Cousins Properties Inc (CUZ) 2006 Q3 法說會逐字稿

Good day, and welcome to this Cousins Properties Incorporated Third 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.

With me today are Dan Dupree, our Vice Chairman and Jim Fleming, our Chief Financial Officer and Tom Charlesworth, our Chief Investment Officer.

Welcome to our third quarter conference call.

At this time I'll ask Jim to review the financial results for the quarter.

Jim?

Thank you, Tom.

And thanks to everyone for your interest in Cousins Properties.

Certain matters we'll be discussing today are forward-looking statements within the meaning of federal securities laws.

Actual results may differ materially from these statements.

Please refer to our filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2005 for a discussion of the factors that may cause such material differences.

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

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

In the third quarter we continued to execute our strategy of capturing value in mature stabilized assets and recycling this capital into new opportunities for value creation.

During the quarter we closed on the sales of both Frost Bank Tower and Bank of America Plaza.

Value creation on our share of Bank of America Plaza was $87.7 million or 73% of our undepreciated cost and value creation on Frost Bank Tower was $44 million or 31% of our undepreciated costs.

Including the additional contributions we anticipate receiving from Prudential into the avenue fund.

This year we have captured over $280 million in value creation from stabilized budgets.

Proceeds from these transactions were used in part to purchase 191 Peachtree during the quarter.

As you may remember from our last call, we see 191 Peachtree as an opportunity to create significant value over the next several years.

However, we expect some short-term dilution from the operations of 191.

The building is currently 54% leased, but only 19% occupied.

Most of the difference between these two figures comes from a 371,000 square foot lease to Wachovia, which expires in December 2008.

Even though the lease is currently paying $9.8 million per year, we will only recognize $5.9 million in FFO under current lease accounting rules.

When Wachovia lease expires, we do not expect it to be renewed so we anticipate revenues over operating expenses will decrease in the short-term as we implement our plan to re-lease the building.

We are already in discussions with several prospects to lease new space in the building.

And we're in active discussions with other existing tenants for renewal and expansion of space.

This past Wednesday, we also closed the sale of the Avenue of the Peninsula in Palos Verdes, California for $95.7 million.

Based on 2007 projected net operating income of 5.7 million, this price represents a cap rate of just under 6%.

Subject to final accounting, we anticipate a book gain of $20 million and a value creation loss of $5.5 million or about 6%.

Of course this is not the result we had hoped for when we began this project in 1999, but as many of you know this project struggled for a long time.

And we're pleased with the work our retail group did to improve this center over the last three years.

Which addressed the issues with tax, to improve the physical appearance of the property and increased NOI.

It's important to note that since 2003, we've sold or formed joint ventures with over 30 properties.

Realizing over $580 million in positive value creation.

As we explained in last quarter's call, we expect a portion of the proceeds from our asset sales will be used to pay a special dividend to common shareholders.

We have refined our financing modeling -- financial modeling for the coming years as well as estimated taxable income for 2006.

And based on our calculations, management plans to recommend to the board at next week's regular meeting that it declare a special dividend in the range of $3.30 to $3.50 per share payable prior to year end.

This will be our third special dividend in the last four years, totaling over $12 per share, which in large part represents captured value creation that we will have returned to our shareholders.

Our FFO has been at a somewhat lower level for the past two quarters because we've not had any significant track sales, lease termination fees or other lumpy items.

And because our residential lot sales have decreased from prior periods.

In the fourth quarter, there were -- there are a few anticipated transactions that could result in higher levels of FFO.

The most significant of these relates to our north point outparcels.

Because our high level of retail development has increased our holdings of retail outparcels, we've decided to sell these outparcels at North Point, which we've owned for a long period of time.

We're currently under contract with substantial non-refundable earnings money to sell these 12 ground-leased outparcels for $24.4 million or an overall cap rate on current income of 6%.

The outparcels are adjacent to North Point Mall in Alpharetta, Georgia and have a weighted average primary term of six years.

With renewal options that could extend the terms to 14 to 30 years.

The closings are scheduled to occur during the fourth quarter of 2006 and the first quarter of 2007.

