Cousins Properties Inc (CUZ) 2006 Q2 法說會逐字稿

Good day and welcome to this Cousins Properties Incorporated second quarter 2006 conference call.

Today's call is being recorded.

At this time for opening remarks and introductions I'd 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; and with me today are Dan DuPree, our Vice Chairman;

Jim Fleming, our CFO;

Tom Charlesworth, our Chief Investment Officer; and Craig Jones, our Chief Administrative Officer.

I'd like to welcome you to our second quarter conference call and at this time I'll ask Jim to review our financial results for the quarter.

Jim?

Thank you, Tom.

And thanks to all of you for your interest in Cousins Properties.

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 on Form 10-K for a discussion of the factors that might cause these material differences.

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

The most significant transaction in the quarter was the closing of the Avenue fund which occurred on June 29.

On that date, we contributed our interest in five retail properties to a new venture with Prudential and Prudential contributed it's first installment of cash in the amount of of $167 million.

Prudential is committed to make two additional cash contributions of $67 million each on September 29, and December 29, bringing the total to 300 million.

This joint venture worked well for us because it locked in the value we have created in these assets and also provided cash we would use to fund future development.

Prudential is obligated to contribute up to an additional $21 million to the venture based on the completion and leasing of vacant space at the Avenue West Cobb and Viera Market Center.

We have the ability to qualify for these amounts at the end of this year and again at Two Points in 2007.

Based on leases currently in place as well as activity we anticipate, we feel very confident we will earn these additional contributions by the end of next year.

Assuming this is the case, our aggregate value creation on the five properties we contributed to this venture will be $146 million or 74% of our total undepreciated cost.

We've included a schedule in our financial package this quarter to show you the details of this calculation.

In last quarter's conference call we announced we had decided to market Banc of America Plaza and Frost Bank Tower for sale.

We've recently reported that both of these buildings are under contract.

Both of these contracts are now in due diligence periods and we expect them to close in the third quarter.

Subject to final accounting, we estimate these sales will generate value creation of $120 million in the aggregate, or approximately 46% of our total undepreciated cost.

We will give you more details after these sales have closed and we finished our accounting.

We will have some further comments on these transactions and a potential special dividend in a few moments.

In the second quarter, we closed the sale of 90 of the 94 units at 905 Juniper and we've closed one more since the end of the quarter.

The thee remaining units are all under contract and we expect them to close in the third quarter.

This was our first condominium project in Atlanta and we're pleased with the results.

On our other multifamily project, 50 Biscayne, we were 43% complete with the construction at June 30, and we expect to be 62% complete by year-end.

We are recognizing profits under the percentage of completion method on 96% of these units and despite the recent softening in the Miami condo market, we still feel it is likely that substantially all of the contracts will close.

Our land sales activities both lot and track sales were down this quarter compared to last quarter.

Part of this decrease was from track sales because we had no significant track sales in the quarter.

As we have said before, track sales are inherently lumpy and they are difficult to project from quarter to quarter, but we do have significant land holdings that will result in higher levels of track sales in the future.

Lot sales, on the other hand, were off in the second quarter from our internal estimates.

Recently it seems every day we see a report in the news media about the softening housing market and the number of home builders have slowed down their activity even in the non-bubble markets like Atlanta and Dallas.

The demographic trends in these markets are still strong, but home builders could delay their lot purchases for awhile.

Because of this, we can't predict where our lot sales will come out this year.

If lot sales for the year are off 10% overall, from our original expectations, after-tax profits would be down by approximately $850,000.

If they're down 20% after-tax profits would be off $1.7 million, and if they're down by as much as 30%, after-tax profits would be down about $2.5 million.

Although these reductions would reduce FFO by a few cents per share this year, we don't believe they would have any significant effect on our NAV or on the ultimate profitability of our residential developments.

Our residential land holdings were acquired at attractive prices and our developments will still generate substantial profits even if market conditions are soft for a period of time.

On the same property schedule, you'll see that same property revenues less operating expenses decreased slightly for our office portfolio.

This is primarily the result of decreases in occupancy because of the partial termination of the index lease at 3301 Windy Ridge Parkway and the expiration of the Southern Progress lease at 600 University Park Place.

We have already released part of the space at 600 University Park Place and we're in serious negotiations for most of the recently vacated space at 3301 Windy Ridge Parkway.

The overall percentage leased for our office operating properties improved slightly to 86.5% and we continue to see slow improvement in our major Atlanta sub markets.

I'd now like to discuss the components of FFO in more detail by describing the changes between the first and second quarters of 2006.

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

I'll begin with office and multifamily division where rental properties revenues less rental property operating expensed decreased 449,000 between quarters.

Significant differences were as follows: 3301 Windy Ridge Parkway decreased 221,000 as the result of a determination of a portion of the index lease during the quarter as I mentioned, and 600 University Park Place as I also mentioned decreased 105,000 due to a decrease in average occupancy between periods.

In the retail division overall FFO from rental operations increased $1.1 million between quarters.

Significant differences in retail were as follows.

The Avenue of the Peninsula, excuse me, decreased 115,000 due to the Saks lease termination and an increase in reserves, although we also received a lease termination fee of $750 from Saks.

