Cousins Properties Inc (CUZ) 2007 Q2 法說會逐字稿

Good day and welcome to this Cousins Properties, Inc.

second quarter 2007 conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the conference over to the Chairman and Chief Executive Officer, Mr.

Tom Bell.

Please go ahead, sir.

Good morning, all.

I'm Tom Bell, Chairman and CEO of Cousins.

With me today are Dan DuPree, our President and COO, Jim Fleming, Chief Financial Officer, and Craig Jones, our Chief Investment Officer.

Welcome to our second quarter conference call.

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

Jim?

Thank you, Tom.

Good morning.

Some of the 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, 2006, for a discussion of our risk factors.

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

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

This quarter we reported FFO of $0.18 per share, which is down from $0.46 last quarter.

As we indicated on our last call, we did not expect significant gains in the second quarter from lumpy items, such as tract sales and lease termination fees.

In addition, while our residential lot sales improved slightly this quarter, our profits from this portion of our business were considerably lower than levels from a year ago.

On our last call, we told you we were projecting 2007 lot sales to approximately 30% lower than 2006.

Our current estimate, reflecting the continued slow down in the residential markets, is that lot sales will be at least 40% to 50% slower -- lower, excuse me, in 2007 than in 2006.

Just as in the last quarter, we recorded a tax benefit in our income statement because we recorded a pretax loss at our taxable subsidiary Cousins Real Estate Corporation due to lower levels of lot tract sales.

There is a possibility of some significant tract sales and fee items later in the year, but if fees do not occur, we believe we will have a pretax loss at CREC for the year, as well as a continued income tax benefit in the third and fourth quarters.

As you can see from our properties schedule in the supplemental package, office same-property results were down 2% from last quarter.

This is a result of BellSouth terminating a portion of its lease of its forum to provide space for the new American Cancer Society lease, as well as true-ups for operating expense billings at One Georgia Center.

The American Cancer Society lease commenced June 1, but for most of the second quarter the space vacated by BellSouth was under construction and did not generate revenue.

Retail same-property results increased 15% in the six-month period, mainly as a result of the lease-up of The Avenue Viera Market Center.

I'd now like to discuss the components of FFO in more detail by describing the changes between the first quarter of '07 and the second quarter of '07.

You can follow my discussion beginning on page 8 of our supplemental package.

I'll begin with the Office division, where rental property revenues less rental property operating expenses decreased $280,000 between quarters.

The decrease is a result of changes in the following properties.

A decrease of $242,000 at Inforum as a result of BellSouth vacating a portion of its space in the first quarter, as I mentioned before.

Decrease of $238,000 at One Georgia Center as a result of true-up adjustments on operating expense billings.

Decrease of $163,000 at 191 Peachtree due to a true-up of accruals for operating expenses.

Increase of $102,000 at 600 University Park Place due to the commencement of a new lease.

Increase of $143,000 at Terminus 100, as this was the first quarter of operations.

And finally increase of $128,000 at parking -- excuse me, 221 Peachtree Center parking garage, as we acquired this property primarily to provide additional parking capacity at 191 Peachtree in the second quarter.

For the Retail division, overall FFO generated from rental operations increased $152,000 during the quarter.

This increase is primarily from the continued lease-up of San Jose Market Center.

Industrial division FFO from rental operations increased $195,000 as a result of the opening of Lakeside building 20 in mid March.

FFO from tract sales decreased $3.9 million as a result of the first quarter sale of the land adjacent to The Avenue Carriage Crossing.

There were no significant tract sales in the second quarter.

Lot sales profits increased this quarter by $491,000, as a result of a modest increase in lots sold in the second quarter.

Other investment property sales for the first quarter represents a gain on the sale of the five ground leased out parcels at North Point.

There were no similar sales of investment property in the second quarter.

Multi-family profits decreased $573,000, based on our percentage of completion accounting, as we near completion of the 50 Biscayne project.

Development fees increased $1.6 million, primarily as a result of fees recognized in the second quarter on the development of our Palisades joint venture project.

Management fees increased $344,000, primarily as a result of higher out-of-pocket reimbursement revenue in the second quarter from third-party managed properties.

Termination fees decreased by $2.9 million as a result of BellSouth's partial lease termination of Inforum in the first quarter.

However, we did recognize $664,000 in lease termination fees in the second quarter from the termination of the Forth and Towne lease at The Avenue Webb Gin.

I also want to note that our venture with Prudential received a termination fee of $552,000 from the Forth and Towne termination of The Avenue East Cobb.

Total general and administrative expenses increased $914,000 in the second quarter.

Three main items account for this increase: $500,000 in out-of-pocket expenses for third-party and joint-venture properties, which are reimbursed to us in our fee line item; $375,000 in legal and professional fees associated with -- primarily with new proxy disclosure requirements; and $200,000 related to the ICSC convention in Las Vegas.

But for these three aberrations, our G&A costs would have declined in the second quarter.

