Cousins Properties Inc (CUZ) 2008 Q2 法說會逐字稿

Good day and welcome to the Cousins Properties, Inc.

second-quarter 2008 earnings conference call.

At this time, I would like to turn the conference over for opening remarks and introductions to Mr.

Tom Bell, Chairman and Chief Executive Officer.

Please go ahead, sir.

Thank you.

Good morning, everyone.

I am Tom Bell, Chairman and CEO of Cousins.

And with me today are Dan DuPree, our President and Chief Operating Officer, Jim Fleming, our CFO and Craig Jones, our Chief Investment Officer.

I would like to welcome to you our second-quarter conference call.

At this time I will ask Jim to review financial results for the quarter, Jim.

Thank you, Tom.

Good morning, everyone.

Thanks for your interest in Cousins.

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

Actual results may differ materially from these statements.

Please refer to our filings with the SEC including our Annual Report on form 10-K for the year ended December 31, 2007 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 web site at www.cousinsproperties.com.

This quarter, we reported FFO of $0.31 per share compared to $0.27 per share last quarter.

I would like to highlight the factors that contributed to this increase in FFO.

You can follow by looking at our supplemental package beginning on page eight.

Revenues from our operating properties are increasing as development projects become operational and recently signed leases commence.

Rental property revenues less rental property operating expenses for consolidated properties increased $1.3 million between the first and second quarters.

$678,000 of this increase came from one Georgia center as a result of the commencement of the Georgia Department of Transportation lease.

$473,000 of the increase was a result the grand opening of The Avenue Forsyth.

Also income from the Avenue Carriage Crossing increased $173,000 from the first quarter to the second quarter because our first-quarter results were reduced for prepetition accounts receivable on our Linens'N Things lease.

FFO from tract sales was $5.7 million, which resulted from the sale of 28 acres at our Avenue Forsyth project, the sale of 75 acres at Jefferson Mill Business Park, and the sale of 30 acres at our Long Meadow Farms residential project.

Profits from lot sales increased by $471,000 due to an increase in lots sold from 35 lots in the first quarter to 80 in the second quarter.

Income from other joint ventures decreased $756, 000 because we had recognized $784,000 in fees from an oil and gas lease at one of our Texas residential properties in the first quarter.

Multifamily FFO decreased by $877,000 as a result of fewer unit sales in the second quarter.

A reduction in the profit percentage on unit sales, and adjustments in the amount of income recognized on forfeited earnest money deposits at our 50 Biscayne project.

Our net result from 50 Biscayne in the second quarter was a loss of $227,000.

As we announced a few days ago, we sold the balance of our unsold residential units at 50 Biscayne for $30.3 million to a fund that included our partner-related -- the related group and a private equity fund, and subject to final accounting, we expect to recognize additional income from this transaction of approximately $800,000 in the third quarter.

Cousins's share of the pretax profit on the project through the time of the bulk sale is estimated to be approximately $18 million before minority interest.

We expect to recognize additional income in future periods as we sell the remaining seven commercial units.

Development income increased $206,000 as a result of fees recognized on a contract with Cox Enterprises.

In July, Cox announced it was not moving forward with this project and terminated our contract.

We expect to receive a termination fee in the third quarter but no additional fees under this contract.

Management fees increased $362,000 as a result of new contracts announced on our last call for the management of two Atlanta office projects, 999 Peachtree and five buildings in Piedmont Center.

Leasing fees decreased by $324,000 as a result of lower levels of third-party leasing activity at Pinnacle, Concourse, and Spectrum in the second quarter than in the first quarter.

Unlike management fees, leasing fees are transaction-based and vary considerably from quarter-to-quarter.

Total G & O and administrative expenses decreased $1.3 million as a result of a reduction in personnel costs related to lower staffing levels, a reduction in long-term incentive compensation expense relating to the decline in our stock price at quarter end, and reduction in legal and professional fees.

