Cousins Properties Inc (CUZ) 2007 Q3 法說會逐字稿

Good day and welcome to this Cousins Properties Inc.

third-quarter 2007 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 Chairman and Chief Executive Officer, Mr.

Tom Bell.

Please go ahead, sir.

Good morning, I'm Tom Bell, Chairman and CEO of Cousins and with me today are Dan DuPree, our President and Chief Operating Officer; Jim Fleming, our Chief Financial Officer; and Craig Jones, our Chief Investment Officer.

Welcome to our third-quarter conference call and at this time I will ask Jim to review the financial results for the quarter.

Jim?

Thank you, Tom, and thanks everybody.

We appreciate your interest in Cousins.

Certain matters we will 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 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.cousinsproperties.com.

This quarter we reported FFO of $0.14 per share which is down from $0.18 per share last quarter.

We had expected FFO to be a bit higher than last quarter but there were two factors that led to the slower results -- lower than expected lot and tract sales and a revenue adjustment on our 50 Biscayne condominium project.

We sold 99 lots in the third quarter compared to 183 in the second quarter.

This result is consistent with the overall trends in the residential markets and the softness in our markets in Texas, Florida and Atlanta.

We're continuing to monitor the situation closely and we don't expect markets to improve in the near future.

Our latest projection is that lot sales the fourth quarter will be slightly lower than in the third quarter giving us just below 500 lots sold for the year.

During the third quarter we closed no tract sales.

Even though this part of our business has always been lumpy it was unusual for us not have any closings during the quarter.

We do have several tracts under contract and at this point we expect to have a few tract closings in the fourth quarter although it's hard to predict whether these closings will occur on schedule in today's uncertain markets.

The other factor affecting our earnings this quarter was our Miami condominium project, 50 Biscayne.

We've been recognizing revenues on condominium sales at 50 Biscayne on the percentage of completion method since the project began in 2005.

At the end of the third quarter we were 95% complete with the project and in October we began closing units.

Today we've closed 110 of the 529 units at the project.

However, while we continue to feel that our project product is well-positioned relative to the other condominiums with higher price points, we're concerned about market conditions in Miami including changes in the credit markets for financing of condominium units.

Because of this, we believe some of the units currently under contract may not close.

Therefore, we recorded what we believe is a conservative adjustment to reverse revenues previously recognized on the percentage of completion method for 110 of the 529 units.

The after-tax effect of this adjustment was to reduce FFO by $0.05 per share from what we would've otherwise recognized during the quarter.

Under the GAAP accounting rules we reversed all profits on these units even though we will be entitled to retain most of the earnest money at the buyers' default.

As a result, we expect to have additional earnings in the future from these units both from reselling the units and from retaining earnest money under some of contracts.

At this point, we do not expect our overall profit on this project to decrease since we will be entitled to retain 15% earnest money on any contracts that don't close and we would achieve the same total profit if we resold the units at 85% of the original contract prices.

We will continue to monitor the situation as closings occur and we will adjust our estimate in the fourth quarter based on additional information we receive from the buyers in the closing process.

Turning to information contained in our supplemental package office same-property results were up 8% from last quarter.

This increase is the result of the commencement of the American Cancer Society lease late in the second quarter.

Year-to-date same property results for office were still negative because of the effect of the vacancy at the 3100 Windy Hill Road property late last year.

Retail same property results increased 15% in the nine-month period primarily as the result of the lease-up of The Avenue Viera and Viera MarketCenter.

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

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

I will begin with the office division where rental property revenues less rental property operating expenses increased $3.7 million between quarters.

The increase is a result of changes in the following properties -- and increase of $1 million at the American Cancer Society Center which was formally called the Inforum as a result of the commencement of the American Cancer Society lease; an increase of $519,000 at One Ninety One Peachtree as a result of increased leasing and an increase of $1.7 million at Terminus 100 as a number of leases commenced during the third quarter.

For the retail division, overall FFO generated from rental operations increased $246,000 during the quarter.

This increase is primarily attributable to the continued lease-up of San Jose MarketCenter and The Avenue Web Gin.

FFO from outparcel sales increased $768,000 as a result of the sale of an outparcel at The Avenue Forsyth project.

And other joint venture expenses increased because in the third quarter we began expensing real estate taxes on certain residential projects that are no longer under development.

Development fees decreased $636,000 as a result of the reduction in reimbursed fees on our Fort Gillem predevelopment project, lower fees on the [Artisan] project and lower fees on the Emory conference center project.

