from Jessica Tully with Credit Suisse.

Good afternoon.

I wanted to ask you, how soon after a property is fully operational would you expect it to be earning at 100% of its stabilized yield?

Would you expect that, assuming that lease is up [well], would you expect that to occur in that quarter or will it -- does it usually take a few more quarters to kind get the bugs out?

Well, Jessica, I think it depends on the property type, what product you're talking about.

But if we take a retail property, for instance, when we lease up our retail properties, a lot of those leases do not become fully executed until other leases are executed.

So they're dependent on each other.

And so if you have a tenant, say a Gap, who says Hollister has to be open before we pay full rent, we're just going to pay percentage rent until then or something of that nature, it changes the speed at which the process goes.

We generally underwrite the projects to be fully operational and with an NOI that you could say, okay that's the stabilized NOI for this property, a year or more after we open the property.

So that's the way we underwrite them here.

But we've had some that have stabilized very quickly.

I think West Cobb was pretty much up and going in six months.

We've had others that have stabilized more slowly and Viera's taken about a year before we got to the point where we feel like we've got a very, predictable and fully funded NOI.

And do you stop capitalizing interest when it becomes fully operational?

Well, that's an accounting rule.

And I stop capitalizing interest when J tells me I can no longer capitalize interest -- but what is the rule there?

We stop capitalizing interest, Jessica, on the portion that becomes operational when it becomes operational.

So if it's 50% or 80% operational when it opens, we'll stop capitalizing interest on that part that we're receiving rent on.

And then ultimately we'll stop capitalizing interest within 12 months no matter what.

Okay.

Thanks very much.

And then I had an unrelated question.

Can you talk a little bit about the midtown office market in Atlanta, especially in the Class A area, and kind of talk about prospects, or the competitions for the Ernst & Young space that you have coming up next year [inaudible - cross talk]?

I'll let Mr. Dan DuPree, the Chairman of the Midtown Alliance, speak to that.

Thank you.

Mr. DuPree?

Jessica, midtown -- the midtown market has, again, has good velocity and lease up in Class A space.

There is one new building starting at Atlantic station with a law firm as an anchor tenant.

The Hines development, where King & Spalding is locating, has leased another one or two spaces.

They're very, very high on their rate, and there's a little sticker shock within the market.

But all of our projections, taking a look at vacancy and the speed with which the vacancy is being absorbed, which show that, I think, behind Buckhead as being probably the next market to reach a level of stabilization.

As to your question on the E&Y space, fortunately for us and Bank of America, we have a number of existing tenants who need to expand.

So our initial focus as we prepare for that lease expiration in 2007, which I should tell you, one of the nice things that we have to deal with is we've only got 13% rollover in the next two years in our office area -- actually, we only have 11% in the next two years combined in retail.

We expect all of those to renew.

But as we deal with the E&Y space, the first place we're going to focus on is satisfying the expansion needs of our existing tenants and the good news is they're substantial.

Tom?

Jessica, this is Tom Charlesworth.

I would note, too, that the midtown submarket has shown the strongest improvement over the last year.

Its availability rate has come down substantially.

Its net Class A rental rate has gone up by a couple of bucks, and so it has demonstrated some strength.

But I think as Tom and Dan have both said, it has been slow and steady strength.

But that one's been at the top of the heap as far as being better at slow and steady.

Thank you.

[OPERATOR INSTRUCTIONS] We'll move on to Chris Haley with Wachovia Securities.

Good afternoon.

Hi, Chris.

Dan, could you go into - I'm not sure if you -- you just mentioned a little bit on the IBM -- looking at, I think, is that later '06?

The training center?

Yes.

Yes.

And I guess it's one of your larger exposures this year.

Is that fair?

It -- on the office -- yes, I mean that is the largest exposure late in the year.

Okay.

Any thoughts or any comments on action on that?

Well, this is Tom Charlesworth again.

We do not expect IBM to renew.

And at this point, I think it would be appropriate to say that our expectations are that we probably would not have that put to bed until sometime in mid '07.

But certainly our goal would be to try to do better than that.

But that would be the expectation at this time.