Interest expense increased by $1.1 million primarily because we stopped capitalizing interest on projects that became operational including The Avenue Forsyth, more of Terminus 100, and Lakeside Ranch Business Park.

Capitalized interest also decreased because we had lower levels of development activity in our residential projects.

Finally predevelopment and other expense decreased from the first quarter because in the first quarter we wrote off costs associated with one propose retail project.

On a same property basis, our retail portfolio decreased 4.8% between the first and second quarters.

This decrease is primarily attributable to a reserve taken on CompUSA at Los Altos Market Center, reserves for Linens'N Things at North Point Market Center and Avenue West Cobb, and Sharper Image and Bombay bankruptcies at West Cobb.

Please keep in mind, as we've said before, that our same property analysis is based on a fairly small group of properties, especially on the retail side and in some of these properties we only have a minority interest.

You can get a better sense of our property operation business by looking at the property-by-property NOI figures in our supplemental package.

As many of you know, our Board authorized a stock repurchase program in May 2006 and last year we bought some of our stock under this authorization.

We haven't bought any stock recently even though our stock is trading at prices similar to the prices we paid for our repurchases last year.

While we still believe the stock is a good value, we have chosen not to buy stock to date in order to preserve our capital and take advantage of other opportunities.

Our stock repurchase program remains in place, and we will continue to analyze buying stock versus other opportunities.

One of the factors in this decision is the overall availability of capital.

Commercial credit markets have deteriorated further even since the beginning of the year.

DMBS lending that provided majority of funding for real estate loans continues to be nonexistent and banks have seen a lot of pressure on their balance sheets so they are less willing to lend on real estate projects.

Life insurance companies are still active in making loans on stabilized projects, but at lower leverage levels and more conservative underwriting than we have seen in the last few years.

This is painful for everyone in the real estate business including Cousins, but it should give us a significant advantage over other developers, not only for ground-up developments but also for redevelopments and value-added acquisitions.

Although most public REITs are well-capitalized, the majority of our competition in recent years has come from private developers who had easy access to cheep capital in good times but are finding it very difficult to raise money to start new projects today.

In July, we closed an $18.3 million loan on our Lakeshore Park Plaza building in Birmingham.

The loan matures in four years but its prepayable without penalty after two and a half years and carries a fixed interest rate of 5.89%.

Earlier we had paid off an $8.7 million loan on this building, which had an interest rate of 6.78%.

This had been our only project financing matured in 2008 or 2009.

We are now in a great position on our loan maturities.

After closing the Lakeshore loan and after receipt of a distribution on our 50 Biscayne joint venture, the balance outstanding under our line of credit stands at approximately $150 million today.

This leaves with us $350 million available to draw under our line to complete our development projects and to act upon opportunities that present themselves in this economic environment.

Since the projects we are currently financing from our line will require less than $150 million to complete over the next few years, we are well positioned to act on new opportunities.

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

Thanks, Jim.

Well, since Jim covered the key events of the quarter, I will focus on how we see our markets, our projects, and our future prospects.

Most real estate markets are weak across the board, and at this time, we are not seeing any improvement.

In most cases, the bid-ask spread on asset sales is still significant and market psychology remains quite negative.

Credit markets are also very difficult and are really a barrier to new development and acquisitions.

Retailers are suffering and most have cut back on new store openings, and investors are generally seeking a higher return than presently available, leaving a great deal of money on the sidelines.

Other than that, everything is just dandy.

Looking to our current assets, our office properties are doing relatively well despite the current economic downturn.

A Terminus 100 as we said before is essentially full.

The buildings are 95% leased and we have prospects for the remaining space.

At One Georgia Center, the Georgia Department of Transportation has moved into the building and as of August 1, they are paying rent on the full 282,000 square feet under their lease bringing this building to 100% rent paying.

In July, we entered into a 22,000-square-foot lease expansion with one of our tenants at 200 North Point and that brings the building to 100% leased and brings the 400 -- or the 540,000-square-foot, four-building complex over 98% leased.