The Avenue Viera increased 334,000 as a result of an increase in average occupancy during the period.

In addition to the satisfaction of co-tenancy requirements on certain leases.

The Avenue Carriage Crossing increased 201,000 as this recently developed property continued to lease up.

And San Jose Market Center increased 786,000 because most of the anchor tenants opened late in the first quarter.

As I mentioned previously, gains on track in out parcel sales decreased 4.6 million because we had no significant track sales during the second quarter.

Lot sales decreased 548,000 due to a reduction in lots sold from 490 in the first quarter to 352 in the second quarter.

Multifamily profits increased $2.4 million due to the completion of the 905 Juniper project that I discussed previously, and because we progressed further from a percentage of completion standpoint on 50 Biscayne in the second quarter than we did in the first quarter.

Before taxes and minority interest, we recognized $2.8 million in profits on the 905 Juniper project during the quarter more than double that of the first quarter.

We were recognizing profits under the percentage of completion method on only 40% of the units during the first quarter and we were able to recognize full profits on the remaining units as they closed in the second quarter.

Development fees decreased in the second quarter by $927,000 primarily as a result of fees earned on a Temco track sale in the first quarter.

Leasing fees increased 501,000 primarily due to the receipt of a large commission in the second quarter from our Dallas activities.

Lease termination fees decreased $1.4 million because we received a $2.3 million fee in the first quarter on the index space and as I mentioned we received a $750 fee in the second quarter on the Saks phase at the Avenue of the Peninsula.

Interest expense increased $1.3 million during the quarter, primarily because the continued lease up of the Avenue Carriage Crossing and San Jose Market Center during the second quarter resulted in less capitalized interest on these projects.

Because we made additional investments in land on which we cannot capitalize interest and because we experienced an increase in interest rates on variable rate debt.

Other expenses increased 262,000 primarily due to an increase in minority interest expense related to the higher profits recognized with 905 Juniper and 50 Biscayne.

Income tax expense decreased 444,000 during the quarter as a result of a decrease in income from lot and track sales at our taxable REIT subsidiary Cousins Real Estate Corporation partially offset by an increase in multifamily net profit.

The Avenue farmed venture with Prudential has considerably altered our balance sheet so I'd like to highlight the major changes.

Our operating properties decreased by $132 million which is the net book value of the properties contributed to the venture.

Projects under development decreased by $26 million for the costs associated with current expansions at the Avenue West Cobb, the Avenue Viera, and Viera Market Center.

We've added an item called receivable due from venture partner of $133 million for the additional cash Prudential is required to contribute to the venture.

Investment in unconsolidated joint ventures increased by $20 million which represents our 11.5% interest in the operations of the five properties contributed to the venture.

Notes payable decreased by $204 million because the venture assumed the $37 million mortgage loan on the Avenue East Cobb, and because we made a $167 million pay down on our line of credit from Prudential's cash contributions to the venture.

Deferred gain increased 149 million which represents the difference between our share of the proceeds or the cash contributed and our share of the basis in the five properties contributed to the venture.

We will recognize this gain in net income for GAAP purposes as projects developed within the venture are sold and proceeds are distributed.

Minority interest increased $34 million to reflect Prudential's interest in the development venture which holds the cash contributions to be used for real estate developments or acquisitions.

The only significant change in our income statement from the formation of the venture is a $2.8 million loss on extinguishment of debt representing 88.5% of the above market value of the East Cobb loan I mentioned earlier.

Today's accounting rules require that the debt assumed in this transaction be marked to current value at the time of the transaction.

The resulting gain or loss on the debt must be included in current earnings and we've shown it in a separate line item of our income statement.

Because this amount doesn't relate to the operations of the Company we've reported FFO this quarter with a supplemental adjustment to add this amount back.

We've also reported NAREIT defined FFO which does not add this loss back.

We believe this debt adjustment should be viewed as a cost of sale and not as an operational item.

Please note that we have subtracted this amount from the sales price in calculating our value creation.

Beginning in the third quarter we will no longer record revenues and expenses of the Five Avenue Front properties in the revenues and costs and expenses section of our income statement.

We'll record our share of the net operations of these properties in income from unconsolidated joint ventures and our share will decrease as the two additional cash contributions from Prudential are received.

For the third quarter, our share of the operations will be 51%.

For the fourth quarter, our share will be 31%, and thereafter, our share will be 11.5%.

In the second quarter we recorded a $3.5 million charge to depreciation and amortization, for the net book value of the improvements on the Saks space.

This amount was a non-cash charge that reduced net income but did not reduce FFO.

The Saks lease termination was an important part of enhancing the value of this property.

We have now released a significant portion of the Saks space and we are in the process of releasing the remainder.

You may have noted that our net income available to common stockholders this quarter was a negative number.

This resulted from lower than normal FFO for the quarter combined with the mark to market adjustment on the Avenue East Cobb debt and the charge of the depreciation from the Saks lease termination.

We don't think this result was particularly significant.

