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Operator
Ladies and gentlemen, thank you for standing by.
And welcome to the Cousins Properties Incorporated first quarter 2010 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 Tripp Sullivan of Corporate Communications.
Please go ahead, sir.
- Corporate Communications. P
Thank you.
Good afternoon.
Certain matters the Company will be discussing today are forward-looking statements within the meaning of Federal Securities Law.
For example, the Company may provide estimates about expected operating income from properties as well as certain categories of expenses.
Actual results may differ materially from these statements.
Please refer to the Company's filings with the Securities and Exchange Commission, including its annual report on form 10-K for the year-ended December 31, 2009 for a discussion of the factors that may cause such material differences.
Also certain items the Company 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 rates related reconciliations may be found through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of its website at www.CousinsProperties.com.
I'd now like to turn the call over to Mr.
Larry Gellerstedt.
Larry?
- President and CEO
Good afternoon.
I'm Larry Gellerstedt, President and Chief Executive Officer of Cousins Properties and on the phone with me today are Jim Fleming, our Chief Financial Officer, Craig Jones, our Chief Investment Officer and Steve Yenser, our Executive Vice President for Retail Leasing and Asset Management.
And I'd like it welcome everybody to our first quarter conference call.
Before I give my thoughts on the business, I'd like to call on Jim to review the financial results for the first quarter.
- CFO
Good afternoon everyone.
This quarter we reported FFO of $0.14 per share, compared to FFO before special charges of $0.11 per share last quarter.
Contributing to this increase in FFO was an increase in rental property revenues less rental property operating expenses.
Over all of our properties, we had a $2.2 million increase in property operations.
Office generated $1.6 million of the increase.
Retail generated $594,000 and Industrial contributed another $89,000.
I'll highlight the significant changes from last quarter, for our office, retail, and industrial properties.
In the office portfolio, 191 Peachtree increased $902,000, primarily as a result of reserves taken in the fourth quarter for uncollectible accounts.
Looking forward, we expect NOI from this property to remain consistent with the current quarters run rate, and to increase slightly in the fourth quarter.
These estimates are below those we gave you last quarter as a result of slower leasing momentum for the remainder of the year and an increase in concessions needed in today's market.
Terminus 100 increased by $768,000, due to the reserves taken in the fourth quarter and 100 North Point Center East increased $103,000 from the last quarter.
This property has not yet reached the NOI level we estimated in last quarter's call.
But we expect it will continue to increase during the year, and will end the year between $350,000 and $400,000 on quarterly basis.
In the retail portfolio, Avenue Forsyth increased $692,000, primarily as a result of higher than expected percentage rent from tenants in a co-tenancy situation.
We expect NOI for the next two quarters at Avenue Forsyth to be between $1.2 million and $1.5 million.
And we expect the fourth quarter to be slightly higher than that.
While Avenue Carriage Crossing was lower than the prior quarter due to the collection of previously reserved receivable in the fourth quarter, as well as higher percentage rent, it was in line with the statements we discussed on last quarter's call.
And Avenue Webb Gin increased $180,000 as a result of bad debt reserves taken in the fourth quarter.
In the industrial portfolio there weren't any significant changes in income this quarter, but we have had some significant new leases, which Larry will discuss in a few minutes.
One of the primary reasons for the increase in FFO over last quarter was our outparcels sales activities, which generated $4.7 million in gains.
During the first quarter, we sold nine outparcels in three of our retail centers.
We were pleased with both the timing and pricing of these assets.
The weighted average cap rate on these sales was a little under 8%, which resulted in prices above our initial estimates.
The aggregate proceeds of these sales, $13.4 million, helped advance our goal of deleveraging our balance sheet.
While we will continue to look for additional opportunities to sell land tracts, we don't expect anymore outparcels sales for the remainder of the year.
FFO for multi-family sales decreased by $1.2 million.
But we were pleased at the positive momentum generated by sales of the unit at 10 Terminus during the last half of the 2009 continued.
In the first quarter, we sold 19 units which exceeded our internal projections.
We continue to work toward a complete sellout of 10 Terminus by year-end.
Profits from lot sales increased in the first quarter, as we sold 89 lots versus 39 lots in the prior quarter.
Loss on extinguishment of debt represents the write-off of $600,000 of deferred loan costs, associated with the amendment to our credit facility.
In an effort to simplify our disclosures about general and administrative expenses, we separated out our G&A for Cousins Property Services in our supplemental disclosures this quarter.
You can see the breakout on page ten.
Cousins Property Services is our third party office leasing and management business, headquartered in Dallas and it represents about two-thirds of our total fee business.