Subject to final accounting, gains from the sales are anticipated to be $11.8 million or $0.23 per share in the fourth quarter of 2006 and 8.3 million or $0.16 per share in the first quarter of 2007.

Because these will be sales of previously underappreciated property, the gains will be included in FFO.

Our 905 Juniper project is substantially complete.

In the third quarter we sold three of the remaining four units and the final units are under contract and expected to sell before year end.

Our third quarter income statement shows costs of multi-family sales exceeding revenues.

We incurred higher than expected property taxes and had additional costs related to upgrades on certain units previously sold.

Overall, our returns on this project were solid.

Total revenues of $36.8 million exceeded total costs by 7.6 million resulting in a pretax profit ratio of 26%.

As we consider residential development at terminus, our experience with the 905 Juniper project is relevant and instructive.

Our strategy of targeting higher end and move out buyers has been successful.

And our level of quality and customer focus has served us well.

This quarter, our residential neighborhood sold a total of 279 lots.

We mentioned last quarter that despite the strong demographics in our markets, the number of home builders had slowed down their activities, delaying their purchases of lots.

Lot sales at our developments continued to decline and were down in the third quarter compared to the second quarter.

We anticipate some improvement in the fourth quarter, but still believe the number of lots sold this year will be down by approximately 20 to 30% compared to 2005.

Our same property results were up year-to-date on a cash basis.

Compared to last quarter, our office same property results were up slightly and our retail results were down 2.5%.

The decrease in retail is partly resolved in the accounting billing true ups, reported in the second quarter that increased the second quarter results and not the third quarter results.

Ironically, the remainder of the decrease is generally a result of positive events.

The termination of tax at the Avenue of the Peninsula, whose rent was largely replaced by Ann Taylor Loft and Coldwater Creek in less than 30% of the tax base.

Plus the termination of Abercrombie & Fitch at the Avenue at East Cobb who has now been replaced by [Fourth & Town] at a higher rent.

These results were also offset partially by increased revenue from occupancy increases at Avenue West Cobb and Viera MarketCenter.

The GAAP basis results were down more than the cash basis results as a result of straight line rent adjustments required as a result of the Avenue fund transaction.

As we've said before, we believe the results demonstrated over a longer period, such as the nine month period are a better indicator of the overall results from our same property portfolio than quarter-to-quarter fluctuations.

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

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

I'll begin with the office division where rental property revenues, less rental property operating expenses increased $100,000 between quarters.

The primary reason for the increase was the acquisition of 191 Peach Tree during the quarter.

The increase from 191 Peachtree was partially offset by a decrease of One Georgia Center of $165,000 and a decrease of 615 Peachtree of $127,000.

As planned we completed the demolition of 615 Peachtree in September to allow us to proceed at the appropriate with our Plaza development.

For the retail division, overall FFO generated from rental operations, decreased $3.8 million between quarters due to the contribution of the Avenue East Cobb, Avenue Peachtree City, Avenue West Cobb, Avenue Viera and Viera MarketCenter to the Avenue fund venture we formed with Prudential.

The company's share of operations from these properties is now included in income from unconsolidated joint ventures on our statement of income.

The decrease from these properties was partially offset by a $217,000 increase at San Jose market center due to continued lease up of this center and the opening of the Avenue Webb Gin in August 2006.

Outparcel sales, net of cost of sales increased 736,000 as a result of the sale of parcels at two of our retail centers.

The hotel [inaudible] at the Avenue Carriage Crossing and an outparcel at the Avenue West Cobb.

Lot sales decreased $936,000, due to a reduction in lots sold from 352 to 279.

Multi-family profits at 905 Juniper decreased $3.1 million since we closed all but four units in the second quarter.

This decrease is partially offset by an increase in profits recognized at 50 Biscayne as we progressed further from a percentage of completion standpoint in the third quarter.

I want to point out that our percentage of completion profit recognition will slow down on this project as we near completion.

And we currently anticipate we will be approximately 65% complete at the end of this year.

Leasing fees decreased $781,000 due to the receipt of a large landfill commission in the second quarter related to the Las Colinas development.

Lease termination fees decreased 590,000 due to a $750,000 fee recognized in the second quarter on the [sack] space at the Avenue of the Peninsula.