As Jim mentioned, we also closed a new loan on the 96%-leased Lakeshore Park Plaza in Birmingham.

In our existing portfolio, this just leaves 3100 Wildwood as the only operating building with significant vacancy and we are continuing to pursue deals on this special purpose building.

Excluding 3100, our office portfolio is 97% leased up from 89% this time last year.

On the development and redevelopment side, we have 191 Peach Tree and Terminus 200 in process here in Atlanta, along with Palisades West in Austin.

At 191, we just signed a 25,000-square-feet lease in the second quarter with Winter Construction.

And in July we signed a 52,000-square-foot expansion with Deloitte, which brings this building at 191 to 89% leased or 73% leased once the Wachovia lease expires at the end of the year.

Altogether, we have now leased a total of 771,000 feet at 191 since we purchased the building in September 2006 and this includes 335,000 square feet to Deloitte on 13 floors of the building.

We continue to see strong interest in this building, mainly because we are able to deliver an extremely high-quality product at a great value.

At Terminus 200, we recently signed restaurant leases with Cantina Laredo and Three Forks, totaling 16,000 square feet which will add even more choices to the six restaurants already open at our Terminus complex at Peachtree and Piedmont.

We are also working with four office tenant prospects for over 250,000 square feet of the Terminus 200 building.

At Palisades West in Austin, we signed a lease with a four-star real estate group for 32,000 square feet in June, which brings this 376,000-square-foot two building project to 67% leased overall and we are currently pursuing additional prospects to fill the remaining space in the second building.

On the retail side, The Avenue Forsyth opened May 14 with strong sales and good customer traffic.

The center's anchored by AMC theatres, and Barnes and Noble, and many of the names you have become accustomed to in our Avenue projects.

The retail space in phase one is now 73% committed and as Jim mentioned, we just sold an adjacent 28-acre tract to Children's Health Care of Atlanta, which leaves us 10 acres for future expansion of the Avenue.

Our Tiffany Spring MarketCenter opened in Kansas City at the end of July, with Home Depot, Best Buy, JC Penney, Target and PetsMart.

They are all now open for business and early reports are promising.

Including the anchors, this project is 88% committed.

At the Avenue Murfreesboro, Old Navy and Havertys are under construction and will open in the third quarter.

Tenant sales in consumer traffic continues to be strong and the retail space in the project is now 82% committed.

While retail leasing on newly-developed projects is difficult, we are making progress.

YTD, across the retail portfolio we've signed 55 leases for 273,000 square feet plus four outparcel deals.

In spite of these difficult markets, this quarter again highlighted the some time overlooked but important reoccurring business for us, and that's land and tract sales.

From the Children Health Care deal at Avenue Forsyth to our industrial and residential land sales, Cousins has long made selling tracts of entitled land to users or developers an important part of our business and it's certainly been a bright spot this year.

Our third-party business has continued to add new accounts to its roster of assignments.

Since our last call, we have secured contracts to manage and lease 266,000 square feet in Las Colinas, Dallas on behalf of I Star.

Additionally, I am delighted to report, we've added Two Forest Plaza, a 196,000-square-foot building in Dallas and Overlook Three, a 140,000-square-foot building here in Atlanta to our third-party leasing.

Both of these projects are owned by Parmenter.

We now lease more than two million feet for Parmenter between Dallas and Atlanta.

They're a terrific client and we are delighted with this new relationship.

Our 10 Terminus project in Atlanta is now close to completion.

We now have a temporary certificate of occupancy, which will allow us to show units without having to schedule hard hat tours through the construction area.

We have 32 units under contract out of a total 137 which we expect to begin closing in mid August, and we presently have five new contracts being negotiated.

Now this is a very attractive project with outstanding views and amenities and a great location.

While the Atlanta condo market is certainly very slow, we feel 10 Terminus offers a compelling value proposition compared to its competition.

Most of our single-family residential markets remain slow, and although we sold a few more lots in the second quarter mostly in Houston and San Antonio, we expect to sell only about 250 lots this year versus 486 last year and 1941 at our peak in 2005.

At this point in the real estate downturn, we are beginning to see more distressed property opportunities, but very few new development opportunities.

Although retailers have generally fulfilled their commitments to us for our current development and seem willing to backfill space in centers with good sales history, they are reluctant to commit to any new developments at this time.

And present economic conditions make it unlikely we will be starting any new office developments in the near term given the situation in most of our markets.

As a result, with the exception of the Emory Point project, we don't expect at this time to start any new development projects in 2008.

Fortunately for us, we have been able to delay the start date of several of our planned retail projects as we wait for markets to recover.

On the one development project we do anticipate moving forward with this year is Emory Point, our mixed-use project adjacent to the campus of Emory University and the Centers for Disease Control.

The first phase of this project will contain 93,000 square feet of restaurant retail space plus 172 condominium units.

In addition, Gables will develop 275 apartments as part of this first phase.

Now retail spaces are in high demand in this neighborhood, due to traffic conditions and limited retail locations.

And with housing options scarce close to their campuses, we expect the condominium units to sell well in premarketing through some of our partnerships with our nearby neighbors, which include Emory University, Emory Health Care, Children's Health Care, the Centers for Disease Control and the VA hospital.

We plan to begin this development in the fall of this year.

As today's real estate markets continue to deteriorate, we continue to look for opportunities to make investments in distressed assets.

We are starting to see some opportunities now, but we expect that they will become more attractive over the next six to nine months.

As Jim pointed out, we are well-positioned financially to take advantage of these opportunities when they present themselves.

To expand our scope in this area, we have been working recently to set up joint venture structures with financial partners on various types of acquisitions.

And Craig Jones and his team are also spending alot of time talking with lenders, investors, brokers, and other potential deal sources.

One opportunity we are seeing now is single-family residential developments.

Over the last 45 days, we have had discussions with more than 25 banks, mostly regional and local banks about their residential development loans.

Although many banks surprisingly are not yet prepared to acknowledge their real estate loan problems, we have had -- we have found a few that are and we are in discussions with several of them.

We will apply our intense underwriting standards and see where these community -- where these opportunities take us.

Hopefully we will find some good value where is we can use our experience in developing residential communities to do well when the economy turns and housing demands comes back in our Sun Belt markets.

Today's constipated real estate markets make it very difficult -- a very difficult time to be a development company.

As I said, our traditional development opportunities are limited, but we are working hard to find other ways to create value for our shareholders.

However, our Company has been in the development business for 50 years now and we have been through many up and down cycles.

At a point, as long as current democratic trends continue, we will see significant pent-up demand for several of our developments projects as the cycle turns.

And we are well-positioned to take advantage of these opportunities when they become available.

In the meantime, we'll continue to work diligently on leasing our existing properties and carefully watching out expenses.

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

Thank you, sir.

(OPERATOR INSTRUCTIONS) .

The first question is from the line of Sloan Bohlen with Goldman Sachs.

Good morning, guys.

I am here with Jay as well.

A question for Tom.

With the sale of Jefferson Mill and Forsyth, can you give us a sense as to what your strategy is, given you guys are fairly well capitalized on the balance sheet?

Why sell the higher cost basis land at this point?

Well, Sloan, after doing our best to crack the industrial market for a couple of years, we just determined that particularly in this market when we expect to see as the markets recover some really good and well-priced development opportunities, we decide we are going to exit the industrial business.

And so we made an arrangement with our partners, with Weeks, to exit this business.

And we are going to exit the business in pieces.

So this first transaction we did with Weeks we felt was the appropriate way to approach this exit.

It provided a decent return for our shareholders on what has been not a great experience for us in the industrial business.

If you want specific details as to the financial transaction, I will turn it over to Craig Jones.

That's all right.

Just my next question.

On -- could you give us an idea as to the breakout of the second-generation bump in TI and those costs going forward.

And maybe could you give us an idea of what is driving it, you know, now that the department of Transportation is in their building.

Are you seeing it more on the office side or the retail side?

Sloan, this is Jim, yeah, we talked last quarter about the Department of Transportation and the TI that was required there.

If you look at the total for the second generation costs this quarter it was $8.4 million and $7.5 of that was Georgia DOT.

There is about $2.6 million left to go after the second quarter to complete the work on the Georgia DOT space.

Okay.

All right.

Thank you very much.

Thank you.

Our next question is from the line of Chris Haley with Wachovia Securities.

Please go ahead.

Good morning, this is [Young Coo] here with Chris.

I was wondering if you could give us some details in terms of the margins on those tract sales, looked a bit slim.

Again, this is Jim.

If you look at them all together, we've got the Jefferson Mills sales that we announced we have already closed, the Jefferson Mills sales we have under contract, the Forsyth land sale and Long Meadows Farm sale.

If you combine them all together, it was about a 25% margin.

Okay.

Thank you for that.

Can you give us some more color on future prop recognition for the Q3 condo sales?

We anticipate about $800,000 of gain.

That is an approximate number subject to final accounting, but that's our best guess right now from the bulk sale.

Not a huge number but a slight gain in the third quarter from the bulk sale.

Gotcha.

How is the leasing velocity in the Terminus 200?

We saw some news from that end but none were actually office tenants.

Well, we have got some good prospects for T.200 but it's very tough, the Buckhead market is difficult.

We have a lot of supply coming on line.

The success of Terminus as a project is helping us in that very competitive market.

I think we are seeing all the deals in the market, we're getting short listed for pretty much everything.

So far all the buildings are being fairly reasonable with regard to pricing and inducements.

I suppose it will get more competitive over time.

Our leasing guys feel very good about these four prospects.

I think we will have some things to announce in the not-too-distant futures about that.

Having these restaurant leases tied up is a good thing for us because it shows, you know, that the place is going to continue to build momentum, but we will be the last people to say that it isn't going to be tough.

I think we will win, Cousins in Atlanta is hard to beat and sort of head-to-head competition like this as we have demonstrated over and over again but it is going to be tough.

Thank you for that.

And lastly, we saw that rental square feet at Cosmopolitan changed a bit.

Can you give us some background on that?

Well we sold a chunk of that land to GDOT so they could improve, God bless them, the exit, the interchange on the interstate and in the process of doing that, they clipped a couple of buildings.

We had to take them down.

And they paid us a nice price for them.

Yeah, we had about a $600,000 gain in our numbers from that land sale.

Gotcha, great.

Thank you.

Thank you.

Our next question is from Cedrik Lachance from Green Street Advisors.

Thanks.

In regards to the retail same-store results, if you had not taken provisions on Linens'N Things and CompUSA, where would have have been your same-store?

Cedrik, I think they would have been pretty flat from quarter to quarter.

Most of the difference was from that CompUSA adjustment at Los Altos and we do the best we can to report same-store sales.

We have a pretty small retail portfolio so we reported across a number properties, some of which, like Los Altos, we have a minority interest in.

The answer is it would have been pretty flat but for those adjustments.

When I compare your same-store versus what we see being reported by strip centers, by malls, it seems to come in at the low end.

Is there something with the lifestyle center concept we need to be concerned about in this downturn?

At the low end.

I am not sure I understand that.

What -- you mean in terms of leasing?

No, if you look at same-store results, generally malls and strip centers are in positive territory while you are about flat.

I'm trying to understand--

Yeah, actually -- again, Cedrik, the answer is -- I think you will do better -- this is harder, but I think you will do belter by looking at the property-by-property NOI which we've got in our supplemental.

The issue is, we've got a fairly small sample size and fluctuations like tax reimbursements or various other things -- or these reserves can sometimes come into play.

We did -- if you look at it from the six months it is pretty flat and would have been up if not for all of these reserves.

I don't know if you can tell a lot from a trend, from a fairly small sample size like that.

Okay.

In terms of Biscayne, you had written down all your profits in the past.

So if you have an $18 million gain in there, why aren't we going to see $18 million being recognized in the FFO stream?

Can you help me understand the accounting behind it?

Yeah, Cedrik, we had 529 residential units, and we -- we reversed the profit on 120 of those units and we wound up selling those units at a very slight gain that will be reflected in the $800,000 or so gain that we expect in the third quarter.

But explain --

But, in prior periods when we closed the units, we closed over 400 -- we closed about 400 of the units at substantial gains and we did recognize the profit and income as we went along with those actual closings.

So the $18 million gain is really on the books that the point.

What is the minority interest in there since you are already a majority partner in that [JV]?

There is a majority partner on our side that after a certain return for us will get about 11% and had about 11% of the capital in it.

But if you look at the numbers we are reporting it is the gross number and you see a sub traction in the minority interest and you have been doing accounting for that all along.

Thank you.

Can you give some details on the loan-to-value and the spreads on the Birmingham loan.

The interest rate was 5.89%.

It is a four-year loan.

Today if you looked at the -- the four-year rate -- I don't remember exactly what the spread is.

I would say probably 250 to 300 basis points above treasury.

That is basically reflective of what is happening in the market which is spreads have increased.

The base rates have gone down.

You wind up with a pretty good effective rate.

In terms of the loan to value, they haven't disclosed that.

I would say it was probably closer to 60% than 70% given today's market.

Tom, you talked about single-family distressed investment.

Can you comment a little more on that?

Where those projects might be, what could be your participation, is it in JV, straight up on balance sheet?

What size also are you targeting?

We don't have -- we are not talking of a particular size.

But what we are seeing are developments, many of which are 50%, 60% complete where the developer having completed all the infrastructure has lots remaining and the lots are going back to the banks and the banks are just now saying okay with a little more pressure from the OCC, beginning to say look, we have got to unload these nonperforming assets and are looking for buyers at significant discounts, discounts of 40% to 50%.

If we can find good projects which have been successful which have lots where you basically get all the infrastructure for free then we would be willing to move in and take those banks -- those lots from the banks and be able to hold them and wait for the market to return.

Are you likely to proceed alone or on JVs?

It depends on the size of the transaction.

We can do it either way.

In a couple of cases, the banks would like to participate in some way, and, you know, they can participate if you create a structure where -- let's say you create a joint venture structure, they can own up to 49% of that structure and still have the assets off of their balance sheet.

So each deal is a little bit different.

As for markets, North Carolina, Tennessee, of course, Georgia, perhaps Florida though we haven't seen anything there yet.

Okay.

Texas, yeah.

Craig reminds me, Texas.

Okay, so basically all the markets in which you are here at present.

Yes.

Okay.

Maybe final question.

With regards to profit margins on -- when I look at page 33 of your supplemental and your share of consolidated JV residential, it seems that on your tract sales no associated cost of sales.

I am just trying to understand if it is a function of JV accounting in which you would have already received all of your equity back or is there anything else special there?

Cedrik, the JV reporting is -- all rolls up on to our income statement as a net number, so this breakdown is a net number.

You can look at -- I think there are other places where you can get the breakdown of cost of sales and I'd be glad to help you with that.

In the past you have put your cost of sales, but in this particular quarter you did not.

I was wondering if this was an accounting treatment that was slightly different?

I don't think we have it differently in this phase but I will be glad to get on the phone with you if you want to go through that.

Okay, sounds good.

Thanks.

Thank you.

At this time, no additional questions.

I would like to turn it back over to Mr.

Bell for any closing remarks.

We appreciate everybody's participation this morning.

It is a tough market out there.

We don't see any near term improvement frankly, but we do hope to see additional opportunities toward the end of the year, and we will be back to you next quarter.

As always don't hesitate to call us if you have any additional questions.

Thank you.

Ladies and gentlemen, this does conclude our conference.

You may now disconnect.