Because this line of business is unusual for a REIT, we've received a lot of questions about the associated G&A and you will see that it's been running about $7 million to $8 million per year, excluding reimbursed salaries and benefits.
The remainder of our fee business, is more closely linked with our REIT operations so a breakout of the G&A associated with it would be fairly subjective and we have not tried to do that at this point.
Excluding the Cousins Property Services G&A, as well as separation expenses, admission on development fee and reimbursed expenses which you'll also see broken out on page ten of our supplemental package.
Our normal G&A was at $8 million in the first quarter, which was considerably higher than it was in the fourth quarter, primarily as a result of the reversal of the accrued bonuses that occurred in the fourth quarter.
We expect our run rate for this line item to be around $7.5 million to $8 million per quarter for the remainder of 2010.
Interest expense was up only slightly in the first quarter, however we expect interest expense to increase in future quarters as a result of the increase in the effective interest rate on our line of credit and term loan.
Assuming no significant asset sales or other changes in our capital structure, we expect a quarterly run rate for total interest expense, which is consolidated plus joint venture of between $11 million and $11.5 million for the remainder of 2010.
We had a $1.1 million tax benefit in the first quarter.
We recorded a $3 million tax benefit in the fourth quarter due to a change the tax law related to loss of carrybacks.
In preparing to file the amended returns we determined we were entitled to additional $1.1 million and adjusted our receivable accordingly.
We do not expect any additional income tax benefits or provisions for the foreseeable future.
On the last call, we discussed our focus on reducing recourse bank debt while maintaining flexibility to continue to delever our balance sheet through disposition of non-core income producing properties.
Based on an analysis of our overall capital needs and plans, we determined that we did not need our $600 million credit facility.
But we wanted more cushion in our fixed charge coverage ratio to allow us to be prudent in leasing up our vacant space in selling non-core assets.
We therefore approached the banks to reduce our fixed charge coverage ratio from 1.5 times to 1.3 times.
In exchange for a reduction in the size of our credit facility from $600 million to $350 million, an increase in interest rate and fees, and some other covenant charges -- excuse me, covenant changes, we were pleased with the execution of this amendment, and we appreciate the relationships we have with the group of very good banks.
With respect to our other debt, we continued to work with our banks to extend the Murphysboro construction loan and hope to have something to announce within the next month.
We're also making good progress in refinancing the Meridian Mark loan which matures in September.
I also want to make a quick comment about our dividend.
As you know, this is a Board decision.
And our Board is going to keep looking at it each quarter.
In the near term we expect the Board to continue our approach at paying out our expected taxable income, using the combination of two-thirds stock and one-third cash.
But at some point we'll likely return to and all cash dividend.
We expect our Board will take a close look at this issue at its next meeting in late September.
In the meantime, I view the stock dividend as a good way to continue to delever the balance sheet a bit and possibly provide some offensive capital.
I've had a number of investors ask how I feel about our balance sheet and whether our leverage is at the right level.
I believe there are three factors we need to keep in mind.
The first is our overall leverage, which is 42% based on debt-to-market capitalization and 41% based on our bank covenants.
I think these are reasonable levels and much more comfortable than where we were last year when our debt-to-market cap was as high as 72%.
But I also believe it's appropriate for us to continue to reduce our overall leverage as we sell non-core assets.
The second leverage issue is how our cash flow relates to our debt level.
Fixed charge coverage is a good measure of this, as is debt-to-EBITDA.
Our fixed charge coverage ratio was 1.7 times at the end of last year.
This quarter it moved up to 1.9 times and I'd like to see it move up a bit more.
Because of our equity offering last fall, we reduced our debt-to-EBITDA ratio from 11 times to 7 times, and we're working to reduce this further.
As most of you know, we have a good bit of non-income producing properties as well as a few properties that haven't yet reached stabilization.
Both of these ratios will improve as we sell non-core assets and lease up the assets that haven't yet reached full occupancy.
Our compensation committee made this a priority this February and based our long-term compensation on reducing our debt-to-EBITDA ratio over the next three years from 7 times to 5.5 times.
The third measure I would point out on the leverage topic is our level of recourse debt.
By the end of the first quarter, we had brought our recourse debt down from a high last year of $581 million to $216 million.
We now have a contract to sell San Jose MarketCenter, and with the cash we have on hand, the recent closing of Terminus 200 and assuming we close the sale of San Jose and use the proceeds to further reduce our bank debt, we'll able to further reduce this level by over $100 million.
This will result in a very low level of recourse debt for a company our size.
The markets don't always distinguish between recourse and non-recourse debt.
But if we were able to keep our overall debt at a reasonable level and we have significant unencumbered assets then recourse is what really matters from a risk stand point and we intend to keep this at a much lower level going forward.