We view the mark to market debt adjustment on the Avenue East Cobb be as a timing mismatch under GAAP because we were required to take this charge through the income statement whereas the rest of the gain on the Prudential venture was deferred to future periods.

We have closed one loan since the end of last quarter.

When we began work on the Avenue Murphy's Burrow this July, we closed a construction loan on that project with our partner Faison Associates for $131 million or 86% of the total cost of that project.

The interest rate Cousins will pay on this construction loan is just slightly higher than the interest rate on our credit facility.

We closed this loan because it made sense from a venture standpoint and also because it provided some additional borrowing capacity to our company.

I discussed the pending sale of Banc of America Plaza a few minutes ago.

Banc of America Plaza is subject to a mortgage loan that we obtained in 2002.

Because the loan was obtained for Cousins benefit and all the proceeds came to Cousins, we are responsible for repaying this loan when the property is sold.

The current principle amount of the loan is approximately $140 million and we will also be responsible for the cost of defeising the loan which we estimate to be between 14 and $15 million depending on interest rates at the time of the closing.

As we did this quarter with the East Cobb be mark to market adjustment, we will report our FFO with the supplemental adjustment to add back the cost of this defeasance.

Our value creation on the Banc of America Plaza sale after this defeasance charge is expected to be $75 million or 63% of our original cost.

I want to conclude by addressing the possibility of a special dividend from our recently announced asset sales.

We paid special dividends of 100 million or $2.07 per share in 2003 and $356 million or $7.15 per share in 2004.

We estimate the sales of Banc of America Plaza and Frost Bank Tower will generate tax gains of of $193 million.

Some of this amount will be covered by our regular dividends, but if the sales close, a special dividend will be needed to pay the remainder of our taxable income this year.

It is important to note that the Banc of America Plaza and Frost Bank Tower transactions are still in due diligence and we cannot be certain that they will close.

Any special dividend would be dependent on these closings.

Also, our Board will need to make the decision about a special dividend later in the year after the sales have closed and part of the dividend could be paid in the form of stock; however, based on our financial modeling, a special cash dividend in the range of $3 to $5 per share is possible.

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

Thank you, Jim.

Well, we've had a very interesting year thus far, selling fully valued assets and making acquisitions and starting new projects in several of our divisions.

All of these activities have a common goal and that is creating value for our shareholders.

We stress value creation in many of our discussions recently and I'd like to focus my remarks today on the various stages of the value creation process and our level of activity in each of these stages in the hopes that it will help you better understand our company.

At Cousins, the value of creation process starts with identifying and capturing good development and redevelopment opportunities.

Every development involves some risk and the key is to pursue developments where the risks can be mitigated and the opportunities to create value are strong.

Recently we've had great success in identifying and capturing opportunities across our four divisions.

The just announced purchase of of the 1.2 million square foot office building at 191 Peachtree Street in downtown Atlanta is a very good example.

We developed this world class building with Heinz in 1990 on behalf of an institutional investor and managed the building until 2002.

Over the past two years, it has lost three very significant tenants and it now has extremely high vacancy.

Nevertheless 191 is one of the best buildings in the south and we believe it offers tremendous value creation potential.

It is striking to note that at the same time, we are buying this building for $127 per square foot, we are selling Banc of America Plaza, a building of similar size and trophy quality less than a mile away for a record $348 per square foot.

A discussion of our purchase at 191 couldn't be complete without some commentary on our view of downtown Atlanta.

Now, it's no secret that the downtown area has been challenged in recent years with some saying the heart of the city has shifted north to mid downtown and Buckhead; however we believe things have begun to change in downtown and we're clearly beginning to see a revival of the downtown sub market.

With last year's opening of the $200 million Georgia aquarium, which by the way had over 400,000 visitors in the month of July alone, and next summer's planned opening of the Adacent World of Coke and significant residential activities surrounding Centennial Olympic Park, downtown is quickly becoming a much more vibrant community.

We've also recently signed a major lease in our Inform building a few blocks from 191.

For 274,000 square feet, this will bring Inform's occupancy to 98% by next year.

In order to accommodate this new user, BellSouth has agreed to terminate it's lease on one floor of the building and pay us a termination fee of 3.6 million amortized over the remainder of it's lease term beginning early next year.

Now, we're not in a position to identify the new tenant yet, but we're excited about what they will mean for Inform and for downtown Atlanta.

Another good example of how we approached our value creation process is our recent acquisition of the former RTM property in the new City of Sandy Springs, Georgia just outside the northern northern edge of Atlanta.

You may recall we signed a lease last year for Arby's new headquarters and some of the space that had been vacated by Merit.

We've now acquired some of the property that Arby's vacated, or that RTM vacated in that move and it's very well located on Hammond Drive, adjacent to Georgia 400 just north of I-85 and suburban Atlanta.

The Hammond Drive area is slated for significant infrastructure improvements beginning with ramps to Georgia 400 North later this year followed by extensive interchange in public transportation improvements over time.

When completed this site will have exceptional access.

This property has low density today with only 104,000 square feet of office on 9.5 acres.

That's about the same size as our Terminus development and after a few years this property should provide good opportunities for substantial additional development.

In the meantime we have leased 40,000 square feet to the City of Sandy Springs bringing the project to 68% lease so it appears we'll receive a decent return from existing buildings while we consider our redevelopment opportunities.

Jim discussed the slowdown we're seeing in our lot sales and land business and Tampa market is a trouble spot today largely because investor activity has reversed and new home sales have slowed down significantly for some builders.

Demographic trends remain positive there, however, and our low land bases will give us an advantage when the market starts to recover.

Dallas too is showing some signs of softness mainly because of the large market share of national builders there who have very high lot inventories in other parts of the country, but once again demographic trends and growth in Dallas are positive and we'll continue to watch the market being patient and careful not to develop lots too far ahead of real demand.

Atlanta and Houston are experiencing fewer problems at this point but we'll be cautious there as well.

We expect our lot sales in 2006 will lag last year's record pace but still provide good returns.

Jim has given you an update on how a slowdown in the lot business might affect our overall business going forward.

The retail division has recently captured a number of good opportunities that should enter the development pipeline in 2007 and beyond.

Generally we try not to comment on forward projects until after closing, but I want to mention two projects we're working on at this moment because they have received quite a bit of attention.

First is the Avenue Ridge Walk in Cherokee County northwest of Atlanta which we have discussed in a previous call.

Retailers continue to show strong interest in this project and construction plans for the new interchange on I-575 are progressing well.

Our current plan calls for this center to include about 300,000 square feet of retail and we expect to close on the land and begin development in mid 2007.

So far the response from our retail clients has been very positive.

Also, we recently put under contract a tract of land on Georgia 400 and Highway 141 in Forsythe County which we are calling the Avenue Forsythe.

In total this project could exceed 105 acres and include 900,000 square feet of commercial space although it's likely to be developed in two phases.

The surrounding demographics are extremely attractive and with the sites good region regional access and competitive dynamics in the market, initial retailer interest is very strong.

We're currently anticipating a land closing in early to mid 2007.

Our office multifamily division has recently captured some good opportunities in addition to the acquisitions of 191 RTM.

Last quarter, we purchased 22 acres in the southwest sub market of Austin, Texas.

We're now in the final stages of negotiations to create a joint venture that will develop 360,000 square feet of office space in two buildings and we've already fully -- already have a fully negotiated letter of intent with one of the tenants who will also be a partner in our JV that should result in significant preleasing for this project.

Our Terminus project based on current leasing momentum -- at our Terminus project, based on current leasing momentum we've announced that we've begun design and site preparation for Terminus 200, a 505,000 square foot office building to complement Terminus 100.

T-200 is scheduled to start in the second quarter of '07 and we expect to have significant preleasing by then in order to begin the project.

We also expect to begin a condominium development at Terminus of approximately 150 units by early 2007.

Finally, our industrial division has now entered the Dallas market in a joint venture with a private developer.

We've acquired two sites and optioned another for three buildings that will total 1.7 million square feet and we've begun development on the initial 750,000 square foot building.

Already we've signed a letter of intent with a perspective national tenant that would take 350,000 square feet in the first building.

We've also started our first building in Jefferson, Georgia, northeast of Atlanta where we're beginning a 450,000 square foot bulk warehouse.

And I seem to be a bit long winded today, you'll hopefully see that as good news.

To have this volume of early stage high value development under way in all of our divisions bodes well for the delivery of significant value in the future.

Now, let me go on with a value creation process here at Cousins.

Once we capture an opportunity and eliminate as much risk as possible, we begin the development process.

This is the point at which the project goes into our development pipeline schedule which you see every quarter.

In this stage of our value creation process, the key is exceptional execution against our plan and financial pro forma.

Development is not an easy business and there will always be challenges and issues to overcome but our team are very experienced and have demonstrated a great batting average over a very long period of time.

A significant part of our current development activities is in the retail area where we have four projects under way.

During the quarter we made significant progress with our recently opened San Jose Market Center.

This center is now 90% leased or sold and 93% committed including a Trader Joe's lease which was just recently executed.

In addition the City of San Jose redevelopment authorities agreed to support the Trader Joe's deal with a $1.7 million payment.

Next week we'll open phase one of our newest Atlanta area Avenue, the Avenue Webb Gin in Gwinnett County.

Phase one is currently 86% committed and we anticipate occupancy for phase one will be 75% by the end of August.

Phase two is 53% committed with the project overall being 74 % committed.

The project will boast a strong line of especially retailers and restauranteurs including American Eagle, Gap, Fourth and Town, Ann Taylor, Barnes and Noble, Banana Republic, Romano's, Macaroni Grill, Chile's, On the Border, among the 55 other tenants who have committed to date.

The expansion of the Avenue West Cobb is on schedule for opening early in the fourth quarter.

As Jim mentioned Prudential will make an additional additional $21 million contribution to the Avenue fund for this expansion if we're successful in our leasing efforts.

Based on our committed deals we've already secured the bulk of this amount and we are very confident we -- as we are at the Viera Market Center that we will secure the entire contribution amount.

On July 20, with Faison Enterprises in Charlotte we kicked off the Avenue Murphy's Burrow located in a suburb of Nashville.

Together with our partner, Faison, we've already been able to execute leases with Bell, Dick's Sporting Goods, Best Buy, Cost Plus, Ann Taylor Loft, Joseph Banks, and Talbots, we're now 55% committed on phase one which is scheduled to open in October of 2007.

Terminus 100 office building in the Buckhead District of Atlanta continues to experience positive leasing momentum with over eight months remaining until completion and because of this we've announced we will move our offices to 191 Peachtree instead of Terminus.

While we had initially planned to relocate our offices to Terminus 100, leasing momentum is such that we probably would have had to wait for Terminus 200 which won't be in place until 2009.

With the Cousins lease removed from Terminus 100, signed leases plus letters of intent saying that 60% of the project and we're in serious negotiations with other projects that will take us to over 70% committed.

I expect that we'll be at 80% committed by year-end.

Terminus has created it's own momentum and a sense of place from the office and retail occupants of Terminus 100 will carry forward in the future phases of Terminus including the residential and office which we have planned.

Terminus has already assumed a preferred position as the heart of Buckhead and as a premier location in Atlanta.

At our 50 Biscayne project in Miami, construction remains on schedule with expected completion in the third quarter of 2007.

All 529 units remain under contract with $47 million or 20% held in non-refundable earnest money deposits.

Despite weakness in the larger Miami condominium market our location and early construction pricing have resulted in solid value for our buyers.

At the end of July, 8 purchase contracts had been resold with our consent at an average per square foot price of $96 higher than the original contract price.

We expect unit closings to begin in August 2007.

I've just reviewed a very healthy development pipeline.

When we finish the development process we expect to have a completed high quality project that its value typically exceeds our costs by a good margin.

For most of these projects our intent is to hold these assets in our investment portfolio, but at appropriate times such as when the property markets are offering exceptional value we will seek to capture that value, the value we have created for our shareholders.

This is the third phase of the value creation process and we have a number of recent examples of exceptional results at this stage of the process.

Last quarter we discussed the Avenue fund transaction with our joint venture partner Prudential.

The results of this transaction is that we have locked in current high valuations for our shareholders, getting cash that can be used for further value creation opportunity.

I'm quite pleased that we were able to conclude this transaction on June 29.

Including approximately 21 million that we anticipate receiving in 2007, our five Avenue fund properties will have generated a combined 74% value creation.

Not all of our development projects will generate this level of value creation, but this transaction demonstrates the kind of results that successful development projects can produce for shareholders when we take advantage of good opportunities presented periodically by the Capital Markets.

Capturing the value we've created can also be accomplished through outright sales and we have two significant asset sales pending, Banc of America Plaza and Frost Bank Tower.

Many of you will recall the Frost Bank Tower has been the subject of a lot of questions on our conference calls over the years.

This is an excellent quality building but due to market conditions, it was slower to lease than our original expectations.

Yet, if we conclude the current sale we will have captured about $45 million in value creation and Frost Bank Tower representing 32% of our under appreciated cost.

Banc of America Plaza is of course another good story.

At a sale price of $348 per square foot and $436 million overall, we have achieved the highest per square foot building prices in the history of Atlanta.

And also the highest overall transaction price for a building.

The resulting value creation is 63% which is exceptional.

As you know, none of this value creation is included in FFO under the present accounting rules.

Final phase of the value creation process concerns what we do with the proceeds we are able to capture from our value creation.

Inevitably, some of these proceeds are plowed back into the development of new projects or the creation of additional value; however when we have more than enough funds to carry forward our development and other operations, we tend to give the excess proceeds back to our shareholders in a special dividend as done in 2003 and 2004.

At the end of the day, we believe that this enhances shareholders total return in that the same future value creation on a lower capital base results in higher shareholder returns on invested capital.

Jim talked about the likelihood of a special dividend this year.

I need to reiterate that any special dividend will be contingent on the closing of Banc of America Plaza and Frost Bank Tower both of which are still in due diligence.

Also, the decision about a special dividend will be made by our Board after these sales have closed.

Subject to these things, however, as Jim said we anticipate that we could have a special dividend in the range of $3 to $4 per share later in the year.

Finally I want to speak just for a moment about the level of our ordinary dividend.

Although it's a decision our Board will need to make based on our financial projections it appears we will not have a problem maintaining our ordinary dividend at today's levels even after these asset sales and the likely special dividend.

Although some may question our FFO dividend coverage over the next couple years it is important to remember that our ultimate returns as well as our cash flow sources come from both FFO and the value we create and capture from time to time through financing, joint venture, and sales.

Our balance sheet and cash flows are very strong and we are comfortable we can meet our financial needs for the coming years while continuing the current dividend.

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

Do you have any questions for us today?

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

Good afternoon, everyone.

Hi, David.

A couple of questions on the 199 Peachtree.

I don't know if you were ready to speak about this yet but could you talk about CapEx requirements, rent expectations, overall strategy, targeted tenants that sort of thing?

It's 191 Peachtree.

Right.

We can talk a little bit about it but you have to realize it's very early in the game.

The building will have once Wachovia vacates, when they vacate it once their lease is up which is in mid '08 I believe--.

End of '08.

About 850,000 feet of available space and we do have several tenants in mind.

First of all, we'll move there and that will take about 60,000 feet of space and that will probably happen in the first half of next year.

Deloitte and Touche who is the other large tenant in the building, we hope to be able to consolidate their space.

They have space in other parts of the downtown area and to the building, and so that would add another 150 to 200,000 feet.

We're also talking to several other potential prospects but in our pro forma, I think we had four to five years, Dan?

Six.

Six years in our lease up projections.

Now with regard to TI and leasing expense, it's hard to know exactly what that will be but I think we generally think it will be in the 50 to $70 a foot range.

I believe that's what we pro forma?

Actual TI is closer to 40 to 45 and then you have leasing commissions and interest carry on.

So 50 to 70 I think is a fair estimate though that of course could change as we learn more and depending on the tenant mix and length of leases, et cetera.

Does that answer your question, David?

Yes, that's a helpful start actually.

And then just quickly, what's your year-end targeted debt to total cap ratio or do you have a range?

We don't really have a range.

If you look at where we probably will be, it will depend of course on special dividend and if special dividend is paid and the asset sales are concluded that we expect we would probably be in the same range that we were in at the end of last year.

Okay, great.

Thank you.

You're welcome.

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

Thanks for the brief comments, Tom.

You're welcome.

First, your capital expenditures, your second generation TI and leasing commissions in the quarter were up notably.

Can you give us some comments whether that's retail, office, what's on the second half?

I don't know that we've got -- I don't know that I can answer that right now, Chris.

It's a question we can come back to you with.

We did have some leasing at Avenue Peninsula where Saks vacated.

We've been able to release some of the space over in Birmingham that was vacated by Southern Progress.

Right.

And then we generally -- and we've had some lease up at 1 Georgia Center that's continued, we generally -- and at North Point.

So I think it's probably spread out, but I'll be glad to go dig through and get you a better break down.

Jim, is that number in your supplemental, is that a committed number or is that a spent number?

That's a spent number.

Okay, so it's interesting because your occupancy, your pick up at occupancy for the last couple quarters has been matched with a -- it's been matched with a lower level of tenant improvement costs yet the occupancy level didn't pick up much in this quarter, yet your TI's went up notably.

No, we did lose some occupancy this quarter.

That's true; okay.

From a couple of things that we anticipated and then we've made up some of the ground with new leases.

So have you guys thought about how you will handle the leasing costs or the lease up on the 191?

Will you disclose that separately or will that go into base building?

We haven't figured out how weesh going to handle that in disclosures, Chris, but we'll make sure we include it in there in a way that you can figure it out.

On 191 looking at the comparable rates of return you're getting in your developments, let's just take -- love the T1 and T2, and I look forward to the T3.

Is looking at the development yields there versus the rate of return you expect on 191, the lease up period or the stabilization period my guess would probably be it appears a little bit longer with 191.

Could you give us a sense as to what you think the stabilized rates of return would be between -- comparing one versus the other because I know you don't give numbers out.

Chris, this is Dan.

Yes?

Generally, any investment we make, we hold to the same general standard of return, and so I would tell you notwithstanding the longer lease up period, our target IRR will be consistent with our target IRR for other investments, and our returns would be consistent with the returns we would expect -- would be consistent with or better than the returns we would expect on T100 and T200.

And as I've said many times Chris, to you and most everyone on the phone, I'm sure that we generally try to underwrite to a 9.5 to 10.5 yield and a 12.5 to 13.5 IRR and I'd say the vast majority of the time we're in that zone.

Sometimes we surprise ourselves and beat it.

But that's generally if we're approving a project that's our expectation at approval.

Okay.

Jim, you mentioned that the slower velocity and lot track sales will not detract from a value figure or an asset value figure, yet the lower velocity means less cash today which has an impact to the net present value in those cash flows.

Yes.

I have to agree with that.

I mean it has some impact in that you have the cost of carry in some cases for the land and I think the point is that we have a generally low basis in the land.

The land has true intrinsic value which we can extract at some point in the future.

We try not to get too far ahead of ourselves in terms of the development process.

We don't have a lot of invested capital and improvements.

I think that -- so by and large, we believe that while it has obviously and you're exactly correct, they have some interim impact on valuation over time, we think we'll probably get it back.

The other thing, Chris, that I'd point out on this, in our underwriting of these particular deals, these subdivision development deals, we as a matter of course make the assumption that there will be periods of time not unlike this, where there will be actually in any given deal no sales for a period of time.

To kind of stress test it.

Now unfortunately, you can't predict exactly when that's going to be, but our underwriting does reflect this type of a period, so the overall returns on the deals we think will be consistent with the way we enter them.

And just as a way of an example, one of our projects in Tampa, and I was doing this from recall, but one of our projects in Tampa, we originally underwrote at $50,000 per lot and I think the last take down was at 87 or $89,000 per lot so it's been way above pro forma for some period of time.

Now, if we were to sell another 40 of those lots in the next quarter we wouldn't sell them at 89,000.

I don't know what it would be but it would be substantially less than that but it would probably be higher than our original pro forma number.

So that's another reason that we think over time that we probably capture the value that we underwrote the project at initially.

Thank you.

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

Thanks.

Can you guys comment on the process involved with 191 Peachtree?

Was it a widely marketed auction where you were just the high bidder or was there other aspects to it?

No.

There was no marketing process and we've been talking to EOC about 191 for about a year.

They haven't frankly expressed a lot of interest in selling us the asset at a price that we thought was reasonable through most of that time.

Recently, we put Frost Bank on the market and they have a major position in the central business district of Austin and we're very interested Frost Bank, so we had something they wanted and they had something we wanted and we were able to come to an agreement on both Frost Bank and 191.

So Jim, that's sort of the way that process worked.

And with respect to tenants in downtown, clearly we've seen the move outs of some very significant tenants, in many cases to midtown which I think is perceived in the market to be hotter or trendier.

What's it going to take to attract tenants from outside of downtown to downtown?

Is it simply a function of price?

Is it going to require tax subsidies from government agencies?

What's it going to take to reverse the flow?

Well, I think it's all of those things, Jim.

You're on the right subject.

We've already seen a lot of things happen downtown.

With the growth of Georgia State University, with the aquarium and the World of Coke.

The aquarium will receive 4 million visitors this year with the success of the World Congress Center which is our convention center downtown, some additional retail has been built downtown, some additional hotel rooms have gone in, more residential.

There's 1,000 unit residential project underway right now by Novari and Jim Borders, all of these things are sort of creating some momentum that is causing people to look at downtown again.

Then since our announcement, and we're the first headquarters to move back downtown since Southern Company which I think was in 1980? 1990?

Well, it's been 15 or 16 years, this announcement has been met with surprise and a great deal of enthusiasm here in the Atlanta community.

Walter Fisch, head of leasing told me today, he has already heard from several of the brokers in town saying that now that Cousins is moving downtown and that we're taking over the 191 building, they are going to begin to look at that building.

In fact they had one specific client that one of the brokers mentioned that he wants to bring down to the building for a fairly large lease, so that's not saying that they will lease in the building.

It's just saying that this whole idea that downtown is an okay place to go and of course it is very price competitive.

I think that it was the momentum that's changing and that's a call that we made in a market that we know very well and time will prove whether we're right or not but we have a high level of confidence.

Jim, this is Dan.

Also it should be pointed out that when you talk about downtown and vacancy downtown, there are really, in downtown four trophy buildings. 191 being one of them, Banc of America being on the edge of downtown, and by and large, the other three are extremely well leased.

So some of the conditions that exist at 191 is not the norm, and historically, all four of those buildings had been very well leased, and candidly, in a lot of respects this is the classiest with possible exception of Banc of America.

Yes.

I'm glad you said that.

I had to say that -- of the buildings down there.

So it isn't that we've got a total up hill climb.

There's a great history of stable trophy assets in downtown Atlanta.

We just need to restore this one to the same pedestal that the other three exist on.

Jim, it's just a very simple calculus really.

You either think we can lease it up in our home market and if we can it's going to create very substantial value creation for our shareholders, or you think we won't lease it up in which case it's a mistake.

So you have to sort of bet one way or the other.

We're betting we can lease it up.

And sticking with downtown, when you guys bought the Gellerstedt Group, can you clarify what you got in terms of downtown residential development opportunities?

Did you acquire sites?

Did you acquire options for sites downtown?

No.

It's just an acquisition of people and a couple in process projects one of which we were already a partner in.

We chose not to -- he did have a site downtown and we chose not to acquire that site because he had three partners in the deal who had sort of differing needs and opinions and we thought we probably would let him worry about that.

And then switching to InForm, the big lease that you referenced.

Can you make any comment with respect to the economics of that transaction?

Well they met our standards.

In terms of rent?

Yes.

Capital cost?

Right.

We feel pretty good.

That building is pretty buttoned up now for the foreseeable future.

But you don't care to quantify some of those aspects?

We generally don't talk about specific rents and deal terms because we feel like it creates a disadvantage for us in the market.

With respect to your entree into Dallas on the industrial side, why did you choose to venture with Siegfried, and it seems like you're playing the role of money partner as opposed to the active development role that you usually play.

Well, we've been very involved in this process and certainly involved in this first lease, but yes.

We are to a certain degree, Jim, learning the market with our partner Siegfried and that's, as you'll remember, generally the way we enter a market with a new product.

Okay, thank you.

You're very welcome.

And we'll now take a follow-up from David Toti once again with Lehman Brothers.

Hi.

I may have missed this, but has anyone asked if there are any additional asset sales planned?

No.

No one did, and we are always examining, I think we've talked about this before, David, every quarter we look at every asset and we determine whether we think we have created this whole value in that asset and whether we ought put it on the list or not and we have some things on the list, but we're not actively marketing any other asset at this time.

Okay.

And then just one quick follow-up question on the industrial platform.

Can you give some sense of the scale for this business say 12 to 18 months from now in terms of your plans for ramping up development and so fourth?

For which business now?

The industrial.

Well, as we said before, I think ideally we would like to invest about $50 million a year through the cycle, and this year it would be a little more than that.

Probably next year a little less, but give it a year through the cycle for the target.

Great.

Thanks.

Our colleagues have reminded me here.

I say we're not actively marketing any other assets, and we are not.

There are people out there who like some of our assets who from time to time call up and say they want to buy one and so I don't want you to get mad at me two weeks from now if we announce we sold something.

Anybody else?

[OPERATOR INSTRUCTIONS] We'll now take a follow-up from Chris Haley with Wachovia.

I'd be interested your thoughts on the margin, the pro forma margin differences between T-2 or whatever it is, T3 and what Juniper was and Biscayne was.

Well, Biscayne is an anomaly so that's hard to imagine but we try to underwrite, generally underwrite our residential products both of single family and multifamily at about a 25% margin.

Pretax, after-tax?

Pre.

And looking at the swap from Atlanta to Austin or Austin to Atlanta, how would you characterize, I know you provide a Q1 and Q2 building by building NOI, Frost Bank is in a lease up mode, 191 is in a lease out mode.

How would you look at the arbitrage in terms of the going out rate of return versus the coming in rate of return and are you, is that kind of the game or I don't think I should say game but I'll say it anyway, that you were playing in terms of that you were looking at the minimizing dilution or looking at putting that money to work quickly?

We're not that sophisticated.

I mean, we really look at these on an opportunistic basis and we look at the overall transaction on a value creation basis over time.

In other words, how much return can we get on our invested dollar over time for our shareholders?

And if it meets that standard or exceeds that standard then it's a deal that we will do and we don't really think very much about the short-term quarter to quarter or year to year impact it has other than the fact that we on a very regular basis look at sources and uses in terms of cash to make sure that we can fully fund everything that we're doing.

Now, we look at 191 as the development project.

I mean, it's just like we're building a new building except in this case the building is built and it's built quite nicely.

Probably it would cost 350 to $375 a foot to replace that building today.

But we look at it as a development project so we're approaching it that way and it makes us a good buyer of buildings that need significant redevelopment because we're used to taking empty buildings and filling them up.

That's sort of what we do, and in this case we've got a very good building in a, what we believe is an emerging market where if we can lease it at today's competitive rates in the downtown sub market, we'll make a lot of money.

Okay.

It goes to the same message that we've been nostalging for awhile, is we were only concerned about FFO, this is a deal that we would have had great difficulty doing, but since we're more concerned about value creation and net asset value, it's a deal that makes great sense, but notwithstanding the fact there will be a difference in FFO during the lease up period of the project.

On 191, the 51% or let's just call it half leased, what is the rollout of that half leased in there besides, is Wachovia the only one in there?

I don't know much about the building.

Wachovia is the only one that's presently paying rent that is moving out -- that has moved out.

So you are receiving, okay, that has moved out so there are customers there paying rent that are occupied?

That's correct.

But what is the rent paying level or utilization?

Rent paying, it's about 50%.

51%.

It's through late 08.

The end of '08.

And then it just goes or then it falls off?

Yes.

Well, it falls off depending on how much leasing we've done between now and then.

Correct.

Jim, on the special dividend, I'm interested terms of the size of the special in that I guess we're showing GAAP earnings here, not taxable earnings, the gains coming from PREI plus B of A plus Frost are going to be the predominant taxable earnings drivers and in the mix there is also the repatriation of capital from Austin on that sale plus any net earnings.

I'm trying to look at kind of the cumulative taxable earnings number relative to the dividend.

Is that kind of the right process to take?

Chris, from a sources and uses standpoint, I think you're right on.

Which is that we have a number of sources, asset sales, we've got the Prudential transaction, we've also got a number of uses like the 191 project and development projects that are under way.

So from a tax standpoint the Prudential deal is not a taxable transaction so it doesn't generate any taxable gain at this point on those assets.

I see.

So really the tax gain comes from our ordinary operations, from any track sales, any additional asset sales, plus the ones that we've talked about which have a tax gain of 193 million.

So the PREI is not taxable--?

Correct.

Is it not taxable or deferable?

It's like any other venture.

It's a venture and so ultimately there could be -- there would be probably at some point taxable income like there would be on any other situation like a 1031 exchange, but it's no tax in the near term.

Okay.

So did you comment on whether you thought this was going to be on '06 event versus '07?

On the dividend?

Yes.

Should should be '06.

What are your rough gauge as to your tax equivalency as a dividend in '06 under those--?

Well, in the past it's been in the 20%. 18 to 20%.

Yes, it has and we haven't done that calculation, Chris.

It's still pretty early in the process.

We are still in due diligence, but we'll have a substantial amount of our income this year as capital gains so it should be in that same range.

Okay.

All right congratulations.

Thanks.

Thank you.

And ladies and gentlemen, at this time we have no further questions. [OPERATOR INSTRUCTIONS]

Well, thank you, everyone.

We appreciate your time and attention as always and we will be talking to you next quarter.

And ladies and gentlemen, this will conclude our teleconference for today.

We thank you for your participation and you may disconnect at this time.