Cousins Properties Inc (CUZ) 2007 Q4 法說會逐字稿

Good day and welcome to the Cousins properties Inc fourth-quarter conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Good morning, and thank you for joining us.

I'm Tom Bell, Chairman and CEO of Cousins Properties, and with me today are Dan Dupree, our President and COO, Jim Fleming, our CFO, and Craig Jones, our Chief Investment Officer.

Welcome to our fourth-quarter call.

And at this time, I'll call on Jim Fleming to review the results for the quarter.

Thank you Tom, and thanks everyone for your interest in Cousins.

The matters we're 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 factors that may cause such material differences.

Also certain items we may refer to today are considered non-GAAP financial measures with the meaning of regular G from the SEC.

For these items, the comparable GAAP measures and the 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 consistent with our per share FFO last quarter.

Our results did not change because our lot sales continue to mirror the overall downturn in the residential market and we did not have significant tract sales.

In addition, capitalized interest decreased, as some of our recently developed properties became operational and development activities were slower on some of our residential projects.

You will recall last quarter that we recorded an adjustment to reverse previously recognized revenue on 50 Biscayne project.

We've continued to close units through the fourth quarter and into this year.

We closed 280 units in 2007, and we have closed an additional 40 units in 2008 for a total of 320 to date.

As a result of these sales, we have completely paid off the construction loan.

We also have another 53 units scheduled to close in the next few weeks, which will bring our total to 373 of the 529 units.

This will allow us to return all invested capital to Cousins and the related group and will leave 12 unsold units, plus 144 units that will not have closed under the original contracts.

Last quarter we reversed the percentage of completion profits on 110 units.

This quarter we have increased that number to the full 144.

So that we will have no further units on percentage of completion accounting.

As a result of this and some other adjustments we recognized an after tax loss from 50 Biscayne in the fourth quarter of approximately $600,000.

Therefore, in future quarters, we will recognize profit from closing the sale of any remaining units without any offset or adjustments because of previous percentage of completion accounting.

I also want to point out because of the recent change in accounting rules, we're no longer recognizing percentage of completion profits and have not recognized percentage of completion profits at our other condominium project, 10 Terminus Place.

Despite the accounting changes, we do not expect any reduction in our overall profit from 50 Biscayne, since we're entitled to retain 15% earnest money on any contracts that do not close, and can now achieve the same total profit by reselling these units at 85% of the original contract prices.

And despite the problems in the Miami condominium market, our price point is well below the competition because we were able to lock in our construction pricing before subsequent cost increases.

While we don't expect to sell these units in the near term, eventually the Miami market will recover and we believe we will successfully resell these units.

Turning to information contained in our supplemental package.

Office, same property results were generally consistent with last quarter, as there were no significant changes at any property.

Year-to-date same property results for office are still negative because of the vacancy of 3100 Windy Hill Road.

Retail, same property results decreased from quarter-over-quarter approximately 3% between the third and fourth quarters because of an annual true-up of expenses between the Prudential portfolio as well as an insurance reimbursement in the third quarter for one property that wasn't matched in the fourth quarter.

For the year, retail same property results are up approximately 13%, as a result of the lease up of the Avenue Viera and Viera Market Center.

I would like to discuss the components of FFO in more detail by describing the changes between the third quarter of 2007 and the fourth quarter of 2007.

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

I'll begin with the office division.

Where rental property revenues less rental property operating expenses increasing $844,000 between quarters.

This increase is primarily the result of continued lease up at Terminus 100.

For the retail and industrial divisions, FFO generated from rental operations for the fourth quarter remain consistent with the third quarter.

FFO from out parcel sales for the third and fourth quarters representing the sale of one out parcel each quarter at the Avenue Forsyth project.

FFO from tract sales in the fourth quarter represented the sale of a parcel at our Jefferson Mill industrial project for a gain of $622,000 and the sale of a tract at our Timco joint venture.

Other joint venture expenses increased as a result of an increase in real estate taxes on certain unconsolidated residential projects on which development activities had been temporarily suspended.

Multifamily FFO changed from a loss of $3.3 million in the quarter to a loss of $1.1 million as a result of the items I discussed at 50 Biscayne.

Leasing and other fees decreased $2.2 million as a result of a third-quarter leasing commission earned on a lease our Williams Square third party managed property.

Termination fees in the fourth quarter represented $493,000 from the termination of a tenant at the Avenue Carriage Crossing and $496,000 from the termination of the tenant at Avenue Webb Gin.

Total general and administrative expenses decreased $1.9 million as a result of year end true-ups for bonuses and adjustments to expense associated with restricted stock and restricted stock units.