Management fees decreased $655,000 primarily as a result of lower out-of-pocket reimbursement revenue in the third quarter from third party managed properties.

Leasing and other fees increased $1.9 million as a result of a leasing commission earned on a lease at our Williams Square third party managed property in Dallas.

Interest income and other increased $288,000 as a result of interest earned on a mezzanine loan on a condominium project in Asheville, North Carolina which Tom will mention in a minute.

Total general and administrative expenses decreased $886,000 as a result of higher capitalization of salaries, reduction of expenses associated with our move to One Ninety One Peachtree and some other reduce expenses.

Interest expense increased $2.7 million as a result of a decrease in capitalized interest associated with the operating portion of Terminus 100 and the completion of The Avenue Webb Gin.

Also during the quarter we ceased capitalizing interest on the portion of our investment in CR Realty and TIMCO related to projects where there are currently no development activities occurring.

Income tax benefit increased $734,000 as a result of a higher pre-tax loss at CREC, Cousins Real Estate Corporation, our taxable subsidiary, caused by declining lot sales and the adjustment taken for 50 Biscayne.

Finally, other expenses decreased $386,000 as a result of a reduction in minority interest associated with the 50 Biscayne adjustment noted above.

We decided early in the summer to move as quickly as possible on the financings we were planning for the year given what we were seeing in the credit markets.

Fortunately we've done very well on these financings despite the turmoil in the markets.

First we recast our credit facility which closed in August.

The significant changes in this facility are as follows.

We increased the size of the revolving facility by $100 million to a total of $500 million and it can be expanded by an additional $100 million under certain circumstances.

We extended the maturity date of the revolver to 2011 and we reduced the spreads under the revolver by five basis points.

We increased the value of the borrowing base by reducing cap rates on unencumbered property net operating income in the calculation.

We changed the calculation of borrowing capacity to allow us to receive more credit for assets under development.

And we also repaid and terminated our $100 million unsecured construction facility and replaced it with a $100 million unsecured term loan that matures in 2012.

And finally we fixed the underlying LIBOR rate for the term loan at 5.01% using an interest rate swap.

The combined effect of this these changes will give us more borrowing capacity under our credit facility and will reduce our need to use construction loans in the future.

Also the increased property valuations will reduce our interest rate more than the five basis point stated reduction in certain quarters because they will result in lower leverage calculations under the bank covenants.

We've also closed two project financings and have obtained a commitment for a third one.

This required a bit more work than we had expected because of the disruption in the credit markets.

But the results have been very favorable.

In August, we closed a 6.45%, $136 million 10-year mortgage loan on the American Cancer Society which was formally called the Inforum.

We will pay interest only on this loan until 2011 and we will pay principal and interest on a 30-year amortization schedule after that.

In October, we closed a 6.13% $180 million 5-year mortgage loan on Terminus 100.

We will pay interest only on this loan through maturity.

And in the fourth quarter we expect to close another mortgage loan, this one on San Jose MarketCenter for $83 million.

In all of these cases we have been able to borrow the full amount of our project cost under loans that have been underwritten at 70% loan to value.

This underwriting demonstrates that are value creation has been very solid for our recent projects.

We generated additional capital during the quarter through the sale of 3301 Windy Ridge Parkway, a 107,000 square foot building in the Wildwood complex.

We received proceeds from the sale of $16.1 million, recognizing a GAAP gain of $9.9 million and value creation of $2.5 million.

You may recall that we also received a lease termination payment of $2.3 million in the first quarter of last year when we allowed Indus to terminate the lease on a portion of its space.

As a result of these activities, we expect to have less than $50 million outstanding under our $500 million revolver at year-end.

We believe the available capacity under our revolver as well as opportunities to add additional construction and permit mortgage debt combined with capital recycling activities will enable us to fund our development pipeline and act on opportunities for value creation for the foreseeable future.

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

Thank you, Jim.

Before I discuss the progress we are making on our development projects as well as the leasing successes we have achieved in our operating portfolio, I also wanted to offer just a few comments on our residential business generally and the two items that contributed to our lower FFO this quarter, that being lot sales and our Miami condominium project.

As Jim pointed out, our residential life sales business has dropped off sharply during the third quarter.

And even the vast majority of our projects are not in the bubble markets that experienced extraordinarily high home price appreciation over the last several months, we have seen lot sales fall to a very low level even here in Georgia and in Texas.

Year-to-date, we've closed 403 lots against our original plan of just under 1000.