Mid-'07 meaning you'd have it backfilled, so there would be downtime?

There'd be some downtime.

The current expectation, again, it's certainly not going to be the goal, and we have good leasing teams but that's --

Right.

-- sort of where the thinking is.

Okay.

Jim, in your same-store numbers that you reported for the fourth quarter, were there any abnormal revenue items like termination fees or stuff like that?

There were some that really affected -- if you look at sequential quarters, we talked last quarter about some unusual items that had been in the previous quarter, that caused us to go down.

Right.

But one of the things there, Chris, as you probably noted and others have noted, these same-store numbers fluctuate a lot for us because it's a very small group of properties, especially on the retail side, that are in the same-store calculation.

And we can have a -- in this case, this quarter we had a right -- we actually had a reserve at Avenue of the Peninsula that we got rid of because we were able to connect it.

Well, that improved the numbers.

I think last quarter we had some things moving in the other direction.

So there can be some very small things that can affect the numbers.

The answer is, other than what I pointed out before, I don't think there's anything unusual to note in the numbers this quarter, but I think looking at it over a longer period of time, a year or so, is a more helpful way to do that.

Okay.

So taking into account IBM, so kind of a core growth rate for the office portfolio on a cash basis or a GAAP basis, whichever you'd like to comment, do you feel comfortable that you turned the corner to positive?

Well, if you look at the lease percentage --

And the mark-to-market?

I'm sorry?

The mark-to-market, well [inaudible - cross talk]

You know why it's moving up in lease -- if you look at the numbers that have been reported, I don't think we ought to try to -- we will have the same effort moving forward to try to continue to lease the vacancy in the portfolio.

And I think that we've talked about the market.

I don't think we can really do much more.

And we are seeing that steady, slow improvement in -- we would be hopeful that we've turned the corner.

Chris, if you look at the rollover, we do have pretty low rollover over the next couple of years, and the IBM one is pretty late in the year.

Right.

And then you also provide the effective rent per foot of the space that's rolling, and that was my question about where your re-leasing spreads might be?

Yes.

So is that -- obviously '06 comes in pretty low, '07 is pretty high.

That's downtown, then you get back to that 15 to $16 range for a little while.

Yes.

Any thoughts on -- any thoughts on where your re-leasing experience was in '05 and where you think it will be in '06, with you office portfolio?

I think well, we had good success in '05.

I think we'll have good success in '06.

I think our lease rate will go up.

We have that IBM Training Center, which is --

Yes.

-- an issue for us because it's a -- as it's presently constituted it's a special- use building, it's a training facility, so we're either going to have to lease it as a training facility or we're going to have to reestablish the building, which is why Tom said it's going to be a little slower lease up than with our normal circumstances.

Okay.

And sorry, question on your retail.

You said, you measured obviously, you looked at Avenue Viera, and then you looked at five last retail deals.

Is there any reason you're looking at these at this point in time?

Yes, we're trying to get the markets -- the investor to better understand what we do.

We still have investors who -- or potential investors who call us up and try to understand our FFO.

Well, unless you understand our business, which is a diversified development company that builds assets on an ongoing basis and sells mature assets on an ongoing basis, you're going to be very confused about FFO.

So we're trying to get the investor to focus on net asset value, the value we create through the development process because that's really where we would suggest the investor look, if they want to understand the future value of a share of Cousins' stock.

That's why we're talking about it.

This is not necessarily assessing value, whether not it's better value in somebody else's hand versus yours?

I'm sorry.

I didn't get the first of that, Chris.

This is not something an exercise, that you're looking to, in the short run to, potentially venture or sell this Avenues concept?

No, this isn't a sales -- We're not trying to sell the Avenue today.

Okay.

It's not what that's about.

Let me -- two final questions, first, in terms of additional residential projects.

In relation to your experience at Juniper and Biscayne, what would you say your after-tax hurdle rates are on incremental dollars in that asset segment versus what you're generating in retail or office?

Just kind of prioritize again for us?

Well, if we talk in very general terms...

Yes.

-- then we underwrite our for-sale multi-family business to the same basic return standards as we do our other office -- our retail and office business.

And is that risk adjusted?

Yes.

So, you'd be developing a rate of return in the high single-digit to a low double-digit say for Terminus, which might be in the initially 8 to 9 and might be around the rate of return in the low double-digits?

You're willing to go that tight in terms of residential?

Chris, if you look, and I pointed out the numbers in the speech, but if you look at both 50 Biscayne and 905 Juniper, we've given you the numbers for profit we'd recognized this year, what percentage of units that's on and what percentage complete we are.

I think you can use those numbers to figure out where we're coming out on those projects.

And you can calculate it in any of a number of different ways.

It would be hard to compare our residential project that you sell to a retail project that you then have a yield and IRR over time.

But in terms of profit margin, I think you can figure that out from the numbers.

Yes.

And I think they're very good profit margins on those deals.

But a point, in terms of the issues related to the residential business, whether it be for sale or for the land plot preparation work or [track] work, given the macro comments occurring in the residential marketplace, I was wondering if there's any marginal change in terms of your appetite for these transactions on the vertical build and kind of pace assumptions on the lot in a track sale?

Chris, this is Dan.

On the lot sales, one of the nice things about that is it's all in measured bites because they're multiple phase developments.

The differentiation between lot sales and vertical development of residential is that if the market slowed down -- again we underwrite our deals where we make assumptions that the market just disappears for periods of time during the pro forma development -- overall period.

As it relates to vertical construction, two things I would say.

One, we have generally looked at these things in very measured bites. 905 Juniper was 117 units, $29 million project, not a big deal by our standards.

But the other thing that we do and have done and will continue to do as we look at multi-family is we'll underwrite the condominiums, we'll build them to condominium standard.

We'll underwrite them as condominium.

But alternatively, we'll underwrite them to -- for rent criteria as well so there is kind of a floor on these deal.

And that's marketing them as for-rent units until the market's the way we wanted it to be to convert.

But Chris, we're also -- on the condominiums, we're also looking at the statistics, of course, very carefully.

And for example, once sub-market we like is midtown in Atlanta.

And that sub-market that certainly has had some supply come on.

But the interesting thing is that the demand has been there as well.

And we think there are forces, demographically and otherwise, that would make midtown a good place to be in that product type over time but as Dan and Tom have said, certainly in measured steps.

Okay.

Thank you for that.

And I think we think Buckhead is also a good market for it over time.

And same comment on that, measured steps.

Okay.

The last one is regarding G&A expenses.

Assuming your comments related to reduce capitalized interest as developments come on would influence the G&A capitalization, if I'm wrong, please correct me.

Well, I don't --

What would be -- would drove the fourth quarter numbers and what would be - what do you think the total G&A costs are capitalized and un-capitalized in the company today?

Chris, what happened -- there are really two different things that happen on capitalization.

On the interest expense, if we have projects coming behind the ones that are stabilizing, then what happens is the stabilizing -- the ones that stabilize, we quit capitalizing interest on.

And then we start capitalizing interest on the ones that are coming online.

But we're borrowing money to fund the ones that are coming online assuming we're using debt.

So there is a net increase in our interest expense because even though we capitalized the money on the new projects we're borrowing that money on an incremental basis.

Okay.

For the G&A really -- if we continue at the same level of development, and we do have a lot going on right now, you have to make some assumptions about that, but if we continue the same level of development we would have the same number of projects or the same activity on projects to capitalize our G&A to that.

So that's really not the explanation.

The fourth quarter, most of the G&A difference was a charitable foundation that was created, and hen there were some additional small amounts in there.

Okay.

So we just have to make an assumption regarding continued pipeline build and delivery of projects?

I'd be surprised, Chris, if in '06 our capitalization rate, salaries and G&A costs was not equal to or greater than '05.

Okay.

All right.

Thank you very much.

Congratulations on a good year.

Thank you.

And there appear to be no further questions at this time.

All right.

Well, thanks everybody.

We appreciate you hanging in there to late in the afternoon, and as always if you have other questions or comments that you'd like to make, then we're always available to you.

Thanks for being with us today.

That concludes today's conference.

You may now disconnect and have a pleasant afternoon.