Interest expense increased $1.8 million as a result of a decrease in capitalized investment associated with the operating portion of Terminus 100 and the completion of the Avenue Webb Gin, along with lower levels of development activity in CO realty and Timco.

Income tax benefit decreased $1.3 million, primarily as a result of a lower pretax loss at our taxable subsidiary caused by the third quarter adjustment taken for 50 Biscayne.

In the fourth quarter, we completed the steps we began last summer to strengthen our balance sheet.

In the third quarter we recast our bank credit facility and increased the available amount by $100 million.

We added $100 million five-year bank term loan.

We renewed our loan on 100 and 200 Northpoint and we closed a 10-year mortgage loan on the American Cancer Society Center which was formally called Inforum.

In the fourth quarter we closed a 6.13%, $180 million, five-year mortgage loan on Terminus 100 and a 5.6%, $83.3 million three-year mortgage loan on San Jose Market Center.

As a result of this activity, we ended the year with a $500 million revolving credit facility on which we had only announced a balance of $53 million.

In the fourth quarter we entered into a joint venture with Prudential to develop Terminus 200.

We con contributed the land and site improvements and Prudential provided the cash and the venture close to construction loans to provide additional funding for the remainder of the project.

As a result, we do not expect to be required to contribute any more cash to complete this project.

This venture is essentially a 50/50 venture with respect to funding.

However, we're entitled to receive more than 50% of the economics, if the profit return meets or exceeds certain performance metrics.

The result of these financing activities is an expanded capacity to act on new opportunities as well as the ability to complete our existing projects without the need for additional financing.

The unused capacity on our existing credit facility is now about twice the total anticipated fundings needed to complete our current developments.

The ability to fund our cash needs without being dependent on the credit markets is particularly valuable in times of tight credit when opportunities are available for well capitalized companies.

Before I close, I want to make aware that we also repurchased 628,500 shares of our common stock in the fourth quarter, at an average price of $22.57 per share.

We'll continue to evaluate the market for our stock and purchase additional shares when we feel it is advantageous to do so.

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

Thank you, Jim.

Well as we've been expecting for a while now, the economy has cooled off considerably in recent months.

The residential housing markets continue to show extreme weakness and the debt problems that started in the residential area are now beginning to affect commercial real estate markets, consumer spending and the broader economy.

These factors will almost certainly make it more challenging for us and others to start new developments in the near future.

Fortunately, because of the actions we've taken over the last few years Cousins is in a good position to deal with the current economic situation.

Let me first review where we are currently, and then I'll discuss our plans for the year.

I'll start with Residential.

The residential markets continued to weaken in '07, as it became clear there was an over supply of developed lots and unsold homes, even in the high-growth low appreciation markets like Georgia and Texas.

At this point, we do not see any significant improvement in the residential picture in the near term, and we will continue to limit our development of new lots as we wait for supply and demand to come back into balance.

Our lot sales were down significantly in '07.

We do not expect them to improve in '08.

So far, we do not see a long-term reduction in the value of our residential business but obviously, the slowdown is having an impact on our current earnings.

Now on to Retail.

During the fourth quarter deteriorating economic conditions began to affect the willingness and ability of consumers to spend through the holidays and a number of our retailers, especially those in women's fashion had disappointing results in December.

We anticipate this will negatively affect retailer demand for new stores.

Accordingly, we are redoubling our efforts to lease space currently in our inventory and proceeding cautiously with new projects.

That being said, thus far retailers are still fulfilling their commitments to 2008 store openings.

As we reported in our last conference call we opened The Avenue Murfreesboro in suburban Nashville in mid-October.

The retail space and the existing phases is now 80% committed and a number of important tenants have signed leases and are in the process of building out their stores.

Among these are Cost Plus, World Market, American Eagle, Hollister, Old Navy, Haggertys and Linens and Things.

We expect to continue to execute leases with a number of additional tenants throughout the year.

We've been encouraged by the early tenants sales at this center as Barnes and Noble, Dicks Sporting Goods, the Longhorn Steakhouse and Ultra, among others, all exceeded their holiday sales plan.

The Avenue Forsyth in our home market of Atlanta is on schedule to open in the spring.

The retail space is 58% committed and we've signed leased with AMC, Circuit City, Barnes and Noble, Chicos, DSW, Victoria Secret, White House Black Market , J Jill, Joseph Banks, Ted's Montana Grill, Origins and Cold Water Creek.

The markets demographics and regional road network supporting the Avenue Forsyth remain excellent.

We will open Tiffany Springs Market Center in Kansas City in late summer.

This project is 87% committed and anchors include Target, Home Depot, and JC Penney.

We've signed leases with Best Buy, Famous Footwear, [Just Us], Pet-Smart, Sports Authority, Life Way Christian and Ultra.