We don't expect an increase in lot sales in either the fourth quarter or the first quarter of '08.

Put simply new home sales have slowed and builders have allotted for inventories that will more than meet their anticipated near-term demand.

And until these inventories sell off, we don't expect much improvement in this market.

We have stopped developing additional lots in most of our projects and we will work to continue to reduce our lot inventory until the market picks back up.

The slowdown we're experiencing in the lot sales business has reduced our quarterly earnings but over time should not materially affect the value of our residential business since we assumed low periods or slow periods of lot sales for all of our projects in our original underwriting.

In addition even though our residential business has grown over the past several years it still remains less than 5% of our overall portfolio with just over $100 million of our capital invested.

Another item that reduced our third quarter earnings is the accounting treatment for 50 Biscayne, our Miami condominium project which Jim has mentioned.

This is a joint venture with The Related Group on a 529 unit 55 story building adjacent to Bayfront Park in downtown Miami.

Fortunately we were able to obtain construction pricing before the recent cost run-up and we were able to quickly sell out this project to very good prices before the downturn.

Our cost in the project is $288 per foot and our average sales price for the residential units is about $395 per foot.

This compares very favorably to many other similar projects in the Miami area that are currently selling at approximately $600 per foot.

We're holding 20% deposits of which three-quarters is non-refundable.

Some units in our building have already been sold or resold mostly at premiums to our original sales price.

Today we have closed 110 units in the first four weeks since the building has been completed.

Now over the last several weeks we've taken a close look at the Miami condominium market and we recognize the market is under considerable stress.

Given these market conditions, we anticipate that some of our contracts will not close even though we have large non-refundable deposits.

As Jim said we've taken what we believe is a conservative approach and reversed some of the profit we've recognized earlier under the percentage of completion method.

While this reduced our earnings for the current quarter we're confident we will eventually find buyers for any unit that doesn't close under the current contracts.

Since we will be able to keep three-fourths of the original deposit from these units we will be able to resell these units at very attractive prices and still recoup our earnings.

As a result, we still expect this project will come very close to meeting our original pro forma expectations.

One final point is just to remind you of the relatively low risk structure of our investment in the Miami condominium project.

Cousins invested only $9 million in this project and the rest of the capital is provided by our partner, The Related Group together with the nonrecourse mortgage loan that The Related Group arranged.

While these two items had a significant impact on our third quarter results they relate to only a small part of our overall business.

Now let me turn to the more significant parts of our business where things are going much better.

In mid-October our retail division opened Avenue Murfreesboro with our partner Faison.

This is a hybrid lifestyle and power center in suburban Nashville that includes a Belk department store and will ultimately contain 860,000 square feet of retail space.

The retail spaces in Phase I and II are now 78% committed and I'm pleased to report that sales have been extremely strong at this center.

And several tenants including Barnes & Noble, Dick's Sporting Goods, Chicos, White House Black Market and Longhorn have reported that they are exceeding their sales plans by significant margins.

We continue to move forward with The Avenue Forsyth in Atlanta's northern suburbs and are slightly ahead of schedule.

This project is set for an April '08 opening and we're now 58% committed with seven of the 11 outparcels spoken for.

We already have signed leases with several of our key retailers including AMC, Barnes & Noble, Ann Taylor Loft, Chicos, DSW, Talbots, Victoria's Secret, White House Black Market, Jill's and Coldwater Creek among others.

Tiffany Springs MarketCenter our large power center in the Kansas City market is also proceeding on schedule and will open in July '08.

Anchors include Home Depot, Target, and JC Penny's.

Leases are now signed with Best Buy, Sports Authority and Ultra and the project is 87% committed.

Our proposed project in Cherokee County north of Atlanta, The Avenue Ridgewalk, continues to progress towards a development start.

We anticipate starting this project once Georgia DOT starts work in the previously approved interchange on I-575 which we expect will occur in mid 2008.

One of the keys to successful development of course is the lease-up process and we have had good success in our retail projects.

During the first three-quarters of '07 our retail division has signed 97 leases for first generation space totaling almost 1 million square feet and they now have 79 more first generation leases out for signature for an additional 409,000 square feet.

Our operating retail projects are now 91% leased.

We are also continuing to make very good process filling our vacant office space.

We started the year 84% leased in the operating portfolio and we're now at 91% leased at the end of the third quarter.

A good portion of the recent increases is from our 284,000 square foot lease with the State of Georgia for Georgia DOT at One Georgia Center which we reported last month.