Larry will speak in a few minutes about our capacity to pursue acquisitions but I want to make a point on that as it relates to our leverage.
Since we've been making good progress on our balance sheet, I do think we have the capacity to pursue some investments.
And I also believe we will be able to raise additional capital to fund investments through joint ventures and possibly additional equity issuances when it makes sense for us to do those things.
With that, I will close my remarks and turn it back over to Larry.
- President and CEO
Thanks, Jim and thanks again to everybody for being on the call today.
I've had a chance to meet many of you since I became CEO last July.
And as you know, I've worked very hard to focus our company on what I call blocking and tackling.
That includes leasing up the vacant space in our portfolio so that our FFO and coverage ratios improve and our assets are in a position to be financed or sold.
Secondly, increasing our fee business.
And third, selling non-core assets to improve our balance sheet.
And we're making good progress on these things and I want to spend a few minutes going over each of them with you.
After I'm finished with blocking and tackling, I'll talk for a minute or two about our markets, and what we're doing to find new opportunities.
At 10 Terminus Place in Buckhead, the momentum is still strong as we still sell condominiums.
We sold 19 units in the first quarter, which was ahead of our projections.
Since the end of the quarter, we closed another eight units and we have another 13 under contract.
At the time we took the impairment last fall, we had 122 units of the 137 units available, and since that time we closed 72 units and generated $30 million in revenue.
Now, we have about 35 units left for sale.
Our average pricing is holding at slightly over $250 per square foot, which is below our original cost of $350 per square foot but well above our impaired value.
As we've been saying, if this momentum keeps up we should be substantially sold out at 10 Terminus by the end of the year.
I'm also pleased with our outparcels and land sales as we sold more outparcels in the first quarter than we had budgeted for the full year.
The demand in pricing a experienced were encouraging signs that the capital markets have started to heal.
And it's nice to see some real estate investor demand for our properties.
On the land side, we sold one tract at Jefferson Mill to our former partners, Ray Weeks and Forrest Robinson.
And at the end of April, they closed on a tract at King's Mill.
With these two sales, we've now sold one-third of our industrial land.
I doubt we'll sell any more industrial land this year, but as Jim said, we're working on some other land tract sales that may close later in the year.
On the residential lot business, things have picked up a little bit, thanks mostly to Texas.
We still expect to close 300 lots to 400 lots this year versus 142 lots last year and 199 lots in 2008.
This still isn't the pace of almost 2000 lots we saw in peak years but it's certainly an improvement.
We don't expect to sell many lots in Atlanta over the next few quarters.
But we're starting to see some demand in Dallas, Houston and San Antonio and even sold 24 lots at one of our Tampa projects this quarter, which is the first lots in Florida we've sold in the last 30 months.
One last note on the issue of sales, San Jose MarketCenter is now under contract.
The buyer is still in a due diligence period, so I can't comment on specifics, but we're obviously satisfied with the sales price.
We're making some good progress on our industrial portfolio.
Our last three buildings were 44% leased last July.
And the fourth quarter of last year, we leased 156,000 square feet of additional space at King's Mill.
In the first quarter, we leased 223,000 square feet in our Dallas building, and last month, we leased all 459,000 square feet in our Jefferson Mill building.
Our three industrial buildings are now 85% leased overall, and we're in a position to begin looking at options to sell these buildings and exit this, and exit the industrial business.
The retail business, of course, has been tough over the past year, especially in our newer centers that were in lease-up as the recession started to hit a couple years ago.
But we've been making some progress.
In this quarter, we moved ahead a bit more.
Our portfolio has moved up to 85% lease, and as Jim pointed out, we received more rent than we expected from tenants paying percentage rent.
Last year at this time, we had 62 tenants and co-tenancy, representing 332,000 square feet and that number has moved down to 16 tenants, representing 129,000 square feet, or less than 3% of our portfolio.
Even more important, our retailers saw their sales increase substantially in the first quarter, up 8%, from the 2009 levels.
Women's fashions and home furnishings, which are the key to our Avenue properties led the way with sales increases.
As I've said before, we're working hard to get our percentage lease by the end of the year up into the high 80% or possibly 90%.
Leasing office space continues to be difficult in our markets due to the excess supply and the lack of job growth.
Fortunately, most of our portfolio is well leased with little rollover.
We made great progress in Austin this quarter, with an 87,000 square foot lease, with St.
Jude's at Palisades West, bringing the Palisades project to 94% leased.
After that, the vacancy in our operating portfolio is 665,000 square feet based on our ownership share.
