Cousins Properties Inc (CUZ) 2008 Q4 法說會逐字稿

Good day and welcome to the Cousins Properties Incorporated fourth quarter 2008 conference. 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. Please go ahead sir.

Well thank you. Good morning everyone. It's Tom Bell, Chairman and CEO of Cousins Properties. With me today are Dan DuPree, our President and Chief Operating Officer; Jim Fleming, CFO; and Craig Jones, our Chief Investment Officer.

Welcome to our fourth quarter conference call. At this time I will call on Jim to review the financial results for the quarter.

Thank you, Tom. Good morning everybody. Thanks for 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, 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 (technical difficulty) on the investor relations page of our website at www.CousinsProperties.com.

This quarter we reported FFO of $0.20 per share compared with $0.41 last quarter. I would like to highlight the factors that contributed to the difference. You can follow by looking at our supplemental package beginning on page eight.

Rental property revenues less rental property operating expenses from our properties increased slightly between the third and fourth quarters. Our office properties held up well in the fourth quarter but our retail properties suffered from the effects of the current economic environment.

Operations at 191 Peachtree continued to improve as economic occupancy increased. However, the Wachovia lease expired on December 31, 2008 as we had anticipated. So we expect rental property revenues less rental property operating expenses to decline in the first quarter of 2009 and then increase later in the year as additional tenants take occupancy.

FFO from Terminus 100 increased $627,000 in the fourth quarter due to an adjustment in operating expense accruals. One Georgia Center increased $314,000 between the third and fourth quarter as a result of increased parking revenues and a true-up of operating expenses.

At our retail properties, The Avenue (inaudible) decreased $380,000 in the fourth quarter as a result of an increase in reserves from accounts receivable. San Jose MarketCenter decreased $333,000 in the fourth quarter from an increase in reserves for tenant receivables and adjustments to true up our revenues for common area maintenance expenses passed through to tenants.

The Avenue Forsyth decreased $460,000 in the fourth quarter from an increase in nonrecoverable expenses, a decrease in rental revenue from tenants paying percentage rent and an adjustment to straight-line rent on a ground leased out parcel. And Tiffany Springs MarketCenter increased $276,000 (technical difficulty) continued on this newly developed property.

We had no out-parcel sales in the fourth quarter versus two that closed in the third quarter which caused a decreased in FFO from out-parcel sales. FFO from tract sales decreased $1.2 million because the third quarter contained three joint venture tract sales while we sold only one CL Realty tract in the fourth quarter.

Other joint ventures decreased $753,000 as result of a $325,000 impairment charge on a residential project in CL Realty and higher expenses associated with property taxes and carrying costs at certain residential projects. Multi-family FFO decreased by $851,000 because we closed four units at 10 Terminus in the fourth quarter compared to nine in the third quarter. In addition we closed three commercial units at 50 Biscayne in the fourth quarter compared to the third-quarter closing of [the balk sale].

Development income decreased $13.1 million because we received a $13.5 million fee in the third quarter. Management fees increased $684,000 primarily as a result of an increase on out-of-pocket expenses incurred and [billed] to the third-party managed properties and leasing fees increased $1.3 million as result of leases signed at buildings we managed for third-party owners in Dallas and Atlanta.

General and administrative expenses decreased $249,000 in the fourth quarter as a result of a true-up of our bonus accrual and a reduction in long-term incentive compensation expense. For the year, our G&A expenses before capitalization decreased by $3.6 million, in large part is a result of a reduction in non-property personnel.

We continue to review our staffing and other discretionary costs in this challenging economic environment and seek to maintain a balance between cost control and maintaining a staff of talented real estate professionals who can allow us to act on opportunities in this environment and position us to take advantage of future opportunities that we expect to find when market conditions turn more favorable.

Interest expense increased by $2.1 million in the quarter primarily as a result of a decrease in capitalized interest because of lower levels of development activity in our residential projects and completion of other development projects. The impairment loss of $2.1 million represents the write-down of our 10 Terminus condominium project to fair value.

In the fourth quarter we finished construction of 10 Terminus and had all units substantially complete and available for sale. Accounting rules for projects held for sale stipulate that they be recorded at their fair value. While we believe this project will be profitable, in fact, we recorded net gains on units sold in the third and fourth quarters, we expect to hold the units longer than originally planned because of current market conditions.

Because the discounted cash flows over the expected holding period are less than our carrying value, we were required to report an impairment charge. If our original assumptions of pricing and cost prove to be correct, we will recover this impairment charge in profits as we sell future units.

Income tax changed from an expense of $916,000 in the third quarter to a benefit of $4.3 million in the fourth quarter primarily because our taxable subsidiary, Cousins Real Estate Corporation, had a net profit in the third quarter due to a $13.5 million development fee but had a net loss in the fourth quarter due to low lot and condominium sales as well as lower interest capitalization.