This is a classic power center with strong anchors and should drive great customer traffic throughout the center.

Site development work continues to progress well on the Avenue Ridgewalk, our project in Cherokee County north of Atlanta.

Our closing date is depending on the time of the Georgia Department of Transportation's work on a newly approved interstate exit that will serve our site.

At this time we expect to close on the land either in late 2008 or early months of 2009.

2007 proved to be a strong year overall for leasing activity.

For the full year, our retail division signed 161 leases, a first generation space for over 1.2 million square feet.

Additionally, there are 64 more first generation leases out for signature for an additional 312,000 square feet.

Our operating retail properties are 91% leased.

As mentioned earlier, considerable effort in leasing resources will be focused on our existing operating properties and projects under construction in 2008, as we push to increase the overall occupancy in our retail portfolio.

I'm disappointed we haven't been able to execute more leases today than our industrial properties.

We continue to pursue several prospects for both our Atlanta and Dallas buildings and these prospects remain active but decisions by tenants are continuing to be pushed out in this declining economy.

Fortunately, industrial development activity has slowed as well, so vacancy rates are being held in check.

We're working hard on our leasing efforts and we do not intend to build any speculative new space in our parks until we lease the space we have available today.

During the fourth quarter, our industrial division sold a 15-acre site for regional company to build it's 150,000 square foot headquarters in our Jefferson Mill Business Park.

Additionally, Cousins and our partner LNR and the Benham companies were collect selected to be the master developers for the redevelopment of Fort Gillem.

Fort Gillem is a 1,500 acre army base that is being closed under the most recent background of base closing.

The site is located just four and a half miles from Atlanta's airport and our approved plan calls for more than 8 million square feet of industrial buildings and 1,000 residential units as well as additional retail, office and institutional uses.

Our office markets in 2007 were as healthy as we've seen in the last several years.

Fortunately, a relatively small amounts of supply has been added in our markets since the technology in Telecom bust in 2001.

Our office team had a very successful year leasing up One Ninety One Peachtree, Terminus 100, 1 Georgia Center, the American Cancer Society Center, Northpoint and our two buildings in Birmingham.

We'll see continued improvements in income from these buildings in 2008 and beyond as tenants take possession of their space.

Our operating office property portfolio increases to 92% leased at the end of 2007, up from 91% leased at the end of the third quarter and 84% leased at the end of 2006.

We will continue to monitor the office markets in light of the negative economic news we're now seeing.

But we've not experienced any significant problems so far.

Most of our office leasing efforts this year will focus on Terminus 200, the remaining space at one ninety one, as well as finding a user for the former IBM Training Center at 3100 Wildwood.

And downtown Atlanta One Ninety One closed the year 75% leased.

If we include the lease with Deloitte and Touche that we reported in January, we have leased well over 700,000 square feet since we bought the building in late 2006 and the building now stands at 87% leased.

We continue to see strong interest in One Ninety One Peachtree and we're actively working with over 400,000 square feet of prospects.

Included in the 87% leased figure at our One Ninety One Building is about 265,000 square feet of the existing 375,000 square foot Wachovia lease that is set to expire at the end of '08.

One Ninety One is a great value in the Atlanta office market and we feel confident we will successfully release the Wachovia space and continue to exceed our pro forma leasing goals for One Ninety One.

Terminus 100 was 93% leased and 88% occupied at the end of the year.

Including letters of intent, Terminus 100 is now about 95% committed and we have more than enough prospects to fill the remaining 18,000 square feet of office space.

Activity levels continue to escalate as Flying Biscuit joins Equinox, Brick Tops, Lola and MF Buckhead, further cementing Terminus as a major dining destination.

Construction is on track for Terminus 200 with all excavation completed and footings for the tower underway and the first two slabs of the parking deck in place.

We have over 770,000 square feet of lease prospects at this point and the Buckhead submarket continues to draw significant attention, as one of the most desirable locations for financial and professional firms.

While some competitors appear to be moving ahead with potential alternative space, we remain confident the momentum at Terminus will continue reinforced by the overall Terminus experience.

10 Terminus place is averaging 12 new qualified buyers visiting the sales center each week.

Although this activity has not translated into a significant number of new sales contracts in Q4.

While Atlanta condo sales slowed throughout the year, we do believe sales at 10 Terminus with accelerate once the project nears completion.

We now have 34 units under contract and construction is on schedule with completion of two model units planned for the second quarter.

During our last call, we reported pursuing a joint venture with Emory University to develop a mixed use project adjacent to the Emory Campus and the Center for Disease Control headquarters on Clifton Road.

During the process of finalizing the venture documents, Emory decided to be a ground lessor, instead of a venture partner.

Cousins will develop the project, which will include residential and retail components.

Interest in this project is excellent because of the limited housing and retail options in the area and it's urban infill nature.

We expect to begin construction this summer.

Palisades, our Austin project, is on schedule for completion in the third quarter of this year.

Both buildings topped out during the fourth quarter of '07 and we expect to top out the parking garage in mid-May.

As you know the first building is fully leased and we continue to actively market the second building and have proposals out to over 400,000 square feet of prospects.

Closing at our Miami Condominium Project, 50 Biscayne, have gone relatively well given the deplorable state of the Miami condominium market.

As Jim pointed out, we've closed the sale of 320 of 529 units.

We have reversed percentage of completion revenues on all remaining units, except the ones that are scheduled to close in the next few weeks.

Once these closings occur, we will be able to make decisions about what to do with any remaining unsold units.

We should be in a strong position at that time, because we will have already paid off the construction -- because we have already paid off the construction loan and by the end of 1Q, we should have received all of our investment back and had no further units on percentage of completion accounting.

On the overall economy, it's hard to predict how long the current downturn will continue but I'm not optimistic.

I believe the problems in the housing market will go on for sometime, mainly because of the very negative market psychology which exists today.

Until we see a change in buyer attitudes, the market will not be able to build the momentum required to absorb the current oversupply.

Retail and office demand will be driven by job growth and consumer spending and will continue to monitor these factors very closely.

A bright spot is the abundance of equity capital in the market despite the debt crunch.

This should make the recovery happen faster when buyers return to the market.

Past real estate downturns have provided good investment opportunities and at Cousins we are well positioned to take advantage of these opportunities.

Our asset sales over the past five years generated $2.1 billion in capital, $1.5 billion of which we've used to pay off debt and to reinvest in our developments, which significantly reduced the overall leverage of our company.

And last year, we took several steps to lock in debt and to free up availability under our credit facility.

As a result, we can finish our current developments and take advantage of other opportunities without being at the mercy of the credit markets.

It is important to note, this is very unusual for a development company.

Although we tend to benchmark ourselves against other public companies, many of which are also well capitalized.

These are generally not our competitors in the development business.

Our competition tends to be private developers, most of whom have financed their projects with other people's money.

This often gave them an advantage during times when easy money was available, but now the advantage should be ours with our strong capital structure.

We're also seeing a number of deals from other developers who aren't able to find the capital they need to continue their projects and I'm sure we will see more opportunities later in the year.

Some analysts have commented recently about their concerns regarding development risk in a slowing economic environment.

I thought it might be helpful to spend a few minutes on this subject.

We've always recognized that there is risk associated with development.

It is the reason that development yields for us have exceeded straight line investment yields by 200 basis points or more and often much more.

That 200 plus basis points gives us quite a cushion.

On top of that is a disciplined underwriting process which employed 50 years and many cycles of experience.

This process causes us to fully understand the dynamics of our market from both the cost and marketing standpoint before we start a project.

This underwriting allowed us to perform against market dynamics as recently as 2001, when we began Frost Bank Towers - or 2001-2003 downturn when we began Frost Bank Tower, a Class A trophy office building in Austin, Texas, amidst some investor angst.

The net result of that asset performance is that we did lease it and we leased at rates well in excess of competitive space and then sold the building for a record price in the state of Texas, generating value creation of $44 million for our shareholders.

This is important to note because deteriorating economic times often provide the greatest long term investment opportunities for companies like Cousins.

We believe development capability conservatively employed can be an asset in lesser economic times, just as it is in robust periods.

I want to finish by outlining four things we'll focus on in 2008.

First, we'll focus on leasing.

We had good success in our Office portfolio over last year, and we will work on extending this momentum at One Ninety One Peachtree, Terminus 200, and 3100 Wildwood.

In Retail, we'll also build on this year's past success, as we continue to fill up our development properties in 2008 and Industrial, we'll continue to concentrate on the available prospects both in Atlanta and in Dallas.

Second, we'll continue to be opportunistic looking for smart ways to take advantage of the downturn and create long-term value for our shareholders.

As I mentioned earlier, it will be harder for all developers to begin new projects in the near term because many potential tenants are hesitant to commit to new space in today's environment.

However, for those locations they do want, we have the advantage of access to capital and the ability to deliver a quality project on time and on budget.

We will continue to look for opportunities where other developers are unable to move forward.

We'll also look for other investment opportunities where we think the market is not appropriately pricing assets.

Third, we will maintain our disciplined underwriting process.

This has been the hallmark of Cousins for many years.

As we said before, we did not under write our development projects based on the aggressive market conditions of the last couple of years and we will not do so in the future.

If we need to scale back our development starts for a period of time, we will make the necessary adjustments.