And it's really concentrated in two buildings, 300,000 square feet at 191 Peachtree and 140,000 square feet at the American Cancer Society Center, both in downtown Atlanta
At 191, we have leased 939,000 square feet since we bought the building in late 2006.
But we have some more work to do to fill the building up.
We had a 54,000-square foot law firm open for business in late April, and we signed three small leases during the first quarter.
We're also excited about bringing the Commerce Club to 191 later this year.
The Commerce Club is a 50-year old Atlanta club that has been a key business forum for the city, despite being in a location that has difficult access and parking.
It should be a real boost to 191 to have this institution in our building.
In the American Cancer Society Center, most of current vacancy occurred when a Bell South AT&T lease expired last fall.
Fortunately this building has unique characteristics that set it apart from the competition such as large floor place and high efficiency for certain users and we're working with a number of prospects.
Overall, our office -- operating portfolio is 88% leased, and we're hoping to increase that percentage slightly by the end of the year.
That brings me to Terminus 200, our development project in Buckhead.
We've been in discussions with our banks for 18 months about restructuring the loan on this building given the state of the Buckhead market.
Last Wednesday, we closed a restructure that brings in a new financial partner, Morgan Stanley, and gives us an additional two-and-a-half years of loan term, which takes it to December 31, 2013 while providing funding for the increased level of buildout and pre-rent the marketplace is requiring today.
We an our former partner, Prudential, have paid our guarantees under the old arrangement, which had no impact on our financial results, because we had fully reserved our guarantee amount.
Our interest in this property has been reduced to 20%, and we've committed to invest an additional $5.6 million over time with the rest of the funding coming from Morgan Stanley and the banks.
The loan will be non-recourse, subject to customary carve-outs, so our financial exposure will be limited to our $5.6 million equity commitment.
We're excited that we have the opportunity to recognize some financial upside in this property without taking on significant additional financial exposure and of course, we'll be able to earn some management and leasing fees in the process.
Just as important, we're excited to have the chance to complete some leases that have been at a very difficult to resolve until we had the bank restructuring in place.
Last week we announced a new five floor lease in the building and we expect to continue to capture new tenants.
As a matter of fact, we expect to be able to announce shortly four more leases for approximately 75,000 more square feet, which will take the building on an overall basis up to about 40% leased.
We've been getting a lot of questions lately from investors about the Atlanta office market.
And it's definitely a tough one because it's a low barrier market where office demand is driven by job growth and Atlanta has lost jobs for the last two years.
The forecasters are projecting Atlanta job levels to be about neutral this year with modest growth in 2011 and more substantial growth in 2012.
With over 20% of the Class A office space vacant, we're likely to see a challenging market for some time.
But if I have mentioned before, most of our portfolio is leased and with the exception of the space at 191 and the American Cancer Society, buildings where we can provide good value, plus Terminus 200 where we're working off the lower cost basis than before.
Actually, the problems in the Atlanta market may work to our advantage by providing distressed opportunities in a time when most investors have written off Atlanta.
There certainly won't be any new speculative office developed in Atlanta for quite awhile.
When the jobs return and the Atlanta market is healthy again, we should be able to recognize some good value from the steps we take in the next couple of years.
I also want to remind you that we have a significant platform in Texas where we manage and lease over 7 million square feet of office space, mostly for third parties.
But as a result of our platform there, we are able to seek deals that come to market and we're actively looking for opportunities in Austin, Dallas, and Houston.
Another question that we've been getting is whether we have enough capital to chase new investments.
In addition to our current balance sheet, our recent experience at Terminus 200, it showed us there are quite a few institutional investors who want to invest alongside Cousins, where we're willing to invest some capital and utilize our management and leasing platform.
In addition, the public markets appear to be open at the moment for REIT when we're able to identify needs for offensive capital.
While I don't think it makes sense to stockpile capital before new investments, we should have the option to bring in some new equity if we are able to find a significant number of good investments to make.
With that I'll conclude my remarks and turn the call back over to the moderator for any questions.
Operator
Thank you.
(Operator Instructions) Our first question coming from the line of Brendan Maiorana from Wells Fargo.
Please proceed with your question
- Analyst
Yes.
Good afternoon.
This is will actually Young Ku here for Brandon.
Just wanted to talk about CapEx level for a little bit.
You're Q1 CapEx level is pretty low, but if we look at the past couple of years it's been on the high end.
If you match that against your NOI level, how should we think about your CapEx level going forward on a normalized basis?
- CFO
Young, that's a good question.
The level was very low in the first quarter and that was largely as a result of timing.
We do have a fair amount of additional leasing going on as you can tell from our comments on the call.
I can't -- I'm not going to be in a position to give you a run rate going forward, but this quarter was definitely unusually low.