This lease brings One Georgia Center to 100% leased.

We're currently working with GDOT to reconfigure their space and we anticipate the tenant will begin buildout in late '07 with occupancy phased into the first half of '08.

As we have previously reported we have had similar success in most of our other buildings that have vacancy or near-term rollovers following our 2004 and 2006 office building sales including our two Birmingham buildings, our four Northpoint buildings and Inforum which has now been renamed the American Cancer Society Center.

Overall, not including One Ninety One Peachtree, Terminus or our other development projects we've had 609,000 square feet of positive absorption in our office portfolio in the last 12 months.

The one remaining hole in our current portfolio is the former IBM Training Center at 3100 Wildwood.

Our marketing efforts are starting to generate interest in this building and we're now talking with potential prospects.

We also have seen strong leasing interest at One Ninety One Peachtree.

During the third quarter we signed 134,000 square feet of new leases and we've signed two more leases since the end of the quarter bringing the total leases signed since acquisition to almost 400,000 square feet and bringing the building to 75% leased.

We also have 286,000 square feet of additional space under letters of intent or similar agreements for which we anticipate signed leases by year end.

This would bring the building to 83% leased.

It is important to remember that Wachovia currently leases 375,000 square feet through December 2008 and will not renew.

We're working to backfill this space as we lease the rest of the building and we already leased 77,000 square feet of Wachovia's space.

Terminus 100 is now 90% leased with additional commitments that should bring us to 95% leased by the end of the year.

And activity at Terminus has increased dramatically with two of the restaurants opened as well as a bank branch and two additional restaurants opening this month.

Users now occupy 83% of the building.

By year end we expect the remaining restaurants to be open which will make Terminus one of the premier dining destinations in Atlanta.

As you know, we recently completed our financing of Terminus 100.

This $180 million loan is nonrecourse and was underwritten by Northwestern Mutual at a 70% loan to value.

This puts their estimated value of Terminus 100 at $257 million which is $84 million in excess of our estimated all-in cost.

This is a very good example of the value we can produce through our development process.

Our next office building Terminus 200 is on schedule and the construction contract is executed.

We're excavating the foundation and we anticipate being fully underway with our marketing and leasing efforts in the fourth quarter.

We're encouraged by the leasing momentum that has been created by Terminus 100 and as the look at the market rollover for leases expiring in 2009 and 2010.

In Austin, at our Palisades project construction is also on schedule.

During the quarter we decided to increase the size of both buildings slightly.

Building One is now 220,000 square feet and it's preleased to our partner Dimensional Fund Advisors.

And we are seeing strong interest in the 155,000 square foot Building Two where we now have about 500,000 square feet of potential prospects.

We're in the process of completing our documents with Emory University for a joint venture project to develop a mixed use project on Clifton Road adjacent to the Emory campus.

Cousins will be the master developer of the project.

On behalf of Emory we're beginning to demolish some of the existing buildings and we're finalizing the master plan.

We expect to start construction of this project in the first quarter of 2008.

Due to the overall market conditions, condominium presales at Ten Terminus have been slow this past quarter with 30 units now under contract.

But after our introduction event for this project in late September sales traffic has picked up significantly.

The project is scheduled to be completed in the fall of '08 and fully occupied by the end of the second quarter of '09.

We've also made two small investments in multi-family projects outside of the Atlanta market.

In Asheville we made a $7 million mezzanine loan on 60 North Market Street, the condominium project which has 41 of its 66 units under contract.

The team expects a great deal of traffic during the lease season with sales traffic slowing afterwards through the first of the year.

Project construction is 19% complete at the end of October.

In October we also formed a partnership with First Landmark out of Charlotte to build 71 town homes in three phases.

Our total investment in this project will be $16.3 million.

The project is located 11 miles from downtown Charlotte and is targeted at empty nesters.

We've just begun construction and will kick off our marketing in January when our permanent sales facility is available.

The first unit should be delivered in July 2008.

Leasing activity was slow during the summer for our industrial division but activity has picked up recently and we are now pursuing several full building and build to suit prospects in Dallas and Austin continuing on our plan to lease the available space at Jefferson Mills, King Mill and Lakeside Ranch before we begin new buildings in these parks.

Meanwhile we have purchased land for a 730,000 square foot building in Lancaster, Texas south of Dallas-Fort Worth which is a strong submarket with less than 7% vacancy.

Jim talked about our recent financing activity and I'm very pleased with what we've accomplished and the position it gives us in today's marketplace.

I believe we will see a number of new opportunities over the next couple of years because of the turmoil in the markets.

And with our talented people, our ability to develop multiple product types and our solid capital base we will be in a great position to take advantage of these opportunities.

I want to finish with just a couple of comments about the real estate markets and the risk we face as we move forward.

First, it's hard to tell what's happening to cap rates and discount rates because very few properties are changing hands.

But many observers including our team at Cousins believe the current problems in the debt markets have already caused cap rates to expand by 25 to 50 basis points.

And we wouldn't be surprised to see cap rates edge up a bit further by year end.

In my view the markets have returned to a more rational level from what we were seeing over the last three years.

Those of you who know us understand we have been expecting this for quite a while.

And consistent with our overall conservative underwriting approach we have never underwritten our projects to the aggressive cap rates we were seeing in the property markets.

Therefore I feel good about the value creation from our current developments even with these rising cap rates.

Based on our conservative underwriting expect our current in-process development projects will create between 250 and $300 million in new value for our shareholders when stabilized.

The other comment I want to make is about risk.

Most people especially those of us at Cousins realize that development involves risk mainly centered around entitlements, construction costs and leasing or sales.

We have had our level release underwriting process in place for the last 15 years to help us identify and address these risks as we're evaluating potential investments and we understand very well that good execution is the key to our success.

I believe if you examine our track record you'll see that we manage these risks very well over many years and through several real estate cycles.

But there is another risk that results from overall market conditions.

As cap rates move up the NAV and stock prices, [REITs] suffer.

And I think the decline we have seen in REIT stocks this year is mostly a reaction to underlying real estate values.

We have found over the years that a well-managed development project will achieve a significantly higher yield than a property purchased in the investment markets.

These projects should provide a substantial cushion for Cousins and the value creation from our development projects should provide a good buffer against expected cap rate changes.

With that I'll close my remarks and turn the floor over to any questions you might have.

Any questions?

(OPERATOR INSTRUCTIONS) David Toti, Lehman Brothers.

Just a couple of quick questions.

Can you talk a little bit about your dividend and any outlook for that going forward?

By our estimates it doesn't look to be covered for potentially until '09.

As we have said before of course the Board makes dividends decisions on a quarterly basis.

But we have no intention of reducing the dividend.

And the way we look at our dividend payout is based on not only FFO but the value we created regularly through recycling our capital.

So we have no intention at this time to change our dividend policy and feel that our dividends are more than covered over time as you have seen with our special dividends by our value creating activities.

Thank you.

My next question is with regard to the development pipeline -- and it looks like it may have potentially peaked in total value last quarter -- do you expect that pipeline to continue to moderate over the next couple of quarters in response to a slower economy?

We don't really know.

We have a very good shadow pipeline right now of development projects that we are working on investigating in various stages of predevelopment.

But it's hard to predict exactly what will happen in the markets of the future.

We make every development decision.

We underwrite every development decision on a one-off basis through a rigorous process as long as they can meet our underwriting criteria then we will continue to start projects.

But we really don't know how many of these projects will come to fruition.

I can tell you that in the process of developing our '08 plan, it does not appear at this moment that our development teams feel like that our development activities will slow very much in the year 2008.

Chris Haley, Wachovia Securities.

Jim, could you help me understand the calculations that went into the revenue adjustment or profit adjustment for the condominium?

Walk me through how that was calculated.

Sure, Chris.

We have been recognizing profits on a percentage of completion method.

We've gotten to 95% complete at the end of the third quarter.

And that would have with nothing else generated a profit of about $1.8 million during the quarter.

But we took a hard look at the Miami market as Tom mentioned in his comments and there's -- we are concerned about that market.

We are in the process of closing units and the closings are going very well.

But we made an estimate based on the state of the market that we think a number of the units that we have got under contract right now may not close.

Our partner The Related Group has I believe it's 78 units under contract.

We do believe those will close and so we took a hard look at the others and came up with the number which is approximately 25% of the other units that we think may not close.

I'm sorry, Jim -- can you -- so the total number of projects, total number of units, total number that have closed, expected to close -- can you review that?

Let me pull my numbers out here.

If you would have had a plus $1.8 million profit in the quarter, but you recognized a negative 3.3 (multiple speakers)

Here are the numbers, Chris.

We had 529 units.

We've been recognizing percentage of completion accounting on 516 of the 529.

Our partner Related Group is purchasing 78 of the units and of those 72 we have been recognizing percentage of completion accounting on.

So for those 72 we continue to recognize percentage of completion accounting.

We believe those will close.

We've estimated -- we have come up with a number of 110 units that we think may not close under the other contract which is approximately a quarter of the other contracts.

We believe that is a conservative estimate.

We believe -- it's based on overall market conditions.

But that is a number we came up with.

The result of that is that we had been recognizing percentage of completion and we've gotten to 95%.

We reversed all profits on those 110 units even though we would be entitled to keep the earnest money which is 15% of the overall sales price under the contracts if the buyer defaults and does not close.

So we reversed all of the profits and if you use the numbers Tom gave you we have $395 per square foot on average and sales price $288 in cost.

So we've got about $100 in profit.

We've got about $60 of earnest money we would keep.

And even though we would keep that we reversed all of the profit.

So what will happen -- the effect this quarter was a significant negative to our earnings.

As we move forward though, we will recoup profit as we keep earnest money.

We will recoup profit as we resell the units.

If we simply resell units for 85% of the value of the price that we had originally, 85 plus the 15% we would keep in earnest money would get us back to the original pro forma sales price.

So the 25% adjustment equates to a $5 million -- I'm trying to make sure (multiple speakers)

Pre-tax and before minority interest it was a little over $5 million.

It was $5.1 million, Chris.

So if you do the math you'll get to the number you see in our supplemental.

After-tax the adjustment was $2.8 million which was $0.05 per share.

Got it.

Obviously, a related question -- no pun intended -- is your willingness to continue to move forward in Atlanta pipeline of projects you're entering into a venture with Related, a 50-50 trade up venture, what is your -- I'm assuming that you have less interest, much less interest today.

Are there any markets that you're interested in more intently for for-sale condo building?

You know the Atlanta market looks to us like it will sell between 2500 and 3000 condominiums in Atlanta this year which is a very good historical number but not nearly what they sold in 2005 and 2006.

There is still a condominium market in Atlanta and I think you have to be very careful and very specific about where -- your location and your target market.

So I wouldn't say that we won't do any condominium deals in Atlanta.

I would say that we will be very careful about the condominium deals that we might do.

The other market that we like a lot is the North Carolina market which is still showing significant growth.

And we think there are some opportunities in North Carolina and we have an interest in increasing our business generally across all of our product types in the state of North Carolina.

And North Carolina is estimated to grow faster than Georgia for instance between now and 2020.

So we think it's a good future market for us.

My last question relates to the North Carolina transaction.

Albeit a small dollar amount, maybe can you give us a little color in terms of the rate of return you're expecting on the mezz piece and what else you might be seeing in some of the residential related markets that might be of interest?

Why don't you talk about the return on the mezz and then I will talk about the (inaudible).

The state of return on the mezz is 21% -- (multiple speakers) and that's a fixed coupon.

With regard to North Carolina markets, I think that Charlotte market is growing -- showing attractive growth.

There is a very significant empty nester market that's growing in North Carolina both migration into the market and then people moving within the market.

These town homes that we are building are targeted at that market.

They are in a rapidly growing part of the North Carolina, Charlotte submarket and close to retail, dining and entertainment.

And we feel like doing it in three phases, taking a fairly conservative approach and it will be a nice little project for us there.

Thank you and congratulations on the lease-up at One Ninety One.

David Cohen, Morgan Stanley.

Good morning, just back to the Charlotte.

I understand it may represent an opportunity for you guys but just given where the market could be heading in terms of residential I'm curious as to why you would still go ahead with this type of project at this time.

Because we think it offers our shareholders a good return.

Just back to 50 Biscayne, you said you got to the 21% from just an estimate using where you think the market is.

Did you at all look at who the buyers were of those particular units or were they just -- you just took 25% of the nonrelated company units?

David, it's a very inexact science.

I can't tell you the hours of debate we've had around here on this subject.

So we ultimately decided that what we would do is we would take the most conservative approach even though it would damage this quarter's earnings.

And that's what we did.

And it is basically -- the arithmetic worked about like Jim had described.

We have interviewed every potential buyer that we could find.

Our partner has done that.

So there is some research to back up the estimates that we are making.

You know, it's just not an exact science.

I think by the end of next week after we have had two more weeks of closing we'll have a much better feel for how many people are actually going to be able to close and finance their closings.

But right now we decided the best thing to do is take the more conservative approach.

If you were to estimate where the market prices of the units that you think may not close, is it at that 85% level or is that still too conservative?

Is it 10% down from where you were selling them at?

They are reselling units.

Owners are reselling units and thus far most of those resales have been at or above the original sales price.

Just on the buyback side.

Did you guys buy back any stock during the quarter?

No.

Do you anticipate doing so in the future?

That would depend on what happens in the markets.

Are you a buyer?

We are not buying stock the moment.

Last question -- you had some good disclosure on some of the lease terms of some of your remaining tenants.

AT&T -- can you just talk about -- two years remaining on that lease.

Can you just talk about that lease and your expectations of whether or not they will renew or not?

David, this is Dan DuPree.

We mitigated a good bit of that risk at Inforum when we did the American Cancer Society deal.

We got back almost half of that space with an eye towards that.

I don't think AT&T at this point knows what their plans are for Atlanta.

So we don't really have a good read for it.

But what we do know is that building has become very popular.

The market has really moved toward it with the Atlanta Centennial Park there now what that building had been sort of on the edge of a blighted area.

Now it's probably very much considered main and main.

We acquired that building very attractively.

I think effectively the loan that we just put on it was somewhere in the neighborhood of 125% of our total cost and it was at 70% loan to value.

And on top of that our lease rates in that are probably 70% or less replacement cost lease rates.

So in any event with what goes on with AT&T, it will either be good that they renew or it will be an opportunity for us to add even more value to the project.

Just to add a little color to that, David, when we asked AT&T to give up a floor because without them during that we would not have been able to fit the American Cancer Society in the building they were reluctant to do it.

They sort of helped us out by doing it.

They converted their space on the existing floor to densify the number of people they could put in there.

It's basically a back office operation for them and they spent quite a bit of money redoing that space to fit their needs.

It also has an extremely -- they also have as most of the tenants have a very high need for technology.

That building is one of the I guess top buildings in the Southeast in terms of its bandwidth.

So I think we've got a pretty good position.

As Dan said I think we have a good -- if we were to get space back we have a good situation to release into.

But I'd be surprised if we did get it back.

Cedrik Lachance, Green Street Advisors.

On the recent leases at One Ninety One Peachtree can you give us a sense of the lease rates you've been able to achieve?

Cedrik, you never give up.

You keep trying to get us to tell you this extremely important confidential information that we have on lease-ups here.

You know, we are leasing the building at rates that are equal to or slightly above our pro forma rates when we acquired the building.

And leasing is much quicker than we had originally anticipated.

In terms of what you're facing in terms of total vacancy post Wachovia moving out, what is the percentage of the building you still have to lease after Wachovia is out?

Some of that -- there's additions and subtractions.

I think we mentioned that we have got about 290,000 square feet of leases that are in advanced stage of negotiation and you kind of balance that back against 375,000 feet that Wachovia occupies and net against that the 77,000 square feet of space that we've already dealt with of the 375.

So, I think you can apply that to the 72% leasing that we are at today and we probably come out --

I would say mid 70s.

Yes, 75 (multiple speakers)

If we complete all of leases that we now have LOIs on I would say mid 70s.

Okay in your Q yesterday you also laid out some plans for financing in the fourth quarter.

What is the game plan?

Do you intend to increase your development.

Do you intend to invest more heavily as you see disruption in the market or is it just normal course?

We feel like generally and historically in down markets well capitalized companies see opportunities to acquire assets that create good returns for us the future.

Inforum was a good example of that.

So we set out to create a situation where we have had plenty of dry powder to support our development activities and to potentially take advantage of these opportunities as we see them over the next (inaudible).

And I think we're in a good position to do that now.

So I can't predict exactly what they'll be.

But if we look back to what's happened in previous cycles we have seen those kinds of opportunities.

We expect we will see them again this time.

(OPERATOR INSTRUCTIONS) David Harris, Lehman Brothers.

Couple of big picture questions if I may.

As you sit here today have you any sense as to where you think the best opportunities are going to be?

Do you think over the next 12, 18 months is it land?

Is it busted condos?

Is it stabilized assets?

And any color as to where you think property type -- your focus might be in terms of property type?

I think you'll see three -- I think we think you'll see three things in the market.

The first will be on the development side.

You will see projects that have been under predevelopment for two or three years, have now have been fully entitled in good markets and they can't finance their project.

So 4, 5, $6 million they've got invested in predevelopment will be lost and those projects will have to move to someone who can finance them.

So of course we will be on the lookout for doing those either as joint ventures or to take the previous developer out of the project if we feel like there's a good opportunity there that meets our underwriting standards.

The second of course is in land.

