Cousins Properties Inc (CUZ) 2006 Q1 法說會逐字稿

Good day and welcome to this Cousins Properties Inc. first quarter 2006 conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Good afternoon everyone, I'm Tom Bell, President and CEO of Cousins Properties.

With me today are Dan Dupree, our Vice Chairman;

Jim Fleming, our Chief Financial Officer;

Tom Charlesworth, our Chief Investment Officer; and Craig Jones, our Chief Administrative Officer, which is a lot of chiefs.

Welcome to our first quarter conference call.

We appreciate you taking this time and now I would like to call on Jim Fleming to review the financial results for the quarter.

Thank you, Tom.

Good afternoon.

First I need to remind you that certain matters we'll be discussing today are forward-looking statements within the meaning of the Federal Securities laws.

Actual results may differ materially from these statements.

Please refer to our filings with the SEC including our 2005 annual report of Form 10-K for a discussion of the factors that may cause these material differences.

Also, certain items we may refer to today are considered non-GAAP financial measures within the meaning of SEC's Regulation G. Well, these items, the comparable GAAP measures and related reconciliations maybe found through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our web site at WWW.cousinsproperties.com.

We reported funds from operation for the quarter of $0.37 compared with $0.44 for the fourth quarter of last year.

This change is primarily the result of several nonrecurring items that we discussed with you last quarter.

Including the $5 million in income recognized from our Deerfield investment and the catch-up adjustment related to the commencement of profit recognition on 50 Biscayne, our condominium project in Miami.

The difference in FFO from last quarter to this quarter highlights the entrepreneurial character of our business.

We have a portfolio of high quality investment assets but this asset base has become smaller as we have captured the high evaluations of some of our assets in the property markets over the past several years.

The joint venture we announced yesterday with Prudential which we call the Avenue fund is the latest example of this and as Tom will tell you, there's more to follow.

These reductions in our asset base coupled with our entrepreneurial activities tend to result in FFO that's more variable than you would expect to find in a traditional property REIT.

Especially at this time in the real estate cycle.

But as we have said many times, we're focused on total shareholder returns and to do this, we work to create value through a wide variety of activities.

Although some of the activities may appear to be nonrecurring, we have been able to generate significant revenues over a long period of time from these "nonrecurring items."

We will not tell you that FFO is irrelevant.

It is.

But as we have stated in previous calls and most recently in our annual report, we believe that net asset value or NAV, together with NAV growth and value creation tell you more about our company than the current FFO.

While FFO may vary from quarter to quarter, we believe it is far more important to focus on the value we are creating for our shareholders through the development process and the resulting increases in NAV in order to gauge our success in the long run.

This value creation is very apparent in our recently-announced fund joint venture which I referred to earlier.

We announced yesterday we have reached an agreement with Prudential to form a venture into which we contribute our interest in five retail properties and a fund advised by Prudential will contribute cash to fund future development.

This venture will be structured much like the venture we entered into with Prudential in 1998.

We will retain an 11.5% interest in the current properties and we'll have an 88.5% interest in the future development activities.

Assuming we're able to achieve certain leasing objectives at the West Cobb and Viera projects in 2007, the current Avenue fund properties will have a total valuation of $363 million.

Subject to final accounting, we estimate that our value creation on these five properties will be between $140 million and $150 million or 70 to 75% of our total undepreciated cost.

The initial cash contributed by our partner will be received in installments through 2006 which is expected to match of some our cash needs from our projects under development.

The formation of this venture will create no taxable income to Cousins.

Even though the value creation from this transaction will not be included in FFO, we will have a mark to market adjustment on fixed rate debt assumed by the venture.

We anticipate that this will reduce our FFO under the NAREIT FFO definition by approximately $4 million at the time of the closing.

Although we will provide a breakout of this amount, since it will arrive solely from the formation of the venture and not from ongoing operations.

Going forward, we expect the transaction to be neutral from an FFO perspective as the loss of 88.5% of the NOI contributed will be offset by interest savings resulting from lower debt.

We expect the transaction to close late in the second quarter.

We also expect to close a substantial number of units in our 005 Juniper project in the second quarter.

Through the end of the first quarter, we've been recognizing revenues on approximately 40% of the project's total units.

As of the end of the first quarter, we were 95% complete.

We expect to recognize profits on the remaining units as closings occur throughout the second quarter and into the early part of the third quarter.

We currently anticipate closing over 90% of the units in the building by the end of the second quarter and we expect to recognize second quarter pretax profits on this project between $2.9 million and $3.3 million.

On our other condominium development, 50 Biscayne, we are recognizing percentage of completion revenues on 96% of the units.

We were 33% complete with the project as of March 31, 2006.

We expect to complete construction of this project in the third quarter of 2007.

And by the end of 2006, we expect to be approximately 70% complete.

We anticipate that this will result in pretax profits of between 2.3 million and 2.8 million per quarter for the remainder of this year.

As we previously announced, we recast our credit facility during the first quarter resulting in additional borrowing capacity, a reduction in our interest rates spread over LIBOR and financial covenants.