General and administrative expenses decreased 811,000 in the third quarter as a result of an increase in cost capitalized to development projects and a decrease in certain other expenses.

Interest expense decreased 2.3 million during the third quarter because proceeds from the recent sales activities and contributions from the Avenue fund venture with Prudential were used to reduce debt balances.

Other expenses decreased 481,000 due to a decrease in minority interest expense related to the lower profits recognized at 905 Juniper.

The income tax expense decreased 1.9 million during the quarter as a result of a decrease in income of lot and track sales and a decrease in profits recognized at 905 Juniper, all of which are recognized at our taxable subsidiary.

Joint venture FFO increased $2.1 million in the third quarter primarily as a result of income from CP Venture Five, one of the Avenue fund entities.

Before I close, I want to point out that during the quarter our partnership with Faison that is developing our Avenue Murfreesboro project obtained a $131 million construction loan.

The loan matures in four years and Cousins' share of interest on the loan accrues at LIBOR plus 1.15%.

As of quarter end, the outstanding principal balance was $8.2 million.

At the end of the third quarter, our company's debt to market capitalization was 15%.

And including preferred stock, our leverage was 24%.

This is comparable to our 17% debt level at the end of 2004 after our substantial asset sales that year.

We expect our leverage will be at about the same level of year end, taking into account the sale of the Avenue of the Peninsula and the planned special dividend.

Today's low leverage would be less than ideal for our property holding company, but it gives us the needed borrowing capacity to fund our future development costs and we expect it will increase over the next two to three years as we continue to fund the remainder of our $868 million development pipeline as well as the shadow pipeline projects we plan to begin over the next several years.

Finally, I'd like to point out that we've included an updated schedule on pages 37-39 of the supplemental package summarizing value creation.

We've also posted a schedule on our website showing value creation as a percentage of our underappreciated costs.

This year, we've captured a total value creation of $281 million or 60% of our undepreciated costs.

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

Thank you, Jim.

I'll start with some general comments on our real estate markets and products and then discuss some of our ongoing and proposed development projects.

All of our markets continue to grow in both population and jobs.

The census bureau projects population growth in our primary markets of Texas, Tennessee, Georgia, Florida, California, and North Carolina of over 47 million people between [2020/30], which is almost 60% of the total growth projected in the United States.

And job growth continues to be strong at all our primary markets running about 2% to 4% per year.

This should provide ample development opportunities for our company going forward.

And I'm pleased to report we continue to see good development opportunities for our office multifamily, our retail and our industrial divisions.

And our shadow pipeline for each of these divisions continues to build.

But markets can change quickly and we -- and as we have said many times in the past, there's no certainty that projects in our shadow pipeline will go into production.

I'm pleased to report in all cases our office markets seem to be improving and our retail and industrial businesses remain strong.

Our residential business, however, is declining and I'll discuss residential in more detail in a few minutes.

We have had several notable transactions this year, which reflect the value that can be created through the development process.

This quarter we revised our value creation calculation on the Avenue fund properties upward slightly to 75% of our total undepreciated costs and our value creation on Bank of America Plaza was 73% while Frost Bank Tower garnered a 31% value creation.

Bank of America Plaza and Frost Bank Tower set sales records for the state of Georgia and the state of Tennessee at 348 and 354, state of Texas, I'm sorry.

At $348 and $354 per square foot.

Jim mentioned our recent sale of the Avenue of the Peninsula.

As a development company, I guess it's inevitable.

We will encounter some projects that for one reason or another do not meet our expectations.

And AOP was one of our most disappointing projects in recent years.

But our retail division has done a great job of improving this center over the last three years and our $96 million sales price was a satisfactory result given where the projects stood just a few years ago.

Important contributors to our long-term success are the development projects we're building today along with our shadow pipeline of transactions that may provide opportunities for future development.

Our pipeline of end process development continues to grow.

As a result we've now crossed over the $1 billion mark in total expected cost on projects under active development at this time with Cousins' share of these costs at $868 million.

We have the opportunity to create a great deal of value from these projects.

We remain keenly focused on finding additional opportunities that meet our strict underwriting standards and on executing all of them well.

I'll take a few minutes to update you on some of the projects in our current pipeline as well as some of the ones that look most likely to start in the near future.

Now I'll start with 191 Peachtree, which we're treating as a development project since it was only 90% occupied when we acquired it.

This is one of the highest quality buildings in the Southeast and it is the only trophy quality building in Atlanta with low occupancy.

At our purchase price of $153 million or $127 per square foot, we're well positioned to use our strong market relationships and business ties to lease the building at an attractive economic return.

We're also working with a wide range of constituencies to continue to improve the overall downtown environment which is adding to our ability to attract tenants to 191.

We're very pleased with the renewal underway in downtown and I'm pleased to report that the downtown environment is already improving rapidly with very significant development in investments underway and the office residential and hotel sectors.

We continue to make solid progress with several of our in-process projects, as well.

Signed leases and letters of intent account for 72% of the total office and retail space at Terminus 100 and we have excellent prospects with whom we are negotiating that would bring the committed percentage to 83% with initial occupancy to commence in April of 2007.

The Terminus project is now regarded by many in Atlanta as the heart of Buckhead and as the premier location in -- and as a premier location in Atlanta.

We believe that [sense of place] will carry forward into future phases of the project including [10] Terminus Place, the condominiums that we plan to start in the first quarter of next year and the Terminus 200 office building.

The 142 unit, 10 Terminus Place condominium tower is in final design and we have just begun our preliminary marketing.

Initial efforts have resulted in 206 names on our qualified prospect list.

And our marketing center just opened this past Monday.

At our 50 Biscayne project in Miami, construction remains on schedule with expected completion during the third quarter of '07 and despite weakness in the Miami condominium market, our location and early buyout of construction costs have resulted in solid value for our buyers.

Today the 11 purchased contracts have been resold at an average price of approximately $100 per square foot above the original contract price.

We expect unit closings will begin in August of 2007.

Austin's office market is improving and despite our recent sale of Frost Bank Tower we have no intention of leaving that market.

Earlier this year, we purchased our 22-acre Palisades property in the Southwest sub-market of Austin.

But earlier today we finalized a joint venture that will develop 360,000 square feet of office space in two buildings.

We have just signed a lease for the first 210,000 square feet with one of our partners.

We will have a 50% interest in this project and we expect to begin construction in the first half of '07.

Our land division is working through the recent changes in the housing market.

During the third quarter, we closed 279 lots, which is the lowest number we've seen recently and significantly below our plan for the quarter.

Indeed the lot sales business has slowed quite a bit this year and we now expect total 2006 lots sold for our project will be between 1500 and 1600 versus our original estimate of about 2,000.

Tampa, Florida is by far our most effective market, largely because of the high level of investor activity that market has seen in recent years.

We have three projects in Tampa with a total of 309 developed lots and inventory.

New home closings are down, completed home -- inventories are up and the competition is increased as some investors are liquidating their holdings.

Fortunately overall housing demand in Tampa -- in the Tampa area continues to be fueled by strong job growth and the continuing migration of retirees to the area.

The land we own in Tampa -- in the Tampa market was acquired on a favorable basis before the large recent appreciation and raw land prices.

Our low land basis gives us a competitive advantage as we wait for supply and demand to return to equilibrium.

We also have seen a slowdown in lot sales of Texas.

While market conditions in Dallas and Houston remain quite good, these markets are dominated by large production builders who are executing an aggressive nationwide plan to reduce their lot and land position.

For example, Houston has remained a strong market with consistent home sales, no material buildup of inventory, and strong economic indicators.

Notwithstanding these positives, a number of builders have told us that the national office will not allow them to take down additional lots even though they are meeting or exceeding their annual sales projections.

Dallas and Houston will remain strong markets for us once builder confidence returns.

And in the interim, we will continue to show restraint in our lot production.

In Georgia we've not experienced the cancellation rates and lot take-downs that we've seen in Texas and Tampa.

And in fact Atlanta net home constructions actually increased during the national slowdown.

Unlike Texas, Georgia builders are predominantly mid-size to small local companies who so far continue to buy, build, and sell in the wake of a national slowdown.

We will continue to be conservative in our production to prevent a build up of vacant developed lots in our Georgia communities, but to date we've not seen significant issues here.

Consistent with the opportunities we're seeing in this market, our two most recent residential developments are both in Georgia.

First we're adding the second phase to our Callaway Gardens development, building on the momentum we've established in our Long Leaf project there.

Our Callaway development has been successful in integrating modest-sized attractive homes into a wooded environment that is well known for its natural beauty and conservation.

And now we've applied these same concepts to our new Blalock Lakes project, a 399 lot development on 3,000 acres with hunting, fishing and equestrian activities as well as 1500 acres of preserved natural areas.

The project is only 45 minutes south of Atlanta and it's being extremely well received.

In our residential business, we'll continue to follow the conservative underwriting we've used in the past and we'll work to provide multiple price points in each community and to develop in phases to prevent the buildup of vacant developed lots.

Our industrial division continues to expand into new markets.

In July we formed a joint venture with Seefried Properties and purchased 85 acres in Flower Mound, just north of the Dallas/Fort Worth airport.

Construction is underway on the first building of 750,000 square foot warehouse facility and we've already signed Home Depot Supply to a five year $355,000 square foot lease in this building.

Occupancy is expected in April of 2007.

I'm also pleased to announce that Snapper Products has just elected to take an additional 52,000 square feet at King Mills bringing their total to 339,000 square feet.

Also, a team led by Cousins' industrial group was selected by the Forest Park/Fort Gillem Local Redevelopment Authority to conduct the visioning and economic analysis phase for the redevelopment of the 1500 acre Fort Gillem army base, which was selected for closure by the 2006 BRAC commission.

The base is loaded just 15 miles from downtown Atlanta and five miles from the Atlanta Hartsfield-Jackson Airport and should provide some good development opportunities in the future.

The retail division has made considerable progress advancing development opportunities during their third quarter.

I would like to highlight three likely future developments that I expect to be central building blocks of a successful 2007.

In suburban Kansas City, we have approximately 100 acres under a purchase contract that we -- where we anticipate developing a large power center.

We expect phase one of the project will be approximately 580,000 square feet and will have seven to eight outparcels.

There is also a likely second phase that could be 210,000 square feet.

We are currently negotiating to anchor in mid-box commitments and progressing through a rezoning process.

Plan posing is expected to occur in the second quarter of 2007.

It is worth mentioning that this project was sourced by our new retail regional office in Austin, Texas.

We continue to make progress in the development of large regional open-air lifestyle centers.

The next being in Forsyth County, just north of Atlanta.

And we anticipate beginning construction in Forsyth County in early 2007.

Our current plans call for phase I to include over 500,000 square feet of commercial space and 11 outparcels.

Phase II opportunity comprises approximately 40 acres of commercially zoned adjacent land that will be developed when market conditions will warrant.

We have reached agreement on business terms with several key anchors and we are in the process of securing commitments from fashion retailers.

The Avenue in Forsyth will be our largest Atlanta Avenue to date.

Also in the Atlanta area, we continue to make progress on the Avenue Ridgewalk in Cherokee County, which will be located at the new interchange on I-575.

This center will encompass approximately 300,000 square feet on 50 acres.

Engineering work is underway on the interchange and we anticipate that we'll be able to start development in mid to late 2007.

Early releasing results at Ridgewalk are very encouraging.

With the addition of the Avenue Forsyth and the Avenue Ridgewalk we will have developed six Avenue lifestyle centers at the greater Atlanta area and 10 overall.

The projects are all located in demographically attractive areas with high growth and income.

The Avenue brand is now nationally recognized and is well regarded by both consumers and retailers.

The Avenue Murfreesboro in suburban Nashville is currently under construction and the first phase is expected to open in August of 2007.

This 805,000 square foot project which we are developing in the joint venture with Faison currently has signed leases with Belk, Barnes & Noble, Ann Taylor Loft, Chico's, Talbot's, Dick's Sporting Goods, Cost Plus, Best Buy.

In total phases I and II are approximately 60% committed.

Last quarter we mentioned the August opening of the south side of the Avenue Webb Gin in the Atlanta suburb of Gwinnett County.

Early indications are that this project will be very successful.

The development features a strong lineup of quality fashion retailers and restaurants.

And after the end of the quarter, the north side of the project opened and the overall project is currently 78% committed.

Finally, the retail team and collaboration with the office group has been successful in securing an exciting list of restaurant commitments for our term in this project in Buckhead.

During the third quarter, we signed leases totaling over 33,000 square feet with [Aquina] out of Las Vegas, [Bricktops, MF Sushi and Lola].

In addition to our progress on development projects, I'm pleased with the progress we're making at leasing our current office portfolio.

As you know we've sold a lot of well leased office properties over the last three years and kept some that needed additional leasing.

One Georgia Center continues to be our biggest challenge at 45% leased but our North Point buildings which started the year at 81% leased are now up to 89%.

And our 600 University Park building in Birmingham which had a significant rollover earlier this year, we have a serious prospect that we would expect to take almost all of the vacant space.

We also have good prospects for Lake Shore Park Plaza.

Recently we announced this 274,000 square foot headquarters lease for the American Cancer Society at our informed property bringing the total of that building to 98% leased.

Our client service team has also recently signed a 411,000 square foot lease with CompuCredit for our client teachers at the Concourse Complex, bringing that project to 98% leased in the suburban market but basis market vacancy is 17%.

All of this points out the effectiveness of our leasing team even in suburban markets with significant vacancy.

We're very fortunate to have such strong leasing teams in both Atlanta and our Texas markets and we have a high degree of confidence that our people will continue to have success as they work to release our office properties including the new 191 Peachtree building.

Though our development business is booming, I would be remiss if I didn't remind our investors that there is still risk in our business.

And as a development focus brief, we take on some risks that other pure property [reads] don't.

We work hard to control these risks and to minimize their impact and historically our investors have expected and received high returns because of our development efforts.

In today's environment, there are other risks in the real estate market which are more related to capital markets and they could impact all reads.

Cap rates and investor return requirements have driven pricing up over the last several years to unprecedented levels.

Experience has taught us that significant deviations from historic norms tend to move back towards those historic norms over time.

Just as cap rates and discount rates have fallen significantly, there is a risk that over time they will move in the direction of their historic norms, reducing real estate valuation.

We have minimized this risk by capturing currently high valuations and returning a large portion of the capital to our shareholders and through our robust development pipeline which should continue to provide growth for our company even if cap rates increase.

Frost Bank Tower is a good example of how we've addressed development risks.

The building started in 2001 at what -- at a time many considered the worst point in a deteriorating market.

We believe we could outperform the market since our project was clearly superior to competitive building.

And our hard work paid off as we consistently attracted new tenants to our building at rates substantially higher than those being offered elsewhere.

In some cases our proposals were $6 to $8 per square foot higher and we still won the business.

This quarter we completed the sale of the building and announced $44 million in value creation.

We were able to achieve this positive result even in a down market because we did the right things throughout the development process.

Site selection, building design, construction, and leasing and ultimately deciding to capture the value we created in a strong investment market.

I can't say enough to complement our terrific Austin team for the job they did in building the superior product, leasing it at superior rates and delivering it to the marketplace for a $44 million in value creation.

Sadly I have to tell you that this is the last conference call for our good friend and colleague, Tom Charlesworth.

Tom has decided to retire from Cousins at the end of the year after shouldering a great deal of responsibility for Cousins Companies for over 25 years.

We'll miss Tom's leadership and wisdom.

But since he moved to part time status two years ago, Tom has done a great job of transitioning his responsibilities and we are delighted to welcome Craig Jones to the new CIO role.

We'll definitely call on Tom's insight from time to time but we know we're in capable hands with Craig Jones running the underwriting process and with a deep and experienced senior management team.

With that I'll close my remarks and open the floor to any questions you may have.

May I have your questions please.

Thank you. [OPERATOR INSTRUCTIONS]

All right.

Well, thank you everyone for participating in today's call.

If you do have any questions as time goes on, don't hesitate to call us.

We're always available to respond to our investors and analysts.

Thank you for your time.

Thank you.

That does conclude today's conference call.

We thank you for your participation and have a nice day.