We saw 100 to 150% price increases in residential land in various markets around the United States.

We have seen lending there at extremely high levels.

So we think a lot of this land is going to come back on the market both undeveloped and developed land and so we will pay a lot of attention to that to see if we can find significant opportunities there.

But you know those -- when we say opportunities we don't mean a price reduction of 10 or 15%.

We would have to see very significant price reductions in those properties and then we would acquire them and hold them for future development.

And we've done very well doing that over the years.

Lastly, we think -- or actually two more things.

The unbelievable cap rates in the last few years and the very generous financial markets brought a bunch of developers into the retail and commercial development markets that are undercapitalized and were basically merchant builders taking fees and flipping the projects at 50 to 100 basis points.

We think most of those developers will go away.

They won't be able to finance new projects.

So we expect to see some opportunities there as well as long.

As retailers and retail markets and office markets continue to expand we think that expansion will slow down a bit if there are fewer developers in that marketplace there will be more opportunities for Cousins or for other well capitalized companies.

Lastly, we saw a lot of assets trade at what we think are actual cap rates of 4, 4.5, 5% particularly on the office side.

So there are situations where we think that those office assets would come back to the market and provide another owner with an opportunity to acquire them at a reduced price and lease them up and find a good return.

Now in those instances, we probably would not buy those assets on our own nickel.

We would probably buy them in a partnership with a financial partner where we would take a percentage ownership and the leasing and management responsibilities and then a promoted interest above a certain return.

So those are the kinds of opportunities we think we will see in the market over the next couple of years.

Any particular color on where -- which property term you might sort of see more opportunities?

Or is it really just going to be driven by (multiple speakers) specific?

I think it will be very opportunistic.

Are you in discussions with anybody in the sort of the one, two, three buckets that you referenced?

Yes.

Do you think -- does it feel like spring next year before that we are really going to see this thing really open up in terms of the volume of potential opportunities?

About four or five months ago we started getting phone calls from people who wanted to get their money back and no longer thinking there was a profit opportunity -- just wanted to get their money back.

Now we're seeing opportunities for people who just want to get out and take the loss.

But we have not seen opportunities yet where the assets or the land has been discounted to an extent that we would feel makes a good opportunity for us.

I would suggest that that probably first, second quarter next year before we will start seeing those opportunities.

You feel like you can afford to be patient, I guess.

Then somewhat on the related [thing] you kind of threw out a 25 to 50 basis point move up in cap rates on I'm assuming the stabilized assets you're really referring to in your marketplaces.

Does that feel like a movement on the road to a much higher move or do you think that's a level at which things could be claimed to be kind of sticky?

Well with so few assets trading, it's really hard for us to know.

We think there is more to go.

I think as we've discussed before probably seeing 100 basis point expansion from '06, '07 levels we think is highly likely.

Where it goes after that we're not sure.

I don't think anyone here thinks that we're going to see it returning to the pre-2004 historic cap rates of 10% for office and 10 to 10.5% and 9 to 9.5% for retail but somewhere in between those and today's rates.

(OPERATOR INSTRUCTIONS) Chris Haley, Wachovia Securities.

Jim, I think you had mentioned in your prepared remarks that you had to start expensing certain taxes or expenses related to your residential business.

And given the revenue challenges that are in the business today are there some expense items that will start to come through that will further squeeze margins or potentially result losses in certain quarters in that business?

I don't think there is anything more than what we have experienced in the current quarter.

What we have done is to try to be very conservative and not put any more locks on the ground.

So we really ceased the ongoing development activities at some of our -- really virtually all of our residential lot developments.

As the inventory burns off we will start that back up again and we will start capitalizing again.

So is that a subtle disclosure change -- I think you'd indicated or you provided an aggregate number of around 10,600 lots this quarter.

You said you had six -- I think it was approximately 1600 that were under development or in process?

No, we have got between 1500 and 1600 that are currently existing that are developed lots.

In our overall projects, which includes the joint venture, our share is a lower number than that.

But that is the total number that's on the ground today and then there's another 10,000 that can be developed in the future.

At this time we have no other questions in queue.

I would like to turn the call back to Mr.

Bell for any additional or closing comments.

As always, we appreciate your attention and joining us on this call this morning.

We try to provide as much information as we can in our supplementals but we are always available for your phone calls or meetings.

So please don't hesitate if you are uncertain about any of the data we provided for you to give us a call.

Thank you for joining us and we will talk to you next quarter.

That does conclude today's call.

Again thank you for your participation.

Have a good day.