Joint venture FFO was $352,000 higher in the fourth quarter as result of the commencement of operations of Palisades West and the continued lease-up of the recently developed Avenue Murfreesboro. And finally, preferred stock dividends decreased in the fourth quarter because we repurchased 1.2 million shares of our Series A and B preferred stock during the quarter.

I would like to bring a few items to you your attention in our supplemental package. First as I just mentioned, we bought back 1.2 million shares of preferred stock last quarter.

This was a very attractive buy with an average yield of over 14%. Each year this yield on our investment will be a benefit to our FFO.

We also considered repurchasing common stock but did not make any purchases last quarter. Our common stock is selling at very attractive prices and buying it today should be accretive over time.

However any of these purchases would have been made with additional debt and we chose not to take on additional debt in today's environment. We will continue to balance these considerations as we go forward.

Retail same property results were down just over 11% between the third and fourth quarters and just over 2% for the year. As I just noted when commenting on revenue changes at specific retail projects, most of this decrease is the result of conservative reserves on tenant receivables.

While we hope we can recover some of these amounts in the future, they are indicative of the difficult economic environment in which we live today. You may also have noticed that our overall leasing percentage for operating retail properties decreased from 91% last quarter to 84% this quarter.

4% of this drop it is because development properties are not included in this calculation and the Avenue Murfreesboro as well as Phase II of the Avenue Carriage Crossing transitioned from properties under development last quarter to operating properties this quarter. The remaining 3% drop was because we experienced declines in the Avenue Carriage Crossing, Northpoint MarketCenter, The Avenue West Cobb and Los Altos MarketCenter mainly due to bankruptcies of Circuit City and Linens 'N' Things which rejected leases at these locations in December.

You can see in our supplemental package that we have about 10% of our office leases expiring in 2009 with another 4% expiring in 2010 while our retail expirations are 3% in '09 and 2% in '10. 2009's 10% rollover in office is consistent with the ten-year average lease term and it's generally a very manageable number.

But in today's economic environment, it will take more work than usual to release office space. The larger blocks of this space are in downtown Atlanta at the American Cancer Society building and in the Alpharetta and Northpoint market north of Atlanta.

At the American Cancer Society building, we're working on direct leases with two subtenants which would take care of 58,000 square feet and we will need to find another user for the 139,000 square feet of AT&T lease space that expires in September. In Alpharetta, we're hopeful we will be able to renew about half the lease space. Taking care of these lease expiration is part of our overall leasing goals for 2009.

A question came up last night about our fixed charge coverage ratio which is at the bottom of page seven in our supplemental package. Fourth quarter number is 1.52 and the question was whether we have a [concern] under bank credit facility which requires a minimum coverage of 1.5.

The ratio in our supplemental package is calculated using GAAP numbers and we have been publishing this number for as long as I can remember. The idea is to give an indication of how we're doing from our published numbers.

But the bank calculation is different because our credit agreement provides a number of adjustments to FFO as well as exclusions from fixed charges. We haven't finalized our bank compliance calculations but our preliminary estimate for the fourth quarter is 1.80. It's also important to understand that the ratio required under our credit agreement is calculated on a trailing four-quarter basis and our estimate for the past four quarters is 2.23.

As we discussed on the last call, refinancing risk and liquidity are serious concerns for some real estate companies today. I want to reiterate that in 2009 we have maturities of only $8.6 million consisting of several small loans.

In 2010 our two largest loan maturities are The Avenue Murfreesboro of which our share is $55 million and San Jose MarketCenter which is $83 million. Both of these loans had extension options into 2011 although there are conditions we will need to meet to qualify for the extensions.

The only other significant loan repayment obligation we have in 2010 is a $23 million loan on Meridien Market Plaza but we believe the cash flows from that property would support a significantly higher loan amount. At the end of the year, we had approximately $83 million in cash.

Since we have construction loans in place for both Murfreesboro and Terminus 200, this cash is sufficient to fully fund all anticipated development costs and capital expenditures through 2009. We will maintain this cash as long as we feel it is appropriate given the credit conditions in the overall market. And of course while we have cash on hand, our credit facility balance on our interest expense will be somewhat higher. But we feel this is a cost worth incurring in order to ensure our ability to fund all of our obligations.

To mitigate our exposure to floating-rate debt, we executed two interest rate swaps during the fourth quarter with a combined notional amount of $150 million. These swaps effectively fixed LIBOR (technical difficulty) the underlying rate on most of our floating-rate debt at an average rate of 2.84% for two years.

I also want to reinforce the comment we made last quarter about our credit facility. Due to the cash we have on hand, we don't anticipate needing to draw on our facility this year for any existing developments or capital needs. So it's available for other opportunities.

None of the financial covenants under the credit facility are tied to our stock price and we are in good shape today with the covenants under this credit facility. All of this puts us in a much better position than many of our competitors as we look ahead to 2009 and beyond. With that, I will close our remarks and turn it back over to Tom.

Thank you Jim. For those of you have known me for a while understand I'm not exactly the glass is half full sort of person. So over the last couple of years, we've worked hard to reduce risk and to get our financial arrangements in the best possible shape. Today I think everyone would agree we are well below the half full point and so I'm very glad that we were able to sell a significant number of our assets during the boom and restructure our debt and credit facilities in early 2007.

As a result as Jim says, we are in a much better position than many real estate companies to deal with today's downturn. Our stock price declined considerably towards the end of 2008 along with the rest of the REIT market. And after recovering a bit, it has now dropped again.

Despite our asset sales, special dividends and healthy balance sheet, our stock price has fallen off pretty much in tandem with the rest of the REIT stock and must say I'm disappointed the equity markets are not differentiating between real estate companies at this point in the cycle. Given the unbelievable market turmoil we experienced in 2008, it turned out to be a decent year for Cousins.

We were relatively successful in both leasing the space in our current properties and reducing our expenses and our land and asset sales were right on plan. While we didn't move forward with any significant new developments or distressed acquisitions in 2008, I think that has turned out to be a good decision as prices continue to fall.

And while we continue to look for either distressed acquisition or development opportunities, so far we just haven't seen new projects on either front where we felt the risk-adjusted reward was worth pursuing. I look forward to a time when we can once again talk about value creation but it's hard to say when we will get there.

Our key focus in 2009 is largely the same as in 2008. Continue to lease the remaining space in our development projects, keep occupancy high as possible in our existing properties, keep our overhead as low as possible while retaining key talent, conserve capital to be able to take advantage of opportunities when they are presented and continue to look for distressed acquisitions and potential developments opportunities that meet our high standards. This morning I would like to talk a bit about each of these objectives.

We spend a lot of time these days at Cousins focused on leasing. In our operating office properties, we have done quite well, ending the year at 97% leased versus 92% at the end of last year.

We had a number of transactions that helped us accomplish this including our sale of 3100 Wildwood and some good leasing victories at Northpoint. Since the office leasing business is mostly a local business, our long established relationships and high-quality assets continue to help us do better than most of these difficult markets. As the recession continues and affects more and more businesses, we could see some fallout from our office tenants but so far things are holding up quite well.

On the office development front, our most important leasing effort of course is Terminus 200. Our office space at Terminus 100 is fully leased and we have some great amenities at Terminus.

I think now Terminus is generally thought to be the top office location in Buckhead. But with the economy where it is and with all the buildings coming online in Buckhead over the next twelve months, most tenants have been playing the waiting game and it's been very difficult to get tenants to commit.

We're currently working with several prospects at Terminus 200. Our goal is to have the building 50% leased by the end of 2009.

All I can really say at this point is we will continue to do what we do at Cousins, relying on our strong leasing team and our relationships to lease the building. We do hope to have some leases to report in the first half of the year and we will let you know where we stand on our next call.

Our 191 Peachtree building continues to be a success with leasing now up to 74% after the long anticipated Wachovia termination at the end of last year. Our momentum here remains quite strong because we're able to offer one of the best buildings in the market at a very compelling price.

Our lobby renovations are now complete with El Molino, our high-end Italian restaurant opened, along with 191 Bistro and our coffee bar and the health club is on track to begin operations midyear. And even in today's market, we continue to see a good stream of prospects for 191 and we signed a new half-floor lease with a law firm in December and we're working with several prospects ranging from the 7,000 to 50,000 square foot level.

Retail leasing on the other hand is going to be more challenging in '09 as we all know retailers had a difficult year last year. Their prospects at least in the first half of '09 don't look much better.

In the fourth quarter we had a decline in our leased operating portfolio basically because of Circuit City and Linens 'N' Things bankruptcies. And suffice it to say, we will have our work cut out for us in holding onto an increasing occupancy in 2009.

We continue to monitor the health of our entire retail portfolio on a regular basis, paying close attention to and anticipating and mitigating tenancy issues wherever possible. Despite all of the retail turbulence in 2008, we successfully signed 304,000 square feet of new and renewed retail leases and with a great deal of focus and effort, we hope to be able to do this again in 2009.

The initial phase of Avenue Forsyth finished the year 56% leased and 60% committed. And we were able to sign 76,000 square feet of leases in 2008 at The Avenue Forsyth. But unfortunately we also took a step back late in the year in losing a 20,000 square foot Circuit City store at the end of December.

We're currently in discussions with several possible replacement users as the size, layout and location of this space is very attractive. We are also seeing some demand for our second story office space at Forsyth and we signed an 8500 square foot lease in December.

The overall Tiffany Springs project finished the year at 89% leased. During 2008 we signed 42,000 square feet of new leases.

On this project and in the fourth quarter, we executed four smaller leases totaling 13,000 square feet and received a new lease commitment for 3000 feet. We have about 66,000 square feet left to lease at Tiffany Springs.

At The Avenue Murfreesboro, we had 75% leased and 77% committed on the phases built to date and we have about 188,000 square feet left to lease. We don't see a lot of opportunity in 2009 in our residential markets.

We sold 199 lots in 2008 and there is significant overhang in our markets from completed lots and local homebuilders are having a hard time getting bank financing. But I don't expect to see much pickup this year.

On the condominium side, we have only one project at this point and that is 10 Terminus Place at Buckhead. In today's financing market, it's quite difficult for buyers to sell their existing homes and to give financing on new ones.

So our sales have been slow, closing just 13 units since our completion in August of 2008. However 10 Terminus has access to all the Terminus amenities and our value proposition is substantially better than our competition. So to date, none of our units have been sold at a discounted price and some are even sold above our proforma.

We still have 16 units under contract and we expect to close many of these as soon as buyers secure financing or sell their existing homes. The key issues for us at 10 Terminus are the buyers fear of further price deductions in this difficult residential market and of course unit financing. We're working on two programs here at Cousins to deal with these issues.

Jim talked about our overhead and I just want to say that this is something we're very aware of we're working to reduce it wherever possible. We have cut our non-property headcount by about 25% from the end of 2007 and we have also made significant reductions in our discretionary spending.

In order for us to succeed in the long-term, it's important that we maintain our strong team to the degree possible. So far even with the cuts we've made, we've been able to keep a very talented core group of people.

We have increased our fee-based activities for third parties to help keep our people fully occupied and produce additional revenues. Some of our most recent fee-based projects include the Center for Civil and Human Rights in Atlanta and the Green Line, a major redevelopment plan sponsored by Central Atlanta Progress.

In November our Board decided to reduce our common dividend from $1.48 a year to $1.00. Given the current credit environmental and today's premium on liquidity, the Board felt it would be wise to have more cash available both to reduce leverage and to pursue opportunities when they become available.

It did not reduce the dividend below $1.00 because it wanted to make sure that our dividend fully covers our taxable income. Later this month we'll have another Board meeting and I'm sure the directors will take up the issue of a possible partial stock dividend which several REITS have already announced including two of the largest.

On the opportunity side, I'm sorry to say it's the same old story and I'm starting to feel a bit like a broken record. Debt markets remain constipated with the result of very little transaction activity.

And while I still believe the severe downturn will lead to some unprecedented buying opportunities at some point for companies like ours who have cash and access to capital, unfortunately to date we just haven't seen any distressed acquisition opportunities that meet our standards. We've been focusing on this throughout 2008 and we have two of our very best, Craig Jones, our Chief Investment Officer, and David Nelson; working in this area almost full-time. We're going to keep looking and at some point I'm confident we will begin to see some very good opportunities.

I wanted to conclude by recapping where we are. As Jim pointed out, we have more than enough cash on hand to fund all of our expected needs in 2009 and we have about $200 million available in our credit facility to use for opportunities as well as good access to additional joint venture funding for acquisitions.

Our debt maturities over the next couple of years are manageable and we continue to have good relationships with our banks. So we will keep doing what we have been doing --focusing on our leasing and overhead efforts where they will have the greatest short-term impact on our Company and keeping an opportunistic eye on acquisitions and development opportunities that will provide the best long-term value creation for our shareholders.

With that, I'll turn it back and ask for any questions. Your questions please.

(Operator Instructions) Sloan Bohlen, Goldman Sachs.

Hi guys, I'm here with Jay as well. Just a quick question on the retail reserves taken in the quarter. Are those specific to particular retailers? And then more broadly speaking, can you give us a sense of what your rent expectations are for what the marked to market could be on if those spaces become available again?

Let me answer the first part of that, Sloan. This is Jim. They were on specific tenants. They were done property by property.

They tended more to be smaller tenants, more local tenants. And we feel that we have been conservative about those but we generally -- where we had tenants that hadn't paid us, we reserved those. The second part really was -- had to do with where we're going to come out on leasing.

Sloan, the question is how we expect vacant properties leases to roll down or releasing to roll down?

Yes.

Okay. You know, it depends very much on the tenant and the center. But if you wanted to make sort of a generic, across-the-board prediction, I would say in 2009 5 to 10% rolldown.

Okay and then if you could answer a similar question on the office portfolio and then specifically for the AT&T lease.

Once again, office portfolio depends very much on the asset and the market. Most of our office leases are long-term, 10 years generally, generally include 3% bumps. So by the end of the lease term, the leases are quite high.

(multiple speakers) on the AT&T lease -- so you can expect some rolldown there and once again, it's very asset specific. But I would say if you had a 10-year term on a newer building with 3% bumps, you'd have to expect to see rolldowns in the 10% range.

On AT&T specifically, however, that space was leased at a very low rate. Remember, we bought that building basically out of a foreclosure at a very attractive price and had a 300,000 square foot lease with AT&T. Prior to closing, I think we actually made the lease. So that one has a good chance of rolling up.

Hey guys. It's Jay. I had a question on the retail. You mentioned the small shop space.

Can you give us a sense of the types of retailers? Is this local retailers? Are these mom-and-pop type locations? What are you seeing in terms of trend?

Is there any specific category that's being affected more so than others? I guess I'm asking in the context of Q4 retail sales as we all know were so abysmal and sort of the implications for the latter part of the year.

Yes, I think that we for instance signed -- or had three new commitments in the last week for Avenue Murfreesboro. So there are still tenants committing. So it's definitely tougher.

One of the things that we're seeing that's interesting and I have to admit we've been working at it is moving top local tenants who generally do perceive themselves as an Avenue customer into Avenues. We're having some success there and I think that is probably going to work out pretty well. The fashion retailers I think are having the most difficultly and you don't see hardly any expansion on the part of fashion retailers.

Now are some of the losses here due to the losses of big boxes or is this just simply small tenant fallout.

Our losses are almost exclusively Circuit City and Linens 'N' Things.

Just switching gears for a moment, can you talk about your land inventory? It looks like the pace you're going, it's possibly a 10-year inventory with $120 million at this point. Can you give us a sense of just valuation there and what you think -- how that could be tested going forward?

Well the land inventory breaks into several different pieces. We have land that we hold for development, for commercial development. If I had to guess -- and sometimes we entitle that and sell it to other developers and sometimes we develop it ourselves.

So that's probably a three to five-year cycle I would say. Other land is in developed or partially developed residential properties and I think we have 23 currently, in partnership mostly with our Four Star partner. And those are dependent on when the markets come back and I would say that's probably -- if the markets come back in '10 as we expect they will, that's publicly a three or four-year process to sell those lots out.

And we take a close look at those every quarter obviously to see if we need to take impairment and thus far with one exception, Jim, discussed as to our single-family residential business, we have only had one situation because our basis is pretty good in most of those properties. And then the third category is big tracts of land, some in Paulding County, about 6000 acres plus in Paulding County that we own with Four Star.

That land by large will get sold off in big chunks. It's not going to be developed by us. Some of it will but a large portion of it will not. When that comes back, I suspect that land will sell pretty quickly.

And as you know, we have very little basis in that land and the last time we sold some of it, we sold it in the 10,000 to $12,000 an acre range. So we're not too worried about that.

So it sort of depends. I think if you wanted to put an aggregate number on it, probably depending on the property type, three to eight years and thus far we don't see any impairment in the vast majority of it and in fact think there are significant gains in most of it.

Okay, that's helpful. And then back to Jim just for a second, the fee income you had referenced, obviously the third quarter you have the big onetime item. Can you give us a sense of as you look at the level for 2009, clearly the $48 million number is probably not sustainable. Is even the prior year number, $36 million, realizable?

I think what you have to do there, Jay, is to take away the $13.5 million fee that we got in the third quarter. You'd also need to take away the commission that we paid that was I think $3.4 million in the third quarter to a more normalized level. It's hard to say where we're going with the business but I think really '08 was pretty consistent with '07 if you take those out.

Our third-party business is looking pretty good actually and it continues to grow. You know, it's a little bumpy because of leasing. A couple of big leases, you get a 2 or $3 million dollar hit.

What we are doing is we're seeing a lot more opportunities to use our development talent in fee-based situations where you have financial institutions or organizations who need help in finishing up projects or trying to figure out what to do with projects that either have got or they think they're going to get back. And so we're pursuing that pretty hard, trying to keep our development team busy and paid for while we go through this downturn.

And, Tom, just sticking with you, you mentioned obviously not seeing the opportunities yet. But give us a sense of what sort of return you need today. Is it sort of mid to upper teens? Where are you seeing the -- where you want to deploy capital I guess in this market?

I think on an unleveraged basis, if we could see something that has got a 13% unleveraged IR, we would probably take a hard look at it. Of course you've got to take a really hard look at risk. So the underwriting would be very strict and on a leveraged basis, high teens, low 20s.

Ian Weissman, Banc of America.

Hi, yes, good morning. Just one or two questions.

Tom, you talked in the past about the challenges of dealing with these co-tenancy clauses in your retail portfolio. I'm not even sure there is a way to quantify it but in this environment I have to imagine that is even a bigger challenge. How much of sort of this occupancy issue is related to that co-tenancy situation?

Well, none of the occupancy issue is related to co-tenancy. But you know co-tenancy is an issue for all retail landlords because over the last I would say five years, it's become basically a part of every lease that you sign at a mall or a lifestyle center.

So we are very proactive on our co-tenancy issues. We schedule them, we stay out in front of them, we negotiate where required. But it's important to remember at least for us, the vast majority of co-tenancies basically have a one year window. In other words, if you follow the low co-tenancy requirements, the tenant has the right to do something; in some cases reduce their rent, in some cases go on percentage rent.

But that opportunity lasts for a year. At the end of the year, they have to make a decision. We call it fishing -- or cut bait. You either have to go back to your original lease or leave the center.

So if the tenant is performing well, in other words, if their occupancy costs are reasonable as a percentage of their total sales per foot, they're not going to go anywhere and they usually revert back to their original lease. If the tenant is doing poorly, then you know you try to get out of in front of that process so that you have some good prospects for releasing that space because you can assume that they're probably not going to stick around when they have to make that decision.

Or conversely if you think the retailer has a good shot in the future, their problems are temporary, then you might renegotiate something for another year. So I think some people have the mistaken impression that this is forever. Fall below co-tenancies and the tenant has the right to leave the center immediately or the tenant has the right to reduce their rent forever. That's generally at least in our case not evident in our leases.

Okay, so they have a year to make a decision but -- so you've lost a number of boxes, large boxes in the last quarter or so -- Circuit City, Linens 'N' Things and what have you.

The tenants that surround -- or in those centers potentially within the year though could -- I don't know how their leases are written and if there's co-tenancies in those specific centers. But say they are. You might actually see occupancy dip because they're going to move out towards year-end. They have a year to do it, right? (multiple speakers)

They have a year to make that decision but those particular -- Linens 'N' Things, they've had some co-tenancies associated with it. But it's usually -- most co-tenancies are you have to have five of the eight or three of the six in your centers.

It doesn't -- one retailer leaving does not generally create a waterfall of co-tenancy issues. It would take more than that. And then Circuit City is generally not on most lists.

Okay, I mean looking into sort of your crystal ball, if you had to look out year-end '09, where do you think retail occupancy ends the year?

I don't have a crystal ball anymore. But you know, I would say somewhere between 80 to 85% leased.

Okay, so we could lose another couple hundred basis points and maybe win some battles and be a little bit higher from here?

I think if we ended the year where we started the year, we would feel pretty good about our activities for the year.

Okay and finally one question on Terminus 200. It has been -- you've been marketing this space for a while now. I know there's a lot of product out there. Are you or your peers who are building new product capitulated on face rents yet and if so, how much?

I can't speak for our peers but we have not and I would guess most of the guys are trying to hold their face rent. We have seen TI allowances go up and free rent go up a bit. But until somebody actually signs a lease so that we can sort of get a picture of what the environment looks like at least in that building, it's going to be hard to say. I can say that with the three leases that we are in deepest discussions with so far, face rates have stayed about the same and TI has moved up 10 to $15 a foot and free rent has been extended.

By how much?

Not the same in every case but I would say about 30, 40%.

And just finally, what type of tenants are kind of sniffing around for space and how much space? Are we looking at people looking for 5000 square foot blocks or there are much larger users out there?

No, these are 50,000 to 100,000.

In what industries?

Technology, law, consulting.

Chris Haley, Wachovia Securities.

Jim, on the retail reserve, did you offer a (technical difficulty)

I can't hear you Chris.

Can you hear me now?

A little better.

On the reserving amount, did you offer reserving for retailers? Did you offer an amount?

We went through it property by property. So I think you can tell -- you can also look at it on a property by property basis in our NOI in our supplemental. So, yes really -- I'd be glad to walk you back through it if you want to after the call but I think we went through it item by item for the different properties.

That would be helpful. When we think about the forward quarterly run rate off of the assets where reserves were taken or where occupancy was impacted due to bankruptcy which typically occurred in December, is it fair to say that the run rates on these assets, the retailing assets, will be equal or lower in the first quarter?

There's a combination of two things, Chris. One of them will be repeated and the other one will not. The one that will be repeated is we do have reserves in there for Circuit City and Linens 'N' Things. So that as we go forward, there's one Circuit City that will continue through the first quarter. The other two have been terminated and the Linens 'N' Things are gone. So, yes, that will continue.

For the smaller tenants, wherever smaller tenants have not paid us rent, we reserve the rent. And so we're hopeful that we will be able to recoup some of that and collect rent on that space. So that should if things work out the way we hope, that would not repeat and in fact trend in the other direction.

So there's two things working against each other, Chris, and I don't want to get into the issue of predicting what our revenues are going to be next quarter. But those are really the two factors to keep in mind.

You know, Chris -- it's Tom. I probably should have said this earlier. There's a lot of focus on retail obviously because all of you know that retailers are having a really hard time.

But it is important to remember that about 25% of our NOI comes from retail. So if we lost half the tenants, we're talking about 12.5%. So I don't want people to be overly concerned about retail.

Thus far by being aggressive and preemptive and paying attention, we have been able to significantly improve our retail situation in terms of helping tenants stay in the centers in business and helping them have a successful business in our centers. That's what we will continue to do.

Thank you for that. And I would agree your office NOI is about 2.5 times your retail NOI. However that was -- obviously we can focus on the cautionary signs which occurred in the quarter. I just want to understand what type of run rate we're looking at it into the early part of 2009 knowing that you do not provide guidance.

Well one thing I will say, Chris, on that is we talked in our last call about Circuit City and Linens 'N' Things. I think if you refer back to that, that will give you a little bit of help.

We said on the last call that we had four Linens 'N' Things leases. Those are now gone and then our total exposure to Linens 'N' Things was $978,000 on an annual basis for both face rent and reimbursements. And then Circuit City, we had three stores and the total exposure to Circuit City was $606,000.

The reserving though is a new piece of information which few have been able to offer specific details on. We should see that in your balance sheet, correct, though on the left-hand side in terms of receivables and delinquencies? Is that correct? Will that be detailed in your 10-K?

Chris, I don't know that it's large enough to be material. But clearly in the MD&A section of the 10-K, we will talk about retail trends and what we are seeing and what is going on with our tenants.

A bigger picture question, Tom. Recognizing that you don't have your crystal ball anymore, I will ask anyway.

We have various ideas and proposals regarding federal funding and intervention on the debt markets. When you think of trying to invest capital at an attractive risk-adjusted rate of return, the hardest part of that is really looking at the risk. Could you offer your view as to what positives short-term or long-term you view or negatives you view of intervention on the real estate debt markets?

Well I think the markets today, Chris, remain basically frozen for several reasons. The most obvious is that most financial institutions have too much real estate on their books and too much bad real estate.

But another big reason in my opinion is that nobody knows what the government is going to do, so nobody is willing to do anything until they get some clear signals from the government. And since the signals have been changing about every 30 days, it is hard for them to really commit to anything.

We have had two or three projects that Craig and his folks have been looking at that we have had some interest in, looked like they were moving along. But then the government would come along and do TARP or talk about some future program they might do and then the financial institution would withdraw and say well no. I want to see what this is going to look like.

So I had breakfast this morning with a major homebuilder who told me that his sales which had been actually improving had suddenly stops because nobody wants to buy anything unless they -- until they see whether they are going to get a $15,000 tax credit or not. So there are unintended consequences in the government's actions and I think that caused the markets to stay frozen pretty tight.

Personally, having no benefit of a crystal ball, I think in the second half of the year most of this gets resolved, that we will see a debt market. It's not going to be very pretty but we will see a debt market working within the real estate world and we will begin to see transactions.

So I would guess those transactions will look pretty ugly. And that is sort of what we are thinking here. Second half of '10 when some of this debt starts to roll over, some of the debt that was actually held in financial institutions that never got into the CMBS pipe starts to roll over, we will see some opportunities.

The CMBS debt, our view on that is it's going to be very, very difficult. In fact we don't really know how those credits are going to get resolved one way or the other and we think that is possibly going to slow the process down a bit.

Okay, last question on Terminus. You're looking at a 50% lease rate by year-end 2009. Is that correct?

That is correct.

I understand that there have been some leases or at least 3344 is moving up your leased rate. I believe they're doing well. That's obviously been a project that's been in the market for a while.

But we understand that there are several reasonable sized tenants [in our market] in the 50,000; 60,000 square foot range and you mentioned three. I am assuming they're all playing the assets off of each other. When would you -- what do you think has to happen to get these folks off their chair?

The ones that are going to make a decision are the ones that have to move. I mean, two of these three that we are talking about have an immediate issue. They have to make a decision pretty soon one way or the other because they have to move out of the space that they are in.

The third one has a little more time. But I mean, I think that is basically what it is. You'll see leases getting made when tenants have to move. And there are a couple of other big tenants out there -- what was it -- Zurich -- was that the name (multiple speakers) Munich RE I think is close to signing a lease not with us because they have a situation they have to get out of.

Marsh is now back into the market. I assume Marsh will probably stay where they are if they wanted to. But I think that is what you're going to see first. Tenants in the Buckhead market or in any of the Greater Atlanta markets who have a situation where they have to move by X date and they're looking at Buckhead -- and that is one of the interesting things going on.

We have tenants looking at Buckhead now who have not normally looked at Buckhead because they think it's going to provide them with a more attractive value. So once we see some of that and we see the market sort of gets set as to pricing, then I think we will see some more activity.

Frederick (inaudible) Green Street Advisors.

In regards to the write-down of 10 Terminus, can you walk us through your thought process and assumptions there?

The issue there as it was with the one single-family project where we had a write-down was that we had everything complete. So we had all the units substantially complete and available for sale. And when we got to that point, we were required to mark them to fair value.

We still believe as I said a few minutes ago, we still believe this'll be a profitable project. But when you come up with a fair value in today's market, you've got to apply some discounting of the cash flows. We assume it will take us longer than we had originally anticipated to sell the units.

And so we -- the accounting rules are fairly arcane. I won't get into them. I think the more logical way to think about this is that you take the cash flows that you're expecting from sales of units and you discount them to a present value at an appropriate discount rate. You do that and we had a small impairment. So it was as we said, $2.1 million on a little bit over -- we had about a $70 million number on our books at this point.

What kind of discount rate did you have to use?

Well now you're going to force me to get into the accounting rules. Actually the way you do this is you go through a number of different scenarios.

You take a base case and then you construct some others to take the risk out of the equation and what we did there was to assume extended periods. And even though we don't anticipate it, we assumed some discounting on the pricing. And when we did that, you then -- you discount that at the risk-free rate.

That's the way the accounting rules work. It's a complicated analysis. I would say it is the equivalent based on our proforma is probably low teens in terms of the discount rate.

Okay, in regards to the decision to buy back (inaudible) preferred, can you walk us through how you evaluate this capital allocation versus buying back your common versus retiring debt or any other options that are available to you?

Sure. It is an art, not a science. We're not in the position as some REITs are where we have public debt out there that could be bought at a discount. So really retiring debt would be negotiated with lenders and it really wouldn't -- that really isn't the same kind of opportunity you'd find with some REITs that have got public debt.

We also don't have any convertible securities out there to go buy. So really for us, the choices are common or preferred. In either case, you have got to go use debt which would come from the line of credit typically and we will ultimately have to repay in 2012. It is a very low interest rate on the debt but we will have to repay that and redo a credit facility by 2012. So you've got a somewhat short-term issue.

You will have positive arbitrage because you can borrow money on a credit facility at a low rate, but you're having to use up your credit facility borrowings and take on debt. So it is a balancing act.

For the common, it looks to us like a great value. It should be accretive over a long period of time. The nice thing about the preferred is that it is accretive in the short-term as well as the long-term and it helps our fixed charge coverage ratio under our line of credit test because it counts as equity and not debt for that purpose. So we did a modest amount and we will keep balancing these issues as we go forward.

Obviously (inaudible) about what you perceive to be the value of your common versus where it is trading at. Is there a point at which though it could be interesting for you to actually issue equity in order to take advantage of future opportunities you might see? And at what kind of prices do you think it would be reasonable to do so?

I think the answer is yes. It is something that we think about and I wouldn't want to comment on the pricing issue.

Just one final question. You seem to have lost some more residential land or residential tracts in suburban Atlanta. Can you give me -- could you explain the thought process behind that acquisition?

Yes, we bought the land at about 50% of its value and we have a builder who is still building and selling homes quite successfully who wants to build on it. So that is what we did and we've sold the first two and basically the plan is he builds two and we keep two out there in front of him at all times and we will work through it over the next 18 months or so.

Where is it at in terms of infrastructure at this point?

It's completed.

(Operator Instructions) David AuBuchon, Robert W. Baird.

Just one quick question. I'm assuming you looked at debt in terms of your investment alternatives. Can you just describe your thoughts behind that?

Dave, we had a little trouble hearing you but I think the question was have we looked at debt as an investment for us and describe the thought process. Is that right?

Yes.

We have looked at a couple debt issuances, most specifically on buildings that we used to own. But we haven't (inaudible) anything yet that we felt met our -- fell within our risk-reward parameters.

(Operator Instructions) there are no further questions. I would like to turn the call over to Mr. Bell for any closing remarks.

Well thank you everybody for joining us once again. As always, if you have any other questions, feel free to call Jim or me or any of us and we will answer them to the best of our ability and we will see you next quarter. Thanks for participating.

Ladies and gentlemen, this concludes the Cousins Properties Incorporated fourth-quarter 2008 conference call. Thank you for your participation and you may now disconnect.