And you can look back over the last couple of years as we've had significant leasing and see what the CapEx numbers were there.
I would expect to have relatively higher CapEx levels over the next 12 months to 24 months as we continue our leasing and get the portfolio filled up.
- Analyst
Okay.
Great.
Thanks Jim.
And just wanted to talk about your core FFO a little bit, just excluding your sales business.
If we look at your Q1 run rate, we can call that around $0.06 or $0.07 per share.
If you annualize that we get maybe around $0.28 a share.
If you take some of the upside in your core leasing gains, we can probably get to around $0.40 per share.
Which, on current stock price would indicate around 20 times plus or minus.
So how should we think about that going forward?
I know you guys are trying to exit out of your -- some of your non-core investments.
But if you take everything out, it doesn't look like you're normalized FFO level or FAD level would indicate a current valuation at current level so I just wanted to get your perspective on that.
- CFO
Yes.
Young, let me start to answer that.
Larry can jump in here.
A couple of thoughts for you.
One, we do -- we are trying to get out of the industrial business, and so we would likely sell industrial properties once we get them leased up so we wouldn't enjoy the FFO going forward but we would get benefits from paying down debt.
And the same would be true for any other assets that we chose to sell, so as we're selling these things like land and other things, those will, we will get some benefit from reducing the debt levels.
I think the residential lot business will be a business we'll be in for some time and Larry may want to comment some more on that, but we certainly don't want to expand our presence in that business.
But at a point a number of years ago when we sold close to 2,000 lots we generated very high levels of FFO.
It had been almost non-existent lately, but if we see some lot sales pick up, we can get some more contribution from that piece of the business.
And one other thing that we have had a number of questions from investors about is what they could expect in terms of additional FFO from our properties that aren't fully leased and that's one of the things I think people don't fully appreciate.
We are our economic occupancy on the office properties is about 85%, the retail is about 83%.
If we can get those up to the mid 90%, which is historically where Cousins has operated, there will be a significant amount of additional FFO.
It's roughly -- our share is roughly 6 million square feet of office and 2.5 million square feet of retail so that's over 8 million square feet so just 10% of that is another 800,000 square feet, that would be our share.
You could do the math in term of what you think the rental rates are.
But my sense is that if you would apply rental rate plus an operating expense pass-through number which we're largely eating right now as a result of the vacancy.
So it would be a significant number.
- Analyst
Got you.
Thanks for clarifying that.
And just on your land business a little bit, you talked about that there briefly.
But I just wanted to get your take on your commercial land holdings and how much of that you expect to sell versus keep it on your balance sheet to you can develop it going forward?
- President and CEO
This is Larry.
We -- the commercial land and -- I have stated this at other meetings.
We certainly -- we look at our commercial land holdings, we have more commercial land than we anticipate needing for our development activities.
We really have gone through that land portfolio on a site-by-site basis.
And so as the market comes back for commercial land, which a lot of this land is -- most of this land is very attractive commercial land.
We will be a net seller of commercial land and most of that land we have owned a fairly long period of time.
And we feel confident about there being a market for it down the road.
And there are attractive land which we think we should hold for future development needs.
But on a net net basis we definitely will be a seller of commercial land in term of percentage it represents of our current portfolio.
- Analyst
Great.
Thank you guys.
- CFO
Thanks, Young.
Operator
Thank you.
Our next question coming from the line of John Stewart from Green Street Advisors.
Please proceed with your question.
- Analyst
Thank you.
In the press release, you referenced the sale of industrial land at King Mill Distribution Park.
Can you give us some color on the pricing there?
- President and CEO
We, John, we've sold two different tracts.
We sold one the a King Mill and then one at Jefferson Mill.
The King Mill was during the quarter, I'm trying to remember this right.
And Jefferson Mill was after the end of the quarter.
In both cases, we sold them for a little bit more than our cost basis.
We had about a between a $300,000 and $400,000 gain on the King Mill property and the one that's happened since the end of the quarter, we're going to have about a $800,000 gain on.
- Analyst
Okay.
That's helpful.
Larry, maybe I could direct this to you.
Given the progress that you've made leasing up the industrial portfolio, it looks like pro forma for the last leasing activity up to 85%, so pretty close to stabilized.
Obviously that was a big step you wanted to take before you marketed this for sale, but how do you think about the time frame to taking the industrial portfolio to market at this point?
- President and CEO
Well, once again, I look at it on an asset by asset basis and the asset that we've just gotten 100% leased at Jefferson Mill and that's a -- .
- CFO
20 years.
- President and CEO
It's a 20-year lease.
That's one that we probably -- in the near term, they occupy the building in September.