We've set our plan as to start 300 to 400 million of new developments per year through the cycle.

We've been able to start more than that over the last several years and as a result, we have many good projects that are now coming online.

We will keep up the pace of development where it makes sense but we will not force developments that don't.

Fourth, we will continue to focus attention on our cost structure.

This includes making sure our G&A and other expenses are in line with the development opportunities we're seeing.

Rest assured, we will not allow the current downturn to distract us from our long-term goals.

Because overall our most important measure continues to be the value we create for our shareholders.

Terminus 100, the American Cancer Society Center, the San Jose Market Center are all good indications that's even in today's market, the value creation for good developments and smart acquisitions is substantial.

The value creation implied by the recent loan underwriting for these three properties is a cumulous of 56% or $204 million.

This value creation is what increased our NAV over time and in the long term it should have significant impact on our total return to shareholders.

With that, I'll close my remarks and turn the floor over for any

Ladies and gentlemen, we will now begin the question and answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from David Cohen with Morgan Stanley.

Please go ahead.

Good morning.

David.

How are you?

I wanted to follow-up on the residential, obviously very weak and you've extended the project lives of a lot of projects in the supplement.

And I was wondering if you could talk a little bit about that process obviously it reflects the state of the markets.

And also is it safe to say maybe we should adjust our pricing and margin expectations as well.

Well, David, most of our residential developments have been underwritten significantly below the recent pricing of '06 and the first half of '07.

So we have not seen any significant deterioration in value from our original underwriting of these projects.

Now, certainly sales velocity has decreased substantially and we're not developing new lots at this time, but we feel that as the residential market comes back and we feel that it will come back, and our principal markets of Georgia and Texas, we will be able to sell the lots very close to our pro forma pricing and move forward from there.

And you've talked, obviously, that you think there will be some opportunities ahead and I think you talked a lot about that on the last conference call.

But can you just talk a little bit more about what you've been seeing recently in terms of distressed land or more kind of commercial real estate opportunities where are you guys seeing the most opportunities right now?

We're seeing developers and investors searching for buyers for residential lots, fully developed residential lots and raw land, entitled raw land.

We do not feel that by and large that this pricing has reach the a level where we want to pursue them.

But they are steadily decreasing.

We have not seen for the most part, banks enter into the market yet on land on which they've foreclosed, though we expect that will probably happen the second half of this year.

We are seeing many overtures from other developers who are well into the development process on their projects but are not able to obtain the required financing to complete the project.

By and large, those developers as of fourth quarter of '07 are still trying to get out whole or make a little bit of money or take a back end position in these developments.

So we haven't felt they're attractive enough yet, but we feel like this will also begin to change in the second half of the year.

Okay.

Just a final question.

On Terminus 200, it sounds like there is a lot of great leasing prospects, so I'm curious.

One, I think you said 700,000 square feet, is that 700,000 square feet looking also at the alternative buildings in the market?

And second, how did you guys approach doing the JV?

Should I think about this as you giving up any upside here?

Why did you guys decide to form the joint venture?

Well I'll answer the first question first.

I don't know -- I know that 150,000 feet are not looking at other locations at this time.

But I can't speak for the rest of it.

I assume they are.

As you know, there are other buildings that are supposedly going to be developed in the Buckhead market.

We're a little ahead of those buildings and have momentum in the Terminus project with our first building basically 100% leased, well ahead of schedule.

But I really cannot speak to you know what the other builders are doing or what developers are doing or what schedule they may be on.

But we're finding a very significant level of interest in Terminus 200 and we're feeling good about our leasing prospects there.

What was the second part of the question?

I'm just curious.

Oh, the JV.

Terminus 100 seemed like a home run and it was a good prospect of Terminus 200.

Why do the joint venture?

Primarily two reasons-- the first was to make sure that we had ample capital available as we move forward to take advantage of some of the opportunities that we would expect to see as we move through the '08 year and into the early parts of '09, related to your first question.

And second, it was risk mitigation.

Great.

Thank you.

You're welcome.

Our next question comes from the Jay Haveman from Goldman Sachs.

It's actually Sloan Bohlen.

I'm here with Jay.

Just one question, a follow-on from David's question.

With regards to the commercial developments where developers are having trouble getting enough financing, how would you look to invest in that sort of [zone]?

Would it be out right acquisition or would you like to provide financing and what kind of markets and what kind of property types.

I think it could take three forms.

It could be a financing option.

It could be a joint venture, or it could be an acquisition.

Okay.

And are there particular markets where you're seeing that more than other markets or particular asset types?

Well, I think the most active right now are the mixed-use projects and retail projects and of course, residential.

Residential being first among all of them.

With regard to markets, we're staying focused on our sun belt markets so we do not really see -- we're not seeing much activity outside of -- well that's not true.

We see lots of activity but we're not focusing on activity out of the sun belt markets.

So nothing out west?

No.

Well out west where the sun is shining but not in California at this moment.

And one last question.

I think last quarter you had mentioned you saw cap points move up from 25 to 50 basis points, if wonder if you could update us from then what you've seen.

Well there is no market today so it's hard to know where cap rates are because nothing is selling.

But when we hear about markets that have been put on the market and withdrawn and we look at the pricing that was available on those, I would say cap rates have probably already moved 100 basis points.

Okay.

Thank you very much, guys.

Thank you.

Our next question comes from Ian Weissman with Merrill Lynch.

Yes, good morning.

Just a follow on to that cap rate question.

Asked another way, what are sort of unlevered IRR expectations in your markets today?

Well for us or for the market?

Well for you guys and maybe contrast that to the market.

For us it hasn't changed any.

We still -- we like to see unleveraged hours at 12 to 13% in our investments.

In the marketplace, it's hard to say.

There's a huge amount of investment capital available for distressed properties; these opportunity funds or vulture funds.

And I really -- you probably have a better idea than we do on what kind of return they're looking for.

I mean I would say that returns and expectations have moved up 100 basis points and even in markets like New York City, it's probably just 8% unlevered IRR and I just wanted to understand how that compares to maybe suburban markets in your footprint.

I would think it's at least that.

Okay.

You had made a comment about slowing consumer and obviously stores are looking to take on fewer new stores in this environment.

What about bankruptcy filing and store closings?

What are you hearing from your tenants in the retail front?

We're not hearing much.

Joe Murphy who runs the retail division is very active in ICSC and he just came back from a meeting, I think it was last week, a board meeting and they're nervous.

I think you have a lot of nervous retailers out there but not talking about failing - just talking about reducing costs and reducing new store counts and in some cases reducing store counts period.

And what is your expectation for occupancy in your retail portfolio by year end '08?

My expectations or what is actually going to happen?

The latter.

I would like to see our retail portfolio at 93 or 94%.

I think we can get there.

Okay.

Perfect.

And just last question.

It looks like at least from -- if I look quarter over quarter, you had a development, the Avenue at Carriage Crossing it was phase one, I believe, an expansion of 50,000 feet, that's no longer in the fourth quarter supplemental.

Did you scrap that project or what has been the change?

No.

This is Dan Dupree.

That's -- that was a 50,000 square foot phase deal and we actually have three very, very hot prospects that we're working on right now that would take virtually all of that space.

So it's very much still an active deal.

Ian, this is Jim.

We just pulled it off the schedule because we weren't sure exactly the square footage or the timing and we had had timing on there, I think, to be completed in 2010 and it seemed pretty speculative, but as Dan said, it's still active, and you'll see it on our land schedule, if you look at the land schedule, that's where we put it.

Great.

Thank you very much.

Our next question comes from the Cris Haley with Wachovia.

Please go ahead.

Good morning.

Good morning, Chris.

Just to clarify the condo situation, so the expected closings over the next, three, six, twelve months -- did I understand you correct, Jim, that there will be the margin you will recognize -- will there be an adjustment for a reversal of the reserve taking during the third quarter and what appeared to be taken in the fourth quarter above and beyond the sales that might close over the next six to 12 months?

Let me see if I can answer that, Chris.

We don't expect the margins to change.

We reversed percentage of completion accounting on as you know 110 units in the third quarter and another 34 units in the fourth quarter and we have closing schedule, some with our partner and some with others of 53 units that we are expected to close here very shortly, within a few weeks.

Once that's done, we'll have no more percentage of completion accounting.

We plan to still use the same profit margin and we'll be able to achieve that if we're able to resell the units for 85% of their original sales prices.

You may recall, the original sales price was $395 a square foot.

That would put us at 330 something dollars a square foot in terms of a resell price, which would still achieve the same profit and save profit margin.

That's the way we've done our analysis.

We'll -- obviously we'll evaluate where we have when we get past the next few weeks and see what we want to do.

Chris, this is Tom.

That market is really awful.

And I'm proud of our team for closing the units that they closed.

But we're going to have, you know, somewhere between 120 and 140 units probably left when this is all said and done.

And fortunately, we'll have all of our money back.

So it's really probably in the second quarter before we determine what we're going to do with those units.

Are we going to just hold them, which we could afford to do and wait for the market to come back.

Or are we going to lease them on an interim basis and then put them back into the sales market when the market comes back.

We're just not quite certain, how we're going to approach that yet.

You mentioned Avenue Ridgewalk, did you provide scale or size of this project?

It's about 330,000 square feet.

Avenue?

Yes.

It's an Avenue.

It's really a hybrid, Chris.

It will have -- it will have some mid box uses but primarily, it will be the Avenue Ridgewalk.

So it's principally an Avenue product.

Okay.

Thank you, Dan.

And then on capital of capacity, when you bound -- first, I'd just like your thoughts and then go into some analytics.

First the thoughts on balancing buybacks, additional developments to the pipeline and third, acquisitions.

And then to get into details, how do you think -- how should we think about your capital capacity in terms of remaining capital to fund development plus future capacity?

Well, Chris, if we do not do anymore permanent loans, we probably have another $300 million that we could spend opportunistically.

And as to how we spend it, it sort of depends on each individual transaction.

If we just sit -- just where ever the best opportunity is for our shareholders over the long term, I don't think we can really give you a preference one way or the other until we see what the opportunities look like.

And then thinking longer term on capacity?

Chris, one way -- Tom is absolutely right and you can look at a snapshot today and look at what we've got available on the line of credit without going to the debt markets at all.

But the other way to look at it is to look at the way we've modeled it from a financial standpoint.

And as we've said I think in the past, we've got a financial model where we've rented out for five years and made certain assumptions about what happened over the five years.

And those assumptions are that we have very little capital recycling sales or joint venture transactions that we use debt to fund all of the additional development, and that we continue at a high pace of development which is between $400 and $500 million a year.

And if we were to do that, we would still stay within our debt covenants for that five-year period in terms of coverage ratios and in terms of overall leverage.

So that of course would require us to go get some more financings because we would be using debt to fund all of that.

But there is the capacity there without running us afoul of our debt covenants.

Thank you.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS) Our next question comes from Cedrik Lachance with Green Street Advisors.

Please go ahead.

Thanks.

Tom, can you give us some more details on the Fort Gillem project.

There seems to be some partners in there and your press release and the [Times] talks about you being a master developer.

What kind of capital commitment are you expected to have in that project and what's the time frame on it?

Cedrik, the time frame is -- the project pro forma goes out for 10 or 12 years.

It's a very long-term project.

The next two years, as I understand it, are basically focused on completing the development plans and negotiating with the Army as to how they're going to make the land available to the joint venture because they have various alternatives.

They can give some of the land to the City of Forest Park.

They can sell the land at reduced prices.

They can sell the land at market prices.

A lot of that depends upon on what Forest Park is going to do with the land.

It is possible that some pieces of Fort Gillem will continue to be used by the Army, some small pieces.

It is also possible that some parcels will be developed very early because there is some active interest in some parcels there now, and I think their conversation is going on next month with the Army about perhaps breaking some of that loose early on.

As to the capital cost, obviously we don't know how much capital is going to be required yet because we don't know exactly what is going to be developed there yet and we're probably -- I don't know, probably a good year away from any capital being invested and probably a year away from having a good answer for your question.

Okay.

Going back to yield and development yield.

You mentioned that cap rates probably moved by 100 basis points since the peak, but that your development expectations are still roughly the same in terms of IRR.

At what point do you start to move the IRRs that are required north to 12% to 13% and in the current environment, would it be possible for to you reasonably expect IRRs north of 12% to 13%?

Cedrik, this is Dan.

You know, we have always been focused between -- focused on our going in yields and our anticipated exit cap rates and trying to get the spread between the two.

I mean frankly, in the last three or four years, we've been a great beneficiaries because we haven't materially altered our going in yield expectations and we've been the beneficiary of significant cap rate compression, which is one of the reasons that we accomplished 40% value creation across the entire $2.1 billion worth of assets that we sold.

So the fact that cap rates are moving back, you know, I don't think it's our sense that caps rate have moved back to where they have shrunk the 200 basis point spread that's been our target right along.

But once they do, then we're going to have to rethink our position and that would probably be the point at which we'd have to increase our yield expectations on the development deals that we look at.

But I don't think we're there yet.

If you were to start a project today, whether office or retail, do you think you would be able to get a development yield north that is more than 200 basis points in excess of your expected exit cap rate.

Yes and I would tell you that our expected exit cap rate would be higher than today's actual exit cap rates.

By how much?

It would depend on the product and the location.

It's also hard to predict the future of cap rates but I can tell you, if you look backwards which is something we know something about, I would say all of our underwriting over the last three or four years has been anywhere from 150 to 200 basis points above the cap rates at the moment.

So we're always underwriting to historical cap rates.

Is there a particular property sector in which you think you are more comfortable to invest right now?

Cedrik, we're so opportunistic.

We feel very comfortable in the residential and land markets and in the retail markets and in the office markets.

Probably a little less comfortable in the industrial markets.

So I think it really is going to depend on where you see the most distress and where the best opportunities are for long-term value creation.

Okay.

Thank you.

You're welcome.

Our next question is a follow-up from Jay Hinderman.

Go ahead.

It's Jay.

I joined from another call.

But just a question on the downtown leasing market, downtown Atlanta and just sort of comparing that with Buckhead.

It sounds like you have pretty good interest in both but just getting a sense of what you are seeing in terms of changes maybe in demand and net effective rents or maybe any changes in concession packages or free rent, et cetera.

I think downtown, to use the colloquial term, "hot" right now.

A lot of focus downtown.

A lot of people coming downtown to -- hadn't really I bet this time last year weren't considering downtown as a potential move market.

If you look at the people we've moved into One Ninety One, almost all of them have come from outside of the downtown market with the exception of the Deloitte consolidation.

So there is some funny things going on right now in -- in the Atlanta marketplace.

Midtown, which has been such a hot market, recently is suffering from a lot of construction activity.

They've closed the 14th Street Bridge this week and it's pretty hard to get in and out of the mid-town area, traffic is quite a nightmare.

And so I think that's also pushing people to Buckhead and pushing people to the downtown area.

Of course, rates in downtown are advantageous.

There's a significant spread between Buckhead rates and downtown rates.

I think that's having some effect.

And just the downtown environment has changed so dramatically.

I mean with these -- over 2,000 new dorm rooms -- or 2,000 new beds in the Georgia State dorm, there is a bunch of kids on the street.

Probably 25 new restaurants have opened, the Aquarium and the World Coke has brought a bunch people downtown.

I mean downtown, they recently reported that downtown is the safest subdistrict in the city of Atlanta from a crime perspective.

So there is just a lot momentum here.

And then also on the residential front, have you seen any sort of positive impact from the recent Fed activity, obviously, lowering interest rates and the impact on mortgage rates or is it really more a function of just fears over the economy and job losses?

The answer to your question is no and it's really psychology.

I mean the buyer is frozen in place.

They can't sell their house.

So they do not want to buy a new house because they're afraid they can't sell the house they have.

They're afraid to buy because they think the prices are going to go down some more.

All they read in the paper is about how terrible everything is going to be.

So the market is just sort of frozen and it will change and when it changes, it will change really fast in our view.

But I think you -- given the supply situation in our major Texas and Atlanta markets, we're probably at least a year away from seeing any significant change.

Okay.

Thank you.

Our next question is a follow-up from Chris Haley.

Please go ahead.

Two questions related to land and just a follow-up.

You mentioned Tom there is no long term value change on your land activities, residential lot development businesses?

Do you anticipate any short near term adjustment to carrying value, book value.

Well we look at it every quarter, Cris, and reviewed it recently and we do not see anything today.

Okay.

And then continuing on the land, now that you've got the -- we've got the publicly traded Four Star from (Inaudible).

Do you sense any change in investment attitude, operating changes at Four Star X temple inland in terms of the relationship joint venture you have with them.

I think Four Star is -- not right now obviously because of the depressed market but I think they'll certainly be a more active developer going forward and they're pursue development projects on their for-development land position that do not include us as we'll pursue project that's do not include them.

With regard to our Timco and CL joint ventures, things are going along as planned.

And then last on G&A and some of the other fees that come in regularly.

Jim, how should we think about the third party leasing fees, development fees, management fees in relation to corporate cost, G&A costs.

Should we think of that as trying to match each other over time, is that how you would try to run the business?

No, we -- we're making a profit in that business and that -- you know, that's what we -- why we're in that business.

But Chris, yes, you're right, the fees that come in, you've got G&A from our company that's unusual because a lot of real estate companies do not have that line of business and so you'll see a higher G&A because of the costs of running the third party having a leasing people, having the management folks.

We do separate out G&A into two lines so you can see the property level folks which are reimbursed as a pass-through and the nonproperty level folks along with the rest of our G&A.

In terms of the fees, the leasing fees tend to be lumpy and that's why they go up and down like they do.

We had a big fee in the third quarter and not in the fourth.

The management fees and the development fees tend to be more consistent.

So if you want to understand the business I think you have to look at it over a period of time.

Okay.

Thank you.

And there appear to be no further questions in the queue, Mr.

Bell and I'll turn it over to you for any closing remarks.

Thanks everyone.

This is going to be an interesting year in 2008.

Hopefully full of opportunities later in the year.

We appreciate your attention to our company as always and if you have any additional questions, you know you can always call Jim or Dan or Craig or myself and we'll do everything we can to answer them.

Thank you for being with us this morning.

Ladies and gentlemen, this does conclude the Cousins Properties Inc., fourth quarter conference call.

You may now disconnect and we thank you for using AT&T conferencing.