In connection with these changes we also closed $100 million unsecured construction facility with the same bank group to fund costs of our Terminus 100 project.

We're fortunate to have a strong relationship with a well-respected bank group and we're pleased that their continued confidence in the quality of asset, our management team and our ongoing business strategy.

I would now like to discuss the components of FFO in more detail by describing the changes between the fourth quarter of 2005 and the first quarter of 2006.

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

I'll begin with the office division where rental properties less rental property operating expenses and increased $644,000 between quarters.

Significant activity within the office properties was as follows. 3301 Windy Ridge Parkway decreased $179,000.

As a result of the termination of a portion of the lease during the quarter.

Lakeshore Park Plaza increased $168,000 as the result of an increase in occupancy.

The Points at Waterview increased $131,000 due to the collection of previously-reserved accounts receivable and an adjustment to straight line rents and 1 Georgia Center increased $413,000 as a result of increased occupancy and increased parking revenue.

In the retail division, overall FFO generated from rental operations increased $680,000 between quarters.

Significant activity within the retail properties was as follows.

The Avenue of the Peninsula increased $156,000 due to an increase in average occupancy.

The Avenue Viera decreased $178,000, primarily as a result of lost rent insurance proceeds that we received in the fourth quarter for damages suffered during the hurricane season.

The Avenue Carriage Crossing increased $469,000 because it opened in the middle of the fourth quarter and it continues to lease up.

And San Jose Market Center increased $220,000 because most of the anchor tenants opened during the quarter.

Gains on track sales increased $639,000.

Included in track sales this quarter is a $740,000 gain from the sale of seven acres at the North Point West Side project and a $3.2 million pretax gain on Temco's Seven Hills project.

Land track sales of course are a significant contributor to the variability to our FFO from quarter to quarter.

Over the past five quarters, they have ranged from a low of $2.2 million to a high of $6.8 million.

Lot sales decreased $946,000 due to a reduction in lots sold from 577 to 490 although this was still quite a strong quarter for lot sales compared to 327 lots in the first quarter of last year.

Multifamily profits decreased $4.8 million, due primarily to the fact that we began recognizing profits on Biscayne in the fourth quarter and this amount included profits for several quarters construction activity whereas our first quarter profit reflected only one quarter's activity.

As I mentioned before, we expect to recognize much higher profits from 905 Juniper as closings occur during the second quarter.

Development fees increased in the first quarter by $500,000 as a result of fees recognized from projects at Temco.

Leasing fees decreased $3.1 million due primarily to the receipt of a large land sale commission in the fourth quarter related to the Las Calinas project.

The lease termination fees increased $2.5 million due primarily to $2.3 million recognized from the termination of 62,000 square feet of the Indus International lease at the 3301 Windy Ridge Parkway building which I mentioned earlier.

Interest income and other decreased $465,000 primarily because of the decrease in interest income that resulted from the payment in full of a promissory note in 2005.

General and administrative expenses decreased $4.9 million due primely to the $4.5 million funding of the Cousins Properties foundation in the fourth quarter which we discussed in the last call.

We also began expensing stock options in the first quarter of 2006.

And this quarter's G&A included $940,000 of stock option cost before capitalization.

Interest expense increased $1.1 million during the quarter due primarily to a decrease in capitalized interest on development property related to the commencement of operations of the Avenue Carriage Crossing during the fourth quarter and an increase in interest incurred on our credit facility related to purchases of land on which we cannot capitalize interest.

Minority interest expense decreased $610,000 because of the decrease in profits recognized on 50 Biscayne.

Interest -- income tax expense also decreased $1.4 million during the quarter as a result of a decrease in income from 50 Biscayne.

A decrease in taxable fee income and an increase in intercompany interest expense incurred by Cousins Feal Estate Corporation, our taxable subsidiary.

Other joint venture FFO decreased $5.2 million due primarily to the $5 million we received from the Deerfield transaction in the fourth quarter.

We made one change to the information we provided in the supplemental package.

This quarter, we have included a separate line in the FFO detail schedule for lease termination fees which had previously been included in rental revenues.

One other comment on the material in the supplemental package on the same property information schedule, cash basis rental property revenues less operating expenses increased between the fourth quarter of 2005 and the first quarter of 2006 for both office and retail properties.

On the office side, this variance is the result of increased leasing, occupancy and exploration of free rent on certain tenants at Frostbank Tower, increased occupancy and parking revenues at 1 Georgia Center and expiration of free rent at 555 North Point partially offset by the increases in revenues associated -- the reduction of revenues associated with the Indus lease amendment at 3301 Windy Ridge Parkway.

On the retail side, the increase is primarily related to higher economic occupancy at the Avenue of the Peninsula, rental increases at the Avenue East Cobb and the execution of a ground lease on a parcel at the Avenue West Cobb.

Two years ago, our Board authorized the stock repurchase plan for our common stock.

This authorization expired April 15, of this year.