And that's one that we'll probably look at the near term as seeing what the, what the market may bear in terms of pricing on it.
The other two are still a little bit less than the -- we feel like we need to get them in the 90 % plus range to be ready to market.
And we've got some good prospect actually at both of them to do that.
So we've got a little bit more work to do on the other two assets, and Jefferson Mill we think we're in pretty good shape to look at that.
- Analyst
That's helpful.
Can you give us a sense of the rents that you're getting on these industrial leases?
- President and CEO
John, I can't off the top of my head in the sense of -- we don't usually give a whole lot of details on our lease terms.
But it remains a competitive market out there.
And as you've seen on our past deals, most of the rents is really driven by how much TI and how much term is in them, but they vary from roughly $2.50 a square foot to $3.50 a square foot.
- Analyst
Okay.
And then understand this may be barking up the same tree but can you give us a sense for the term of the lease at Terminus 200?
- President and CEO
The lease that we have in place, the one that we've announced, the Greenberg Traurig lease is 15 years.
- Analyst
Okay.
And likewise, I understand from your comments that you don't want to go into too much detail on San Jose MarketCenter.
But in the Q it said that you expect to sell that for a gain.
Is that going to be, will that be greater than gross book value or relative to net?
- CFO
We -- John, it would be a gain at grater than net book value.
I think we've talked about some pricing in the past, and how it's moved up a bit.
I'll let Larry comment if he wants to.
Part of the issue is it's under contract right now.
It's still in the due diligence period so we don't want to get too far ahead of ourselves
- President and CEO
But we'd given some color in the last call that when we had priced it last year, it was in the $70 million range and the pricing looked like it was moving up into the mid-$80 million.
And that would be the basis by which we'd probably put it under contract.
And, I think that gives you some color on where it will end up.
- Analyst
Yes.
- CFO
And that John, is higher than our gross basis as you'll see.
- Analyst
That's helpful.
Thank you.
Jim, I'm sorry if I missed this, but how did you account for or will you account for the administrative fee for amending the term loan and credit agreement?
- CFO
We did have a charge of about $600,000 which really were old loan costs from the original deal.
- Analyst
Right.
But in the Q it says you had a $1.6 million administrative fee, so --
- CFO
Yes.
- Analyst
Sorry if I missed that in the supplemental but I just didn't see where that ran through.
- CFO
You didn't, but what I was going to say is the old loan cost as we downsized the loan we wrote off a proportionate share of those old loan cost.
The new loan cost of $1.6 million we're amortizing between now and August of 2011.
- Analyst
Got it.
- CFO
The facility can actually go through August 2012, which is what we would anticipate but the base term goes through 2011, so that's what we're doing.
- Analyst
Okay.
That's it for me.
Thank you.
- President and CEO
Thank you, John.
Operator
Thank you.
(Operator Instructions) Our next question coming from line of John [Glen] from Merrill Lynch.
Please proceed with your question.
- Analyst
Hi, good afternoon.
Can you give us an update on your tenant watch list?
Your rollover is very light this year so I was just curious to see if there was any early termination risk?
- President and CEO
Is is the credit watch list, you're asking about?
We do have a number in both in retail and office.
It's, and these are tenants we've been following for a good while.
It's not a very extensive list.
I came to the company in 2001.
Our list at that point was a good bit longer than it is today.
So I would say just in general, the tenant watch list on retail is smaller than it was, clearly smaller than it was then.
It's a little bit smaller than it was a year ago.
Office, we have a number of tenants we're following, but it's a manageable list.
- Analyst
Thank you.
Operator
Thank you.
Our next question coming from the line of John Guinee from Stifel Nicolaus.
Please proceed with your question.
- Analyst
Nice quarter guys, good job.
Can you just provide -- give everybody a sense on a deal like 200 Terminus.
If you fast forward a couple years or whenever you hit stabilization, what's the capital stack look like?
How much is the construction loan?
How much is Morgan Stanley?
How much are you guys?
What preferences are there?
Does Morgan have a preference senior to you?
Or do you have a preference senior to Morgan Stanley?
To get a sense of whether the $5.6 million is something that people should model as having significant value versus just being a [pro-note]?
- CFO
John, I might -- can I just pick the question in there that I want to answer?
- Analyst
You can answer them all.
- CFO
John.
I'm not smart enough to answer them all.
No, let me give you just a little picture of it from my point of view.
We're providing of the new equity, we're providing 20% of that equity, which the $5.6 million number represents, and Morgan Stanley would be providing 80%.
That would be of the new equity.
The balance of the cash is coming from a 75% loan to equity -- debt-to-equity loan from the banks, which as we said is non-recourse.