In addition, in the first and second quarters, we had about $350,000 in total of expenses between the two quarters for moving our offices to 191 Peachtree.

Interest expense increased from $0 in the first quarter to $531,000 in the second quarter as a result of a decrease in capitalized interest associated with the operating force in the Terminus 100.

And a decrease in capitalized interest on excess land on the Terminus site on which construction activities are no longer occuring.

And finally, other expenses increased $379,000 as a result of expenses incurred on our Fort Gillem predevelopment project for which we are being reimbursed.

The reimbursement of these expenses is included in development fee income.

I also want to point out that our capital expenses have been running at a higher rate in the first and second quarters.

The total we show is $13.351 million for the year.

Of this, $12 million was for the American Cancer Society lease at Inforum.

That lease is for 274,000 square feet, 15-year lease term, and that lease is now -- the build-out of that space is now complete.

Based on our same property results and our project-by-project NOI numbers, we have received some questions about whether our office markets are declining.

This is not the case.

Tom will talk in a minute about our recent leasing activity, where we've completed releasing on a number of buildings.

We had two significant termination fees on some of this space that were included in our previous -- or our numbers in previous periods; $2.3 million from [Indif] Industries at 3100 Wildwood, which was in the first quarter of 2006, and $3.5 million from BellSouth at Inforum, which we included in the first quarter of 2007.

Both of these spaces have now been leased or sold, and as I said, Tom will talk some more in a minute about these.

But the second quarter numbers do not reflect any increase resulting from these leases yet.

Our development activity is continuing at a high level, and as we've said in the past, we plan to use a combination of capital recycling and debt to finance this development.

At this point, we're pursuing several sources of debt financing, using both our balance sheet and some of our operating properties.

In June, we refinanced our nonrecourse mortgage loans secured by the 100 and 200 North Point Center East office building.

We increased the balance of the note to 22 mil -- excuse me, from $22 million to $25 million, reduced the fixed interest rate from 7.86% to 5.3 9%, and extended the maturity of the loan to 2012.

In July, we closed a short-term bridge loan of $100 million to provide additional borrowing capacity over the next few months.

The loan bears interest at a slightly lower rate than our current credit facility, and we were able to obtain this loan without fees.

We're now in the process of attaining fixed-rate nonrecourse mortgage financing on three of our unencumbered assets.

We expect to close these loans in the third and fourth quarter and we expect the interest rates to be between 6.1% and 6.5%, and the proceeds of these loans to be about $400 million.

We are also discussing some possible changes to our credit facility with our bank group, which would increase the size of the credit facility, expand the borrowing base, and extend the maturity (inaudible).

If we're able to make these changes, we believe our credit facility, along with other sources of capital that are available to us, will fund our development pipeline for the next several years.

As most of you are aware, the credit markets have been in a lot of turmoil over the last few weeks.

We've been following these markets very closely, and our goal is to secure our financings as soon as possible in case these markets deteriorate further.

At this point, we don't anticipate any problems.

We've locked the rate on two of our three financing projects and we have already received commitments from many of our bank lenders.

In July, we closed the sale of 3301 Wendy Ridge Parkway at Wildwood, a 107,000 square foot building.

The building was 42% leased, and the buyer will occupy a significant portion of the remaining space.

The sales price was $16.1 million, and subject to final accounting, we expect to recognize a GAAP gain of about $9.9 million and a value creation of about $2.5 million.

In addition, we repurchased 250,000 shares of our common stock in the second quarter.

We discontinued the stock repurchases prior to the end of the quarter, pending our quarterly earnings release.

As we move forward, we will need to reevaluate our strategy on stock repurchases, given the recent downturn in the REIT market.

Before I close, I want to point out one change in our supplemental package.

This quarter we decided to simplify disclosures related to our joint ventures by including only our share of each joint ventures' operations in our supplemental package.

We think the new disclosures will give a more streamlined view of our joint ventures, while still providing the necessary information about the impact on our financial statements.

If you have any feedback on this, feel free to let us know.

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

Well, thank you, Jim.

Obviously we're at an interesting time in the markets right now.

There is great uncertainty in the debt markets and partly because of this, REIT stocks have lost significant value over the last couple of months.

And we're beginning to see increasing stress in the residential land markets, as financing becomes more difficult to obtain.

We also expect to see some cap rate expansion later in the year.

While this is generally bad news for most in the eral estate business, it may well create a number of opportunities for well-capitalized companies like Cousins Properties.

Over the last few years, we've seen very aggressive financing terms, including nonrecourse construction loans, zero amortization permanent loans, and inexpensive mezzanine loans, all of which have lured inexperienced small private developers into the market who have been willing to develop to lower turns.

As these loans become harder to obtain, it will mean less competition on the development side, which should give us more opportunity to pursue additional good developments at good returns.

Also, a reduced availability of debt or at least more prudent underwriting by lenders, they give us the opportunity to find attractively priced acquisitions for the first time in many years.

Our capital recycling over the last four years has given us a strong balance sheet, even with our high level of development, and I look forward to seeing what opportunities the market might provide us.

One of the reasons Cousins has been able to post good returns through many cycles is that often we've found the best opportunities arise in down markets.

Obviously there is great concern about the housing markets and this is hurting our land division, which is also having an affect on our current FFO.

Both the debt markets and consumer psychology are slowing sales and beginning to push down home prices.

As Jim mentioned, we now expect our lot sales to be off at least 40% to 50% this year compared to last year.

And this combined with the lumpiness of our tract sales has contributed to a relatively low FFO number this quarter.

As present, we don't expect to see much recovery and lot sales until late '08.

We do still expect to see some commercial tract sales this year, but nothing is certain in this market until the deal is closed.

As we said many times in the past, FFO is not our main focus.

We could have taken a number of steps over the last few years to increase our FFO by not selling assets or through acquisitions or other changes to our capital structure, but this wouldn't have resulted in any shareholder value, and this is not what we do at Cousins.

Instead we've continued to rebuild our portfolio through development, where we can produce quality assets that fit the Cousins brand and we can achieve significantly higher yields and value creation than we could find in the investment market.

At this time, we have approximately $1.3 million of development underway.

If our developments continue to perform as expected, then we will have replaced the properties we sold over the last four years with assets that have much higher returns over the long term.

This is how we have created value in the past and it remains our strategy today.

Let me spend a few moments on recent activities in our division -- our divisions.

Retail division is continuing to find solid opportunities.

And although we typically don't comment on potential new products -- projects until near closing, I want you to know we continue to see good, potential development opportunities in our key markets.

We'll be able to discuss more about these projects in future quarters as they move ahead, but for now, I simply want to point out that we have 17 projects that have progressed through level two of our underwriting process and we're seeing a lot of activity on this potential future developments in our core markets of Georgia, Tennessee, Texas, Florida, Virginia, and the Carolinas.

Our current retail development projects are progressing well.

At The Avenue Murfreesboro, our hybrid lifestyle and power center in suburban Nashville construction, on this 690,000 square feet Phase 1 and 2 is on schedule and tenant build-out work is well underway.

Dick's Sporting Goods opened early this month, with what appears to be a very strong start.

Best Buy will open in September, and this Avenue will have its grand opening in October.

Several key leases have been executed recently, including Victoria's Secret, Bath & Body Works, American Eagle, Lane Bryant, Michael's.

The center is currently 76% committed.

Construction at Avenue Forsyth is also on schedule and Phase 1 is expected to open in April of '08.

We announced this morning that we have signed key anchor leases with AMC theaters for 51,000 feet, Barnes and Noble for 28,000 square feet.

We've also signed leases recently with Circuit City, DSW, Bath & Body Works, and Victoria Secret's.

We see momentum there remains strong, with a total project commitment to date of 57%.

Tiffany Springs Market Center in the Kansas City market is another example of a solid retail development.

We broke ground on this project in July.

We are already 86% committed.

To date the project includes Home Depot, Target, Ulta, JC Penney, and we've also signed leases with Best Buy and Sports Authority.

We are scheduled for a July '08 opening.

Now moving on to the Office/Multi-family division, It's worth taking a close look at our current office portfolio to understand what we've been able to accomplish in the markets, because our lease percentage and FFO numbers do not yet provide a full picture of what we've accomplished.

As many of you know, after our office building sales in 2004, we retained a number of properties with low occupancy or near-term rollovers.

Shortly thereafter, our two Birmingham buildings were 61% leased following a significant rollover in April of '05.

They now stand at 94% leased, which we expect to increase further by year end.

Our North Point buildings here in Atlanta were 70% leased, including two that we took back from our venture with Prudential, which were 53% leased -- excuse me -- and now the North Point building are at a combined total of 90%.

The Inforum building had a 15% vacancy, plus some uncertainty about the future of the BellSouth lease.

We have now leased that building to 99%, and in the process reduced BellSouth space in half.

At One Georgia Center, the state of Georgia issued a letter of intent in May to Cousins to lease 239,000 square feet to the Georgia Department of Transportation.

We are now engaged in our lease negotiations with the state and we expect the lease term to begin in January of next year, bringing this building to full occupancy.

And our leasing activity on 3301 Wildwood, led to the sale to a user, Harden Construction, which as Jim mentioned, we closed in late July.

This leaves us with significant vacancy, only at the 3100 Wildwood building, and we've said -- as we've said in the past, we don't expect a quick solution to this empty building, since it's configured as a training center.

But recently we have seen several good prospects for this building through our marketing programs, and we could have a solution sooner than we thought.

The point of all this is that our office leasing has gone extremely well this year, and even though our FFO and overall portfolio leasing percentages don't reflect this yet, as these leases kick in, you will see what we've been able to accomplish through the year.

(inaudible) Terminus 100's filling up; Synovus, Atlantic Capital, Riverside Advisors, [Banes], CBRE, Wachovia, [Erian] and Lockton Companies have moved into Terminus 100 during the second quarter.

Leasing momentum continues to be strong.

We anticipate that we'll have that building 92% leased by November.

As expected, retail leasing momentum has also picked up, as retailers are able to visualize themselves on Cafe Street or along Piedmont, in the aminity spaces.

Terminus 100 grand opening is scheduled for October, by which time we expect that several of the key residents and retailers will be in place.

Our 10 Terminus condominium project continues to sell, despite the typically slow summer months and temporary off-site relocation of our sales center.

We had to move it as we began to create the site for Terminus 200.

We are on plan so far with 27 units under contract with deposits averaging 5% of sales price.

Our new marketing and sales center will open in late August.

And in September, we will kick off our marketing campaign with a series of targeted meetings for brokers and residents that will coincide with the opening of the restaurants on Cafe Street.

On Wednesday, we announced a partnership with our 50 Biscayne partner, The Related Group, to develop condominium buildings in the future in Atlanta, and we plan to start with One CityPlace, the first buildings in Related's previously-announced CityPlace Buckhead project.

We think partnering with Related on its entry into Atlanta is a natural, given our local knowledge and development of expertise and Related's status as one of the country's most successful high-rise residential developers.

Given the year plus difference in expected delivery dates, we do not expect one CityPlace to directly complete with our ongoing efforts at 10 Terminus Place.

Terminus 200 continues to progress.

We now have final approval from the Georgia Department of Transportation, as well as the city of Atlanta, for our tieback and construction permits.

We have excavated the site and over the next few months expect to make solid progress on this newest phase of the Terminus building.

At 191 Peachtree we have signed leases totaling 362,000 square feet since we took over this building, including a number of professional firms currently located in Midtown and Buckhead.

We are also in the process of negotiating lease documents for 286,000 square feet of additional space.

So far, our leasing velocity is well above our original projections and we're very encouraged about the momentum this building is generating.

On behalf of our partner, Emery University, we have secured zoning on the two-phase mixed-use project on Clifton Road adjacent to the Emery University campus.

We now are proceeding with design work and are on track to begin demolition on this site in September.

In addition, Emery has engaged us as a fee developer to expand the adjacent Emery conference center and to make some renovations to the existing structure.

We expect to commence work on this project in January 2008.

In Austin, we are well under construction with site and foundation work on our Palisades project.

The first building is fully leased, with many good prospects for our second building.

Significant rain in Austin has slowed our progress somewhat, but we are still on track to complete construction in the third quarter of 2008.

In June, our Industrial division, in partnership with Seefried Properties, acquired a 47-acre tract along Interstate 35 south of Dallas, in the city of Lancaster.

This site will accommodate a 772,000 square foot building, but we do not have a specific start date yet.

The south Dallas area is a growing market for large bulk distribution centers because of its accessibility from northern Mexico, its proximities to Interstate 20, 35, and 45, and its rail service from Union Pacific's intermodal's facility.

At our other industrial locations, leasing activity was slow in the second quarter, which was consistent with the overall markets.

Only 1.5 million square feet was absorbed in metro Atlanta in the second quarter compared to 4.5 million in the first.

And just 2.6 million square feet was absorbed in the Dallas market compared to 4.3 million in the first quarter.

However, leasing activity has picked up significantly since the end of the quarter, and we are encouraged at the prospects we're now seeing.

And our Land division closed the sale of 183 lots in the second quarter, against our original plan of 327.

For the year we've closed a total of 300 lots against a plan of 560.

Clearly our sales are running well below our projected numbers, which is consistent with the overall housing market.

We now have about 1,600 developed lots and inventory, of which Cousins share is about 800, and we are only developing additional lots in those projects to continue to sell houses.

This residential slowdown is having an adverse affect on our FFO this year, but as we've said in the past, we do not believe that there has been much decline in the long-term value of our residential lot businesses, and that these markets continue to see both job and population growth.

We have never assumed any increases in lot sale prices from inflation, even in our long-term residential developments, and in many cases our underwriting has modeled periods of slow lot sales.

As mentioned earlier, we don't expect to see significant improvement in lot sales until late 2008.

On a positive note, recent job growth remains strong in our three large residential markets of Atlanta, Dallas/Fort Worth, and Houston, with Dallas/Fort Worth and Houston ranking first and second respectively in job growth in the United States and Atlanta coming in at number ten.

Additionally, house closings in all three markets have outpaced new home starts, as the markets work through excess inventory.

With that, I'll close my remarks and turn the floor over for any questions you may have.

Thank you, sir.

(OPERATOR INSTRUCTIONS) We'll go first to David Toti with Lehman Brothers.

Good morning, everyone.

Morning, David.

Just a quick question.

Have you ever estimated what the implied drag is on FFO due to your development pipeline as it relates to peripheral noncapitalized costs?

No.

No, I don't think we have.

I think there are a couple of components to that, David.

I'm curious to at what you're getting at and maybe we could do that in the future.

One would be, of course, our dollars aren't invested in operating properties and so there's just the dollars that are invested are not income producing on a temporary basis.

And the other, of course, is that there are costs that we incur that under the GAAP rules we're not able to capitalize.

I think it might be an interesting metric relative to your discussion of suppressed FFO in the future.

If there could be some disclosure around that it might be interesting.

My second question would be, has there been any change in the management team's view of the public verses private discussion, as your stock price reaches present level?

Well, I haven't checked my blackberry since this started, but so far, no one's come across with an offer that's got the attention of our board.

And I would guess at these suppressed price levels, it would be unlikely, but you never know.

As we've said before, we'll entertain any offer.

Our first concern is for our shareholders, and -- but I think there's low expectations on our part.

Okay.

Thank you.

We'll go next to David Cohen with Morgan Stanley.

Hey, good morning.

Morning, David.

Hey, Tom you talked about the strong leasing velocity in the office market, especially in your assets.

Can you talk about the trends in rents?

Where are the rent spreads for those assets that you've leased up, and in Atlanta in general?

Well, I think we're very pleased with where we are in terms of how we're able to lease, and we're getting our lease rates in pretty much every instance.

Either operating at or ahead of pro forma.

I can't speak for the market, I can only speak for our activity, but I think by and large, both in Austin and in Atlanta metro, it's looking better.

Did you have something you wanted to add, Craig?

If you look at our experience Terminus 100, we were able to push rates significantly there, almost $4 a foot during the leasing process, so we're really -- we're really seeing some increases.

Well, what about at the -- even some of the older assets, though?

Well, we're very satisfied with our GDOT lease, and feel fortunate that we were able to fill that building up.

And at 191, so far, the leasing velocity has been double what we expected and we're pretty much operating above pro forma in every respect.

In Birmingham at Lakeshore Towers an older project, we've been experiencing roll-up in the rent there for the last year and a half.

And we're up to 91% leased on that project, replacing a tenant that occupied about two-thirds of that building on average at about $3 a foot more than the other tenant was paying.

Okay.

And at 191, would you be able to -- I think rental rates would be 24, 25, in gross.

Is that something -- does that sound about right for those leases that you signed during the quarter?

We generally don't talk about specific pricing, obviously for competitive reasons, but it sounds to me like you understand the market pretty well.

Okay.

And the operating margins, you've really -- they've deteriorated year over year significantly.

Can you just talk about which business segments are driving that more than others?

David, this is Jim.

On that, really that's a function of space that's not leased in the portfolio.

If you look at the One Georgia Center building, which has been in the 40+% leased, you look at 3301, where we did a termination last year with [Indus].

You look at the 3100 where IBM rolled out, as well as Inforum, where we had a BellSouth termination and had some vacancy that developed.

Really that's what's been driving the margins.

And as we lease space up and as these leases kick in, as Tom pointed out, those margins will change substantially.

With the exception of the training center, I think all of those have been resolved with new leases.

Great.

And just final question.

On CapEx, you did talk about the American Cancer Society lease driving a large amount of that CapEx, so would it be fair to say that those levels should come down materially over the next couple of quarters?

Well, the money has been spent for the American Cancer Society lease.

What I can't comment on is where we may come out in terms of spending money on the 191 building as these leases kick in.

If you look at our development pipeline schedule, you'll see a number of about $230 million for 191, which includes the original purchase price, some interest carry, and the -- what we had pro forma for in the build-out for all the tenants up through lease-ups.

There will be some substantial CapEx related to 191.

Great.

Thanks a lot.

We go next to Chris Haley with Wachovia.

Tom and Jeff, it might be coming through the mail.

What was that, Chris?

It might be coming through the mail instead of your blackberry.

Oh, okay.

Well, I'll go check the mail.

(LAUGHTER)

Jim, on your CapEx, so the way that you might be reporting the leasing costs for 191 is through your second generation CapEx line in your disclosure statements, is that correct?

Chris, we haven't crossed that bridge yet.

We'll try to give you good disclosure when we do it, but we haven't figured out exactly when it's going to show up.

We do have it in the development pipeline and we'll break it out for you when we show it.

Technically, I guess it is second generation space, however, many of your public office companies would characterize that as first generation CapEx because they owned the building or the space was vacant at ownership or they knew the tenants were moving out.

So therefore, they would characterize that as first generation and not include that in their second generation CapEx cost.

So, Chris, we haven't gotten to the accounting decision of whether we're going to call that first or second, but we'll be clear when we do so that you understand it.

Okay.

On your wholly-owned NOI levels, looking at your margin and expenses, could you give us a sense as to what you think your steady state operating expense level is per your -- per in GAAP income statement?

Why don't you readdress this quarter and --

It's very lumpy, Chris for the following reasons.

I'll let Jim explain.

Yes, Chris.

If you -- I think one -- either you or somebody else commented that our -- we were running about a 44% margin -- or 44% cost ratio of operating expenses to revenues from the properties.

That had gone up from about 36% about a year ago, and really that reflects those things that we talked about, which is One Georgia center, the IBM training center, the Indus lease termination at 3301, the Inforum.

I have not sat down to calculate what the number will be once we get all these leases in place, but I would think it would be substantially lower than it is, probably lower than it was at this point a year ago, because at this point a year ago, we did still have some vacancy in Birmingham that we were addressing.

We had some vacancy at One Georgia Center.

So basically the news here is great.

We get these leases in place and except for the IBM training facility, we've got really all the buildings put to bed, so we should be at a more normalized level in terms of operating expenses.

And sticking with that, just in terms of the wholly-owned NOI, which is running about $14 million, $14.5 million as of the second quarter, therefore that is being burdened by an expense level, which will hold.

However, what you're highlighting is that my revenue -- my top line will start to come through due to the leasing that has been executed.

Can you give us some color as to how much leverage will come through the revenue line from these leases?

I can't really do that without commenting on the lease rates.

Really it's a function of two things, Chris.

It's the net rental that we will receive for the space, which will be -- of course go straight to the top line, the operating revenues, without increasing the operating expenses.

And the other would be the pass through of operating expenses to the tenants, which again goes to top line and changes your margins.

So what you would need to do that -- and I don't want to comment on our lease rates, but what you need to do is figure out those spaces are that we've leased up -- and I think we've given a pretty good picture of that -- figure out what you think the rental rates would be on a gross basis, and add that to the top line and you can calculate a new percentage, I think.

So, let me beat the dead horse.

If I look at the amount of leasing that you've done post quarter -- post June 30th, adjust for the sales that have been made, what will my occupancy rate look like -- or my economic occupancy look like three to six months from now, assuming you're able to retain your rollovers?

And just -- and then add to that when the leases actually begin pay.

Correct.

Well, that's what I'm saying In terms of economic occupancy three to six months out.

Yes, that'll get you the right --

And I think we've given you the time frames.

The American Cancer was June 1, we think that the One Georgia Center, the Department of Transportation will be January of next year.

I think we've given you time frames, you still have to layer those in as you do your model.

Okay, but you don't care to offer what you think your occupancy rate can be -- economic occupancy rate can be late '07 early '08?

Well, I would say -- a lot of it's going to depend on this 188,000 square feet at 3100.

And as Tom said, we really hadn't planned to be able to do anything with it this year.

We do have some prospects.

If those were to work out, we would have really -- I don't think we would have any buildings that are less than about 90% leased, is that right, Dan?

Am I --?

Yes.

The One Georgia Center lease alone in term -- not economic occupancy, but actual occupancy will take us from 85% to 90% on the portfolio just that one deal.

So the only substantial vacancy we have on operating projects as we complete these deals will be the 3100 building and we're working hard on that.

Okay.

You guys had mentioned, mentioned -- Tom, you mentioned the Related transaction, recognizing the strength in history of Related in the south Florida moving into Atlanta.

I wanted to try to give a sense as to, if you can, what are you -- what are they getting?

What are you -- what kind of a tradeoff?

What are you giv -- what in your mind did you give away versus what are you receiving?

Well, we think -- we've got quite a bit of experience with Related now and we've been working with them for sometime on this CityPlace project, but we just now finished our agreement.

But what we bring to them is deep local knowledge and relationships and development capability in a market where they have not developed before.

What they bring to us is a very deep and astute sense of marketing and the markets generally, how to deliver a product to certain segments of the market, which they've proven very capable of doing.

So we think that the balance is their design and marketing capability, our development capability and relationships provides a powerful combination here.

Now having said that, the condominium market is slow.

We're back to sort of our average sales rate in the mid 2,000s, and there's a lot of product on the market, though there's not a lot of new product being created now, but there's quite a bit of product on the market.

We have agreed with each other that we're going to be careful as we pursue this process.

We're going to do one, CityPlace first.

It's sort of directed at the young professional and the second condominium buyer.

Then we're going to move over to Terminus to do our first high-rise condo with Terminus.

That's slightly a different geographic location and a slightly different market profile.

Then we'll go back to CityPlace, et cetera, et cetera.

We build these buildings one at a time, carefully watch the market, try to tailor the market to a specific targeted audience, and so far it's worked out pretty well.

Thank you.

Thanks, Chris.

And we'll go next to Alan Calderon with European Investors, Inc.

How you doing, guys?

I just want to clarify a little bit.

On Terminus 100, is that viewed upon as you guys as a long-term hold or a potential to be flipped into a JV upon stabilization?

Under the REIT rules we build these assets to own them and so that's our intention.

Have you built it within your TRS or on balance sheet?

On balance sheet in the REIT.

Okay.

And 191 Peachtree, is that in your TRS or on balance sheet?

In the REIT.

and final question, if you're able to speak to this.

In Terminus 100, where do you guys see the -- do you see NOI increasing materially next quarter?

Sure, yes.

Okay.

Okay.

Alan, we just -- this is Jim -- we just started moving tenants in this past quarter --

Okay.

- and additional tenants are moving in this quarter and next quarter, so it'll be ramping up for the next, probably three or four quarters.

Okay, that answers my question.

And on 191 Peachtree, I'm seeing you had a true-up on your OpEx a little bit, but do you see that number coming up materially in the next couple of quarters, also?

Repeat that.

I'm sorry, true-up on what?

191 Peachtree, your NOI was down a little bit.

I believe you guys said that there was a true-up on your OpEx this quarter on 191 Peachtree?

That's right.

That's right.

One unusual thing that I do want to point out about 191 Peachtree that we do have a lease with Wachovia that continues until the end of next year that's generating a pretty high level of rental.

Those numbers -- or the full amount of that rent is not showing up in our NOI because, under GAAP it was determined to be an above-market lease at the time we acquired the building.

But at any rate, that's what -- what was determined to be market.

It remains in the NOI, and as we lease space up, that will increase our NOI as we move forward.

Okay.

Thank you very much for your time.

Thanks.

(OPERATOR INSTRUCTIONS) And we'll go to Chris Haley as a follow up from Wachovia.

Just the last question on the out parcel tract lot business, you commented that your activity will be 50% in '07 below that of '06.

Is that in unit or in profit?

Unit revenue or profit?

That's in lot sales, Chris, and I want to make it clear to everybody, that's our guess --

No, I understand, understand, that's lots.

-- as to what lot sales will be, because in the present housing market, there's no way to know what's going to happen next.

But I don't think that they'll be any better than that.

That's lot sales, that doesn't include tracts.

And as I mentioned in my speech, we have tracts that we expect to sell this year, but in this market, we're just not counting on anything happening until we close.

Right.

Okay.

Okay, great.

It's hard to overstate how bad the lot and land -- residential land business is right now.

It's bad.

This could provide some real opportunities.

We are beginning to see some opportunities, but that market really stinks, even in areas where we have real population and job growth.

Are you seeing -- to expand on that, are you seeing any lenders just simply force sale or do anything more aggressive, rather than try and work a situation out and renegotiate terms?

We don't -- we're not -- we don't own the houses, so we don't have as much visibility to that as you might think.

But we have seen lenders in the last two or three weeks pressuring landowners to increase equity in their land positions, so the stress there is getting significant.

In other words, there's a lot of people out there that own too much land.

That's right.

Without the revenue to -- that they were relying on to carry the land.

And that land I would guess would begin to turnover between now and the end of the year.

Thank you.

We'll go to Cedrik Lachance with Green Street Advisors.

Thanks.

Tom, I'd like to go back to the $elated partnership.

Can you give us a little bit -- can you give us an idea in terms of what will be your financial participation, what is related financial participation?

and what is the time frame?

And give us just more details in terms of the implications it may have on your balance sheet.

The master agreement -- the partnership agreement is a 50/50 partnership.

It's hard to tell you exactly what the impact of the balance sheet will be because, as I said, we're pursuing these projects on a one-off basis.

So I think what you'll probably see, at least in the current market, is you'll see the the beginning of a building and the cost -- you'll be aware of cost structure of that building and what we expect the velocity of sales to be.

And if they go according to pro forma, when we get about 60% through that building, we'll be beginning the next building.

If they don't go according to pro forma, if they go faster, we'll start faster, if they go slower, we'll start slower.

I don't think the balance sheet will be very significant when you consider our overall development activities of all of the products.

Okay.

So who owns the land right now for CityPlace?

Is it all on Related's balance sheet?

It's all on Related's balance sheet.

And once the project begins viable and you've started the project, then you'll take a 50% -- you'll buy 50% of the land essentially --

Right.

-- and assume 50% construction cost?

We'll (inaudible) yes, for just that site.

And it's actually like that on Terminus, too, going the other way.

We own the land for Terminus..

When we're ready to develop a site, their condominium site there, then that property will be sold into the partnership and they'll own half of that piece and we'll own the other half.

Okay.

And just to be clear, 10 Terminus is still 100% owned by Cousins, right?

Correct.

Okay..

You've also alluded to GAAP rates potentially backing out by the end of the years.

What does it do to your underwriting IRs for those 17 projects that are now in Phase 2 of your predevelopment approval?

We underwrite, Cedrik, to historical cap rate.

We don't underwrite to present cap rates.

I would be very surprised if the cap rate expansion was equal to what our underwriting -- our targeted cap rate would be, so I don't think they will have any impact on our pro forma.

What kind of IRs do you underwrite at right now?

Unleveraged 12 to 13.

Okay.

Just briefly, you mentioned a partnership with Emery University.

Right.

Give us more details about that.

50/50 partnership on a mixed use project, which is on Clifton Road, which is directly across the street from the campus and the CDC.

A very constrained trade area.

In fact, this will be the only product that's really built in the immediate trade area, where 45,000 people come to work every day between Emery Healthcare, the university, and the CDC, so we're very excited about this opportunity.

The land is owned by Emery, it'll be a 50/50 partnership.

It will include both residential and retail product and parking.

When do you expect to take a financial position in that project?

Pardon?

When do you expect to start investing in the project if --?

Well, we've already been investing on a predevelopment basis, but actual investments January -- scheduled for January 2008.

Okay.

And completion of the project three to four years down the road?

It's two phases.

The first phase, I think, is being completed in 20 months and the second phase probably 18 months after that.

Okay.

18 to 20 months after that.

Okay.

What was the investment you made in the parking garage downtown?

That really had two purposes.

The first was to provide additional parking for 191 Peachtree.

It's been very helpful in terms of leasing.

It's immediately next door to the building here.

And the second reason was, it's a parking deck in the middle of an empty block, which is owned by -- the rest of the block is owned by another major real estate entity and we just thought it would be nice to have.

Some day they'll call us up.

Is there any additional development potential for you there?

Eventually that block will get developed.

And when it gets developed, it will either enhance the value of the parking deck that sits there today or we'll be a participant in the overall development and replace the parking deck with the new development.

Okay.

How much did you pay for the parking deck?

$17 --

$17 million, I think.

$17.5 million, Cedrik.

Then, just one final question.

It seems that your investments in residential [NOI] actually have been going up for what is consolidated on balance sheet.

Is it just a function of additional work that's being done on lots that you expect to sell soon?

Or have you already started capitalizing on some of (inaudible) that are out there?

Cedrik, I think they're a couple things.

I think that the projects that are active right now, or more active right now are the Calloway Gardens project and the [Blalock Lake] project in Coweta County.

Those are both wholly owned projects, they're not joint venture, so those'll show up in the consolidated numbers.

And they're also 100% numbers.

And our capitalization is down in that area and our fees are down in that area, so there is some -- just from the less activity, I think those numbers are getting skewed a little bit.

Cedrik, as we enter a new -- those are the only two new projects that we have underway.

And as you'll probably remember when we enter into a new residential development project, we always have a lot of front-end costs, because we have to put the infrastructure in before we start selling the lots.

Okay.

When do you expect those projects into a phase where you're selling most of your lots?

The first closings of -- in Blalock have occurred this month or in July.

We'll continue closing lots through the third quarter.

And we won't start closing lots in Calloway, I don't think, until the first quarter of next year.

Since your pro forma, do you think your profit margins are still on track?

Yes.

Okay.

Thank you very much.

We'll go to a follow up from David Cohen with Morgan Stanley.

Hey, just going back to buybacks, I think you guys have about five million shares authorized.

Given all the other investment opportunities you're seeing, how much further will you go into buybacks do you think?

It's uncertain.

Right now we're sort of watching the market.

Yesterday Cousins traded at $25,65, and at $28.25.

There was an 11% or 12% spread in a day, and with that kind of volatility in the market, I'm not really inclined to make that decision right now.

We're going to watch the markets for a few days and we're going to discuss at our board meeting next Tuesday, and then if we decide to pursue a significant program, we will let the Markets know.

Okay.

In terms of -- you talk a little bit about the pricing level on lots going down -- or the homes actually.

You guys obviously have been reluctant to do that because your longer-term holders, but have you guys needed to -- started to lower your lot prices that you're willing to sell for?

The only place where we have reduced lot prices was in Tampa, Florida, the end of last year, and those lot prices had run up to 100% above our pro forma price and we sold the last 40 lots at about 55% above our pro forma price.

That's the only place we discounted lots today.

Okay.

And when you're talking about cap rates rising by year end, which asset classes do you think would feel that first, and which submarkets, as well?

I think that you'll probably see it in the apartment class first because of the cap rates have been so low there.

But we think we'll probably see it across all the product types, probably by year-end.

All right and --.

I mean some asse -- New York office, probably not going to change.

There are market segments, but we're talking globally, we think cap rates are going up as we speak.

B&C first.

And the lesser assets first just as points out, just as Dan pointed out.

And you're already seeing that?

We're beginning to see that, yes.

Okay.

And just lastly, there was an article about --Tom you potentially being named a campaign finance chairman for Fred Thomason.

Can you comment on that and what type of time commitment you think that will require from you?

Well, Fred's not a candidate so he doesn't have a chairman.

I've known Fred for 37 years, we sort of grew up in Tennessee together and I certainly do support his candidacy for president, but we've made no final decisions as regard to the structure of the campaign.

I can't really tell you how much time I'll invest, but I tell you for certain that I will not invest any time that I think is a detriment in any way to the operations of Cousins Properties.

Thank you.

And at this time, there are no further questions.

(OPERATOR INSTRUCTIONS) And we have no other questions.

I'd like to turn the call back to management for any additional or closing comments.

We want to thank you all for your participation today.

Markets are strange and I realize that there were some concerns over our release yesterday.

I hope we cleared all of that up.

We worked to clear it it all up.

But if we haven't, as you know, we're always available to you, so don't hesitate to give Jim a call or myself, Dan or Craig, and we'll try to answer any questions that you might have.

Thanks again for joining us.

And that does conclude today's conference.

Again, thank you for your participation.

Have a good day.