Although we didn't purchase any stock under this authorization in the last two years, we feel it is prudent to have a plan in place in order to be able to make purchases if market conditions are favorable.

Because of this, we anticipate asking our Board for a new authorization at next week's Board meeting and of course, we'll issue a press release to announce any new plan.

We consider this matter to be routine at this point but I wanted to let you know our thoughts on this subject.

I also want to repeat a point I made last quarter about taxability of our dividends.

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

This has not been the case for our dividends over the past several years.

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 some nontaxable return of capital.

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

This is important for our taxable investors.

And it is a significant difference from other companies.

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

Well, thank you, Jim.

Just want to review a few key points with you this afternoon to clarify how some of these current activities fit in with our overall strategy.

The primary driver of our business as most of you know is well-executed, high quality development.

Over the last few years, we've added to our development capabilities by both expanding our resources in several areas including land and land division and the retail division, but also by adding new products such as our industrial properties and our condominium or multifamily capability.

Today, we're able to pursue a broad array of project types including importantly, urban mixed use development like our Terminus project in Atlanta.

Atlanta's Buckhead financial district.

We feel urban mixed use projects are a growing opportunity for our company.

These actions have enabled us to increase our development pipeline substantially.

Today, we and our joint venture partners have ten projects under development with the total cost of almost $700 million.

In addition to 24 residential communities and across the board, I'm pleased to say our development pipeline is in good shape.

We also have many predevelopment projects in our shadow pipeline and I'll talk more about some of these projects in a few minutes.

Another key part of our strategy is to actively manage our portfolio of investment properties in order to take advantage of strong markets when they're available.

When the property markets offer exceptional valuations on fully matured assets, we tend to capture that value through sales and ventures such as the new Avenue fund that Jim just discussed.

Following this strategy and the three years prior to 2006, we and our investment partners have sold 1.6 billion of our mature investment assets capturing $274 million of value for Cousins shareholders.

Our average value creation on these assets was about 30% of the undepreciated costs.

Once we capture the value in mature investment assets, our strategy is to reinvest whatever funds are needed for future development and to future projects.

I'll talk about some of these later.

To the extent our asset sales generated excess funds, we're inclined to pay these out in special dividend.

We like to use capital as efficiently as possible and not keep any more than we need to fund our development and other capital requirements.

By keeping our capital base as small as possible, we allow our value creation activities to have a greater impact on our total shareholder return.

The numbers Jim discussed on the Avenue fund are impressive.

We've agreed with our partner upon a combined valuation of $363 million which includes approximately 21 million that we anticipate receiving in 2007 based on some additional leasing at Viera and West Cobb.

Based on this number, we're anticipating that these properties will have a total value creation on a combined basis of between 70 and 75% of their undepreciated cost.

Not all of our projects will enjoy this level of value creation but I think this transaction, once again, very clearly highlights the significant value that we can create for our shareholders through a successful development process.

Very recently, we have also decided to offer two additional trophy assets for sale due to the excellent valuations that are now available.

We're with now pursuing the sale of BankAmerica Plaza in midtown Atlanta and Frost Bank Tower in downtown Austin.

We've engaged brokers to sell both of these buildings and we're moving ahead quickly with our marketing efforts.

We believe there will be strong demand for these two buildings.

Both are recognized as the best buildings in their market and they should be terrific investments over the long-term.

In both cases, however, we feel it is now appropriate for us to capture the value we've created in these assets.

And consistent with the strategy I described earlier, we will keep some of the proceeds from these sales to fund our ongoing development activities.

Once we are able to determine the sales prices, we will also consider paying a special dividend with a portion of the proceeds.

For us, the key to value creation is development.

Now, I want to update you on the recent development activities in our four operating divisions.

First, our retail division had another good quarter.

The Target store at San Jose market center opened in early March and all of our major tenants, Marshall's, Cost Plus, World Market, Michael's, PetSmart, Office Depot are now also open.

A significant number of shop tenant spaces are now under construction and are expected to open during this quarter.

Overall, the center is now 85% sold or leased and 89% committed.

During the first quarter, we also opened the expansion of the Avenue Viera which is anchored by Cost-Plus, World Market, and AC Moore.

The expansion of the Avenue West Cobb is under production and on schedule for an October opening.

West Cobb expansion is currently 94% leased with only one space remaining.

Leases have been signed with Gap, Banana Republic, Eddie Bauer, and Ann Taylor which will significantly strengthen this center.

Both of these expansions will be included in the Avenue fund.

Our latest Avenue project under development, the Avenue Web Gin in suburban Atlanta is now 77% committed on the south side and 64% committed overall.

This project is also progressing well and is on schedule for southside to open in August followed by the northside in October.

We've talked in the past about our proposed projects in [Murphy's Burrow], Tennessee, fast-growing suburb south of Nashville.

The Avenue Murphy's Burrow which we're pursuing in a joint venture with our friends at Faison Enterprises made significant advances during the quarter.

Venture management and leasing agreements are being documented with our partner.

And design work is well underway.

Leasing momentum is very positive and we're in the process of preparing to close on the land.

Based on the progress we're making, we anticipate to be able to close on the land and begin construction in the second or third quarter of this year on our Murphy's Burrow project.

We're currently pursuing another Avenue project in metro Atlanta called the Avenue Ridge Walk.

It will be located on I-575 in Cherokee County, a northwestern suburb of Atlanta.

Retailers are showing strong interest in this location and the key factor in our timing to move forward will be the construction of a new interchange on I-575.

The new interchange has the support of federal and local officials as well as the Georgia Department of Transportation and we currently anticipate that construction will begin in mid 2007 and will be complete in the fall of 2008.

Our current plan is to open our Avenue project at the same time the opening of the interchange.

The new multifamily division made solid progress on several development projects during the quarter.

Our decision to increase the size of our Terminus 100 building appears to have been a good one based on the continued positive leasing momentum that we're seeing.

As of today, sign leases stand at 46% of the total project square footage and sign leases plus fully negotiated letters of intent stand at 60%.

And we still have over 11 months remaining until completion of the bill.

Rents to Terminus 100 are at the top of the Atlanta office market confirming that the Terminus development is one of the premiere office locations in Atlanta.

Our 905 Juniper condominium project was substantially complete as of March 31, and unit closings commenced on April 3.

Now, as of April 30, we've closed 34 of the building's 93 units.

As Jim said, we expect to close over 90% of the total units by the end of the second quarter.

Our multifamily strategy targets higher end and move up buyers and we're carefully managing the closing move in process at 905 Juniper to build on our strong brand reputation in this segment of the multifamily market.

We believe this strategy will serve us well as we market future family projects.

At our 50 Biscayne project in Miami, construction is on schedule with expected completion during third quarter of '07.

All 529 units remain under contract and we continue to hold 20% non-refundable deposits on 96% of these units.

Significant progress continues on several of our projects in the shadow development pipeline, as well.

We've received governmental approvals of our master plan for the development of the remainder of the Terminus site which includes additional multifamily retail and office components.

We're in the final design phase of our second office building at Terminus, leasing momentum which thus far, has been very strong will determine the start date of Terminus 200.

We're also proceeding with schematic design work on a 150 unit condominium tower immediately adjacent to Terminus 100.

We've vacated all our tenants from our Peach Tree building in midtown Atlanta.

We anticipate commencing demolition and redevelopment of that site later this year.

We're moving rapidly through the design approval process on this 2.5 acre site which will accommodate a mixed use development containing multifamily, retail, office, and/or hotel uses.

Even though we're pursuing the sale of Frost Bank Tower, we remain extremely committed to the Austin market.

In February, we closed on the purchase of 22 acres in the southwest submarket of Austin.

This is currently the hottest submarket in Austin with less than a 10% total vacancy.

Our site is entitled for up to 360,000 square feet of office space in two buildings.

We're making progress in our pre-leasing efforts.

We hope to commence development late in the year.

Our land division sold a total of 490 lots in the first quarter compared to 327 in the first quarter of last year and generated 4.9 million in track sales gains.

As Jim said, the number of lots sold was below our level of the fourth quarter of last year.

But then the fourth quarter is typically higher than other quarters due to seasonality of lot sales.

Both the lot sales and track sales exceeded our budget and amounts for the quarter.

To complete my review of development activity I would report that the option that our Temco venture had to acquire a timer lease on 22,000 acres in Paldin County Georgia has expired.

We did not elect to exercise this option because of timber lease structure ultimately and unfortunately created too many barriers to profitable economics for development.

On the other hand, we're quite pleased with the purchase of our Temco venture of fee title to 6300 acres in Paldin County earlier this year.

This should provide additional good development opportunities for our Temco partnership for many years to come.

I would also like to make some comments on property operations.

During the quarter, the overall percentage leased of our office operating property portfolio declined from 88 to 86%, a significant portion of this decline was due to our decision to allow Indus International, our sole tenant in the under 700,000 square foot 3301 Windy Ridge parkway building to terminate its lease obligation for three floors of the building in exchange for $2.3 million lease termination fee.

Indus remains obligated for the remaining 45,000 square feet of its space through 2012.

We're currently in discussions with the prospect for the space vacated by Indus.

The Austin Texas market showed continued signs of strong recovery during the quarter.

We leased an additional 18,000 square feet in the Frost Bank Tower at rental rates in line with our initial pro forma increasing occupancy in that building to 81%.

The economics of this lease confirmed our decision late last year to delay leasing some of the vacant space until rental rates firmed and we think this decision will result in higher value for the property upon sale.

Finally, our client services group captured Dallas market share and entered a new market with new third party property management and leasing assignments.

During the quarter, we obtained a management contract for 1.6 million square feet of Lincoln center property in Dallas and subsequent to the quarter end, we were rewarded another significant piece of new business, a third party property management and leasing assignment for 1.1 million feet -- square foot property in Houston, Texas.

Our industrial division executed its first lease at Kings Mill industrial park with Snapper products taking 287,000 square feet of our 417,000 square foot initial phase.

With the Snapper lease in place, we've begun Phase 2, which will expand the building by an additional 378,000 square feet.

As we've said before, it is important to keep some available space to be able to meet short term time frames required by many users of warehouse and distribution facility.

We also announced this quarter that we acquired 304 acres in Jackson County, northeast of Atlanta for a second industrial park.

Like others in the market, we believe there will be an overall slowing of residential lot sales in 2006.

However, our key markets of Atlanta, Dallas, Fort Worth, and Houston have seen stable appreciation and inventory levels over the last few years.

Although Tampa has seen higher appreciation, it continues to experience a low inventory of available lot.

We still expect our residential projects to perform well in 2006.

We've not seen any indications thus far of any significant problems in any of our markets as lot and home inventories have remained at relatively healthy levels.

We'll continue to monitor our housing markets to determine the appropriate lot inventory levels from our projects and to evaluate potential new development opportunities.

I would underscore Jim's comments on FFO, NAV and value creation.

As we said many times in the past, our FFO will fluctuate because of our business strategy.

As our development projects become operational, our FFO will increase and as we sell mature assets, it will decrease.

With significant asset sales, the new Avenue fund and a potential special dividend, you can expect our quarter to quarter results to continue to be uneven.

While we're on the subject of FFO, let me once again point out that FFO does not measure or report our value creation which is our principal measure of success here at Cousins Properties.

The most important part of our business never gets measured by normal FFO metrics that are typically used to evaluate the performance of a REIT.

It is our hope that at some point, U.S. accounting will converge with fair value accounting and the international community so that our income statement will be able to include the value we create from completed investment property.

But that, unfortunately, is a ways away.

In the meantime, it is important to keep in mind that total shareholder return over time depends to a large extent on our development capabilities and the growth and the value of our company's assets.

To understand this, we urge our investors to look at the value we create through the development process and its long-term impact on NAV.

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

[OPERATOR INSTRUCTIONS] Our first question comes from Jessica Tulle with Credit Suisse.

Good afternoon.

Hi, Jessica.

Hi.

I had a couple of questions.

One on 50 Biscayne.

In terms of the people who have purchased the units and of course they haven't closed yet because the property is not complete, it is my understanding they can't resell their units since they don't actually own it.

But they can put it in a resale pool.

I thought that was kind of the way the condos worked.

I just wondered if you knew how many of the units at Biscayne were in a resale pool.

Not very many.

I think what is it, Craig?

We understand from our partner there that approximately seven units have traded and there's -- there's not an overwhelming number in there.

I recall that we have 20% down payments on each of our units.

I think they've all traded up, right?

About $100 a foot on average more than our sales.

Ok.

Good.

And then can you talk a little bit about San Jose?

It looked like the project went up a little bit in cost and I think the completion date was stretched out one quarter.

Jessica, this is Dan.

We had -- we have a little bit of creep in our soft cost and largely, that was trying to speed up our delivery to market.

Well, certainly Target is open and doing well and the other anchor tenants are opening and those that are open are doing well.

So, peculiar amount of creep in soft cost, but that's really it.

You still expect that to be a very positive project in terms of--?

Oh, yes, yes.

Right.

Then I had an accounting question for Jim.

On the stock option cost, you mentioned 940,000 stock option cost in G&A and that was before capitalization.

Roughly how much of that would have been capitalized?

We don't break that out.

It is about $750,000 or about $3 million a year, Jessica..

In terms of expense?

Yes, in terms of expense.

That's a new expense, as you know.

Exactly.

It is really no different than last year.

We're required to take that into expense in calculating our income this year.

So that would be about 750 per quarter then?

Yes.

And that would be expensed?

That's correct.

Thanks very much.

Thanks, Jessica.

[OPERATOR INSTRUCTIONS] We'll go next to Chris Haley with Wachovia.

Good afternoon.

Hey, Chris.

Question on the JV, first congratulations.

The pool of assets that can go in the next round, are they at -- who -- discretion, choice, and can existing assets go in or is it just. all the assets?

Chris, this is Craig Jones.

In terms of the new assets that would go in, the ones under development is totally our discretion.

We would anticipate it would probably be again office or retail.

It could be something that we're working on now.

But we haven't identified any projects and if you look at the last time we did a transaction like this back in 1998, the project came in over a period of years.

Okay.

So you can put in existing assets or let's say Avenue of the Peninsula, if you want to put that in there or a project that's currently -- let's just say San Jose, you could choose either of those to put in?

Chris, this is Tom Charlesworth.

Craig was referring to the development side of that deal.

As far as completed assets, we've already defined which are going in.

Just development assets.

In fact, I think our 8-K on this transaction was filed just a little while ago and has a real good explanation of the deal and actually lists those assets and so forth.

Right.

And the earn out?

How should we look at that in terms of reporting and potential impact on financial statements?

Well, we're confident of our ability to lease the little bit of remaining space we have in those two assets and I think what's going to happen is Craig, you correct me if this is wrong, as we lease the assets, it trips the additional payments, profits, like a progress payment.

Right.

We have three different opportunities to get it.

The first will be at the end of this year.

We already project based on leases in place that we have got right now that have not occupied.

Once they occupy by the end of the year, we'll capture approximately half of that additional valuation and again, we've got net if we did no other leases between now and then.

We've got all the way until the end of 2007.

We can make subsequent collections on that at the end of the second quarter in 2007 and then again at the end of 2007.

And the line item that might be coming through would be what?

Chris, you may be asking about its effect on our income and balance sheet.

Really, all of the proceeds we get in this will be contributions to partnership.

This and that you're referring to is I think called a deferred contribution amount.

It is going to be certainly it marks the -- to market the value of the properties.

But it winds up on the balance sheet and not in the income statement.

So it would be a deferred gain item and wouldn't have any FFO impact when it gets paid in.

How is the master lease going to be accounted for on the one asset?

Well, if we wind up having to pay rent, that would be an expense.

That would come through at least in terms of your disclosure at the asset level?

I'm not sure that we've figured out all of the accounting on this, Chris.

But that's probably right.

In the decision to sell the B of A plaza and Frost Bank, B of A, could you give us a sense as to how much money you would have to write a check for today to get into the game?

Or just kind of looking at some of the other sales that have attempted to occur in Atlanta.

There have been some holes and some tough assets on the market.

What gives you confidence that these can go?

Well, your first question, Chris, of course for you, we would give a special deal on B of A. We feel like it is an irreplaceable asset.

Obviously we're prejudiced.

We think it is the finest building in the southeast.

We've had quite a bit of interest in the building.

The other building in town that has not gone as well as most people thought it might, which is the IBM or Atlantic Center had some issued associated with, some ground lease issues associated with it that I think most people weren't aware of initially.

We're told.

I mean I don't have any inside information on that.

That's just the rumor in town.

If we don't get our price, Chris, we won't sell it.

We love the building.

It is a great asset.

Has terrific returns.

We're just, as we do, we're taking advantage of what we feel is a very, very strong market for assets of this type.

But turns out that the price is not there, then we're delighted to keep it.

We think, however, that the -- there will be quite a bit of demand for the building.

And then any provisions or venture provisions or partner arrangements with each of these assets, is there a similar preferred return or claw back or something?

No.

We're just 50/50 partners straight up with B of A and then we don't -- I guess we have a little bit of Prudential, what is it, the 5% or 6%.

Yes.

Chris, there is a -- there is debt on Banc of America plaza to think about.

That's really Cousins debt and not Prudential.

It is structured as debt to the venture then Cousins had a back to back loan where we borrowed that money so that's our debt.

Just a final question.

The size of this venture, basically two times the size of what you're contributing and then you get a little bit more money from the banks or a little bit more capacity from the banks and a new facility from the banks.

My suspicion is that -- obvious suspicion would be that the pipeline has got to grow more significantly, one for the venture, reflective of the venture and secondly, to sell potentially sell B of A and Frost Bank.

Are they related?

No.

The sale -- the asset sales are a result of the analysis that we do here every quarter about -- have we created all the value in this asset that we can create.

And what the market is willing to give you for the asset.

That's a separate decision from the Avenue fund.

The Avenue fund is a partnership with Prudential on some existing assets for which we feel like we've gotten a great value in terms of contributions to the partnership.

And the right in the future to invest an equal amount in future projects, sort of at our choosing and at our timing.

It worked out very well last time we did it.

I think Prudential was delighted and we were delighted and it seemed like a good time to do it again.

And by doing it this way, it allows us to maintain our brand ability to manage and protect and enhance the Avenue brand which is important to us.

It also allows us to put this money back into the development process where as an outright sales, we would have taken that money and probably dividended some substantial part of it out to our shareholders.

So this gives us a significant chunk of capital to put back into the development process and I wouldn't suggest to you that we think our development process is going to -- from an annualized standpoint, grow significantly from where it is today but you do 3 or $400 million of new development every year and the projects take two and three years, it adds up.

Thank you.

Chris, let me add to that.

We've done extensive financial modeling all along the way.

It is always a balancing act between whether we think the Company needs the money or whether it is appropriate to return it to shareholders but we have looked at -- we've looked at that with the asset sales we did in 2003 and 2004 and we've done a lot of that this year too.

Thank you.

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

Thanks.

Can you guys outline the joint venture fees?

Again, an Avenue fund?

The fees in terms of management and leasing of the existing projects that were contributing to the five retail projects are basically again, their market rate fees.

I'm going to jump in for a second while Craig is getting that for Jim.

We estimate about $960,000 on an annualized basis from the management fees.

Those would start when the fund starts which is probably mid year.

We also have -- there are other fees involved like leasing but again those projects are pretty much leased.

There will be from time to time, construction management, those types of customary property management fees, but not significant.

We would also receive market rate fees on the deals that are to be developed that we would charge the venture.

Is there a promoted interest?

Excuse me?

Is there a promoted interest?

No.

I couldn't agree more with you guys that FFO is the wrong place to look in evaluating your performance and that NAV and NAV growth over time is a much better place to look.

In that context I find it odd that you guys don't -- in fact you're one of the few companies we cover that doesn't show us the expected yield on development.

Given that development is such an important part of your story relative to the size of your operating portfolio, don't you think it would be helpful to point people to your expected yields on development and help them put those yields in the context of current cap rates and expectations on future cap rates?

Why not do that?

Well, that's a good idea.

I hadn't really thought about that.

I didn't know others did that.

We'll look into that.

I think it would be really helpful.

Finally, as I think about the retail development pipeline getting contributed to a venture, the sale of a couple of your bigger office projects, just kind of theoretically, is there a minimum size that your asset base needs to be?

To support the development operation theoretically?

Could you shrink the asset base down to something close to zero and just be virgin building operator?

No, unfortunately, we can't.

We certainly looked at that.

I think we need to stay in the 1.5 billion to $2 billion range generally to support the program that we have underway now.

Why is that the right number?

Jim, that really gets back to the financial modeling and there are a number of issues that relate to the REIT, to our financial covenants with our bank to where we want to be from a stable, operating standpoint.

If you look at where we are right now, in our supplemental, our total market cap including debt and equity is about $2.5 billion.

If you look at the development, we've got underway, that we've shown our development pipeline.

This is through completion.

We haven't got this much money invested at this point in the process.

But through completion, we're at about 578 million.

Then if you add some amount for our lot development projects which we currently show on a GAAP basis at $72 million and that may overstate it some because there's some land in there, but if you really try to look at development as a portion of the total, you take the 578 and the 72, that gives you 650 million.

It is about 26% of our total size.

Now, the Avenue fund really won't decrease our total size.

The money will stay available for future development.

The asset sales made to the extent there is a special dividend.

But there is still going to be -- it's a significant percentage of our total size.

But it is certainly not an overwhelming percentage.

That's very helpful.

Thank you.

This is Tom Charlesworth.

Having been involved in that process myself for some years, over time and I think Dan and I said this and others have said it, Tom and so forth, but we have a quality base of investment assets and generally, what it gets to when you do the financial modeling is that that base needs to be enough to sustain the financing and to allow for the financing of the development activity.

I think what Tom is working out is the range to get you there.

And keeps you at really good debt levels and gives you cushion for other potential cash needs and so forth.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to David Toti with Lehman Brothers.

Good afternoon.

Hey, David.

Couple of questions on the potential asset sales.

Can you speak a little bit about your cap rate expectations?

I hate to predict cap rates, equivalent properties.

We read have traded between 6 and 7and some in the 4s, apparently.

If you happened on something in the good block of New York City.

But I really don't know yet.

Between 6 and 7.

Better than the last time you had a large asset sale.

I'm sorry?

In general, probably on average better than the cap rates realized during the last large asset sales.

It is hard to generalize because the group -- the last group of assets, office assets we sold were -- largely suburban assets, some were better than others.

We had Pinnacle and Buckhead that was sort of the top of the heap.

We had some others that were less desirable and I think that averaged out to about a 7.1.

This is a trophy one of a kind downtown property.

You would probably expect that to demand a little better rate.

And in terms of -- if these sales proceed, are you targeting a certain percentage of the funds that will be retained versus the funds that could be distributed in a special dividend?

Is there a target ratio?

Well, we have to pay out our taxable and I don't know that we've done -- I'll let Jim speak to that.

I don't know that we've done that full calculation.

It is going to depend, David.

Largely on the sales price.

Tom is right.

We've got to dividend out our taxable gain this year either from regular dividend or a special dividend.

But again, it gets back to the sales price and how it fits into our financial model.

We'll let you know once we get further along.

Switching over to the balance sheet.

In terms of the -- forgive me in I've missed this but is there a target in the terms of the amount of debt that you would like to pay down by year end '06?

Debt to pay down by?

I'm not sure I understand.

Well, in terms of -- paying down debt as one of your goals relative to the proceeds from the fund--?

Our debt is already, David, pretty low.

It is 24% debt to total market cap based on our -- the end of the last quarter.

We do have a balance on our line of credit.

Of a little over $200 million right now.

And we will be able to pay that down some for a temporary period.

If we accomplish these assets, it will depend on the sale prices.

It will depend on what we do with the proceeds.

I mean our goal on this is really not to reduce debt.

And then just one last question relative to lease expirations.

Are there any large expirations that you're expecting in the next couple of quarters that we should think about?

David, this is Dan Dupree.

We have really low rollover generally.

I think it is 7% in office and 5% in retail this year.

Which are good numbers.

But at the end of this year, included in that 7% in office, we have the training center here for IBM.

And we'll need to deal with that.

But I think that's 180,000 feet plus or minus.

So, but other than that, it is -- really, really small spaces and our expectation is that for the most part, they'll renew.

I know there's [Inaudible] at the AGL building which is a floor.

They're not going to renew.

But we have some things in the works on that space.

Big one to watch would be in the training center.

Great.

Thank you so much.

Thanks.

We'll now take a follow-up from Chris Haley with Wachovia.

Yes, just question on B of A recognizing the position of the asset of the market, you probably get a lot of local questions as well.

The lease roll situation in the asset, is there any material expirations in the asset that's included within your corporate lease roll schedule in your supplemental?

In terms of -- lease expirations?

Yes, big numbers and big rolls that might be coming in the next couple years?

The Ernst & Young lease will roll over in '07.

But as it relates to that, the good news for us in that building, it is extremely well leased, is that we have a number of other large tenants that need to expand.

So we don't look at the Ernst & Young rollover as a big negative.

In fact, it is probably an opportunity.

The decision to sell in 2004 and '05 was largely based on assets that -- at least the way I perceived it, probably -- maybe incorrectly, is that those were development assets that had reached their maximum potential and the price that you felt you were receiving was well above what you thought that they could be replaced for.

So in this case, this is -- has a little bit longer life to it.

And it has been there for quite -- a little bit longer and I would just be interested in your color in relation to why that asset signaling anything with Atlanta.

Well, I think that no.

In fact, if Terminus project was to be fully developed, the two office buildings, the 125,000 feet of retail, the 800 living units, that would probably be a $550 million investment in Atlanta.

We're very high on Atlanta.

So, it is a combination of two things.

The first is that we think that there's a very strong market out there we'll see.

We think there is a very strong market out there for buildings of this type.

Second is even with a very strong building and a good market, your amount of additional value creation that you get in a mature building like that versus what kind of value creation we can get through the development process, I think our shareholders expect us to reinvest and get a higher return and that's what we do.

And that's what we are doing.

On the land lot activity, land and lot sale activity, can you give us a sense -- you've got sort of the other lot sellers in the market place whether they be a REIT form or whether they be a C-corp form, certainly you're seeing significant amounts of pressure.

Can you give us a sense as to what type of expectations or what type of guidance you would give.

I know you don't give specific guidance.

What's your thought process right now in terms of releasing units into the second half of the year at a volume expectations full year '06 versus '05.

Chris, what we try to do in our principal markets which are Atlanta, Dallas and Houston, little bit San Antonio, little bit Tampa.

But what we try to do is keep a lot inventory of eight to ten months out in front of our sales activity.

So, the amount of lots that we release or produce or manufacture, it depends on the speed at which we're selling lots in order to keep that eight to ten months of inventory out there, now, I can say so far, I think the "Wall Street Journal" did a good job on this last week, in the big front page article they had, so far, Atlanta, Houston, and Fort Worth, and Dallas have held up extremely well.

Had low inflation in those markets over the last three or four years.

They've not overbuilt their inventory to date.

Good projects obviously sell better than mediocre projects.

But we've not seen any fall off yet.

We pay a lot of attention to this.

We look at -- we literally look at the number of people that are touring houses in our projects and -- on a monthly basis.

I mean how many customers are showing up?

How many other lots are being produced?

We really get down into the details.

All I can say is so far these markets are holding up pretty well.

And if that were to change, then obviously we would change the number of lots that we brought to market to try to keep that eight to ten month supply.

That eight to ten month time seems a little tighter than where you may have been a year ago or a year and a half ago.

Except for Dallas, where it got to be 12 or 13 for awhile, we brought it back down again, that's pretty much where we've been, eight to ten months.

Some is less than that.

Tampa is -- as soon as you put them on the ground, they're gone but by and large, that's about right.

Thank you.

You're welcome.

We'll now take a follow-up from Jessica Tully with Credit Suisse.

I just wanted to ask what the approximate size of the Murphy's Burrow and the average in Avenue Ridge Walk projects are in terms of square feet that you would own.

Jessica, they're both -- I think Murphy's Burrow is 7 to 800,000 square foot range and Ridge Walk would be in the 4 or 5 -- about 500,000 square foot range.

Now, the Murphy's Burrow, one, that number would include the power center next door.

Right.

That particular deal is a venture.

With all of these things that we're talking about that we have not closed on the land and we haven't started construction on, we've got -- I don't know eight or ten other cities that we're working on deals in various stages of development.

Some of those are going to happen some of them aren't.

I don't want you to get too terribly focused but you ask in the past frequently about getting a little flavor on the shadow development pipeline and that's really what we're trying to do.

Those are two examples of a pretty large pool of projects that we're working on in retail.

I think we're in a relatively similar position on each of the other three operating divisions.

Dan, is that going to be a 50/50 joint venture with Faison?

Yes.

Thanks.

At this time, we have no further questions.

I would like to turn it back to Mr. Bell for any closing remarks.

Well, as always, we very much appreciate your involvement with our company and if you have any additional questions, particularly as you view the K on the Avenue transaction, don't hesitate to give us a call.

Thank you very much.