And the banks basically had a basis after guarantees were paid of about $80 a square foot for the asset.
So you can model from that where it is.
We would an anticipate that the building would be, at stabilization and around 2013, we're 40% leased at this point, and we do have promotes.
I don't want to get into that structure on the call but at stabilization on the Cousins' share before promotes, we'd be looking at an unlevered 10% cash on cost yield, and then there's a promote structure in there.
I view -- we think the investment from Cousins is a solid investment.
And we're pleased to have Morgan Stanley as the partner and very pleased to be able to work something out with the banks.
I'd also add that I think it not only is it a good investment but Morgan Stanley's participation and others that pursued it validates the -- what I wanted, which was that the market agreed with our conservative underwriting.
And then also I think it's very important, I mean, Terminus is the top address for a mix use project in Atlanta.
And it keeps our brand, whether it's for the residential buyers, the tenants in Terminus 100, the perspective tenants in T200 and the future development brands, which keep our brand on Terminus, which we were able to do
- Analyst
I'm assuming you were able to obtain a long-term leasing and management contract on that?
- CFO
Yes, we were.
- Analyst
Okay.
Great.
Thanks a lot
- President and CEO
Thanks, John.
Operator
Thank you.
Our next question coming from the line of Sloan Bohlen from Goldman Sachs.
Please proceed with your question
- Analyst
Good afternoon guys.
Most of my questions have been answered but just wondering maybe if you could comment a little bit on -- you don't have a lot rolling this year but as you look at to 2011, particularly in office.
Can you guys wager as to whether where you're mark-to-market is today?
And then maybe if you could provide some general comments on where rents are today on a net effective basis and have they flattened out?
Maybe just start there.
- President and CEO
Sloan, the -- in 2010 on the office side, you're right, we don't have a lot of roll.
About 4% roll or 200,000 square feet.
And we've already captured about 25% of that in the first quarter in terms of renewals on that roll.
And the -- most of the other square footage in there is pretty low cost basis space and we think the prospect look fairly good for it.
A good bit of it is in our Birmingham assets whether the average run rate is just a little over $12 a square foot.
We feel good about 2010.
As you look at 2011 and 1212, a good bit of that, most of that is in two leases that expire in May of 2011, and that is a US South 95,000-square foot lease at American Cancer Society Center.
And we feel good not only about renewing that lease, but actually expanding it, where it's fairly advanced discussions with those guys about renewing it and as I said, expanding it.
The other big chunk of space is another 90,000 feet lease that Turner occupies, and we don't really know where they're going to be on that.
We're not as optimistic.
They've had some downsizing on their corporate campus.
We're not as optimistic about that, but their business changes quickly with -- when they get stuff like Conan and March Madness and others.
So we don't know how that will be impacted.
The other two leases are relatively small leases, 30,000 -- couple of 30,000 footers that we have.
I would say, therefore, when you look at a little color on where the leases American Cancer Society Center is an example of an asset that Cousins bought coming out of a previous recession.
And when we're able to compete with the large floor plates on Centennial Park at a $16, $17 rent, it's a pretty compelling case for the tenants that want to be in that building.
And we're not seeing the -- we're certainly, there's plenty of competition, but we're not seeing the rate pressure on these downtown assets that we have at good cost basis like 191 and American Cancer Society Center than as you would be seeing in Buckhead where you have the newer assets and the higher cost basis in them.
- Analyst
Okay.
That's helpful.
And then just one more question for you, Larry.
The last comment you made in your prepared remarks about potentially going out to the equity market if you saw something opportunistic that you'd be looking to do.
Is there a size that we should be thinking about that?
Or would you be willing to do that at today's leverage?
Or would you like to get to some lower level of leverage or better level of coverage first?
- President and CEO
Well, I think as Jim said, we want to continue to work on the leverage, and, and try to work towards a number of 40% or less on that front.
And maybe the encouraging thing about where we are in terms of when we see acquisitions is we certainly, with the payments we've made on our line, we've certainly got capacity on the line to do an acquisition or two.
The other thing that's encouraging is obviously if we see compelling acquisitions to make, that we get uncomfortable with the leverage point, you've got options whether it's the joint venture partners like we chose to do on Terminus 200.
And, I think like most folks you've heard in this earnings season, we're still aren't seeing the acquisitions where we can be overly specific about the ones in our pipeline.
However, I would tell you that our sense of the market is, the conversations that we're having with banks and other lenders that have some of these distressed assets seem to have changed in terms of tone around the end of the third quarter or start of the fourth quarter last year.
And I can't point to institutional sales data that would support that, but I think you've seen it with some other companies with assets that we've been tracking.
We certainly have a very targeted list in Austin and Dallas and Houston and Atlanta of assets that we're tracking.
And we are beginning to see assets that we've had conversations with banks about for a year or more that now we're beginning to get the sales flyers on them or conversation on off-market transactions.
And so I hope that's not just a coincidence and that it's more of a trend to get into see some of these opportunities we've expected to see.
- Analyst
All right.
Thanks, Larry.
- President and CEO
You bet, Sloan
Operator
Thank you.
Our next question comes, is a follow-up question coming from the line of John Stewart from Green Street Advisors.
Please proceed with your question.
- Analyst
Thank you.
Just a couple quick housekeeping items.
Jim, I realize there's a number of moving parts but can you give us a bit of parameters around taxable income?
Maybe what's a baseline rate?
And then what -- when you take gains into account, where do you shake out?
What color can you give us there?
- CFO
I can, that one actually I can do, John.
It's going to be 0 for quite some time.
It won't be positive, won't be negative.
And the reason for it is, last year with a number of things that happened, including the impairments we wound up setting up an evaluation allowance for -- really all of our future tax benefits at our taxable [rate] subsidiary.
We've got a big number there we don't believe it's recoverable in the short-term and so we set it up as a reserve in effect.
So really anything going forward is not going to have any taxable effect one way or the other.
That's actually a positive in terms of our FFO because as we sell lots, tracts, other things within our taxable subsidiary, the -- that won't wind up generating any tax effect.
Now, the --I've gotten a note here passed to me that you may be asking about the re-taxable income, and if you are -- what we've tried to do on the re-taxable income this year is to set the dividend at what we think the taxable income level is going to be.
That was an estimate and we continue to refine that, but we tried to set that at one that we can maintain.
As we get close -- we did that in September of last year.
As we get to September of this year and the Board meets again, we'll go to them and tell them what we think it's likely to be as we go into next year.
And we'll base the dividend on that level, and so I've answered two questions.
Maybe one that you didn't ask, but that's where we are on those two things.
- Analyst
So the -- when you say the dividend is set at, basically at taxable income.
Do you mean including the stock portion or just the cash portion?
- CFO
Yes.
Including the stock portion because that counts as part of our dividend distribution for tax purposes.
- Analyst
Got it.
Got it.
Okay.
And then just a couple of clarifications.
There was a reference on the operating cash flows to a payment made in 2010 for lease inducements?
Can you give us any color there?
- CFO
Yes.
When we leased space to Deloitte at 191, we took over as a lease that they had at another downtown Atlanta office building, and we took it over as a sublease.
And we amortized the cost of that over the course of the Deloitte lease at 191.
So it actually reduces FFO since it was not a tenant improvement -- a building improvement amount.
It was really considered a lease inducement.
But what we have to do from a cash standpoint is as money goes out the door we have to account for that, and what you saw was a movement where we paid some cash out as a result of that.
It had no P&L effect because it was already taken into account when we calculated the lease income.
- Analyst
Got it.
And how big was the cash outlay?
- CFO
I believe it was between $700,000 and $800,000.
- Analyst
Got it.
- CFO
I'm getting a nod so that's right.
- Analyst
Okay.
That's good.
Also, another reference to land received as collateral for a note receivable default?
- CFO
Yes.
- Analyst
What's that about?
- CFO
We had sold some land and received a note back for the majority of the sales proceeds up at our North Point property while back.
We foreclosed on that and took it back.
We actually had it appraised for a little bit higher.
It was appraised for a higher value than the note amount.
We didn't record a gain, though.
We just took it back on our books at what the note amount had had been.
- Analyst
Okay.
And then, just lastly Larry, if I can ask you to, again understanding that you don't want to show too much of your hand as far as your acquisition pipeline.
But can you give us a sense for types of opportunities you might be looking at, whether it's -- I don't know specifically how much leasing risk are you willing to take on at this point in the cycle?
What property types, I mean, you've obviously referenced the markets where you've got wish lists of properties.
But what just general color can you give us there?
- CFO
Well, always reserving the right to be opportunistic, John, we really are tracking, I would say two different paths.
We've got a lot of focus on the office markets where we have a history and a platform already in place, because at the end of the day, the office is a local business.
And you really need to understand your local markets well, and so Dallas and Austin, we've been there over 20 years in each market, and then at Atlanta, and we feel also very comfortable in Houston.
We've managed over one million square feet there over the last couple years until recently, and so we're looking in those markets.
And opportunistically, obviously in other markets, in the Sun Belt.
And I think the -- what Cousins does well is I love to think that there's going to be opportunities that this markets going to give us.
Where you can buy at a very compelling price, and get helped with cap rates and other things in a few years have a gain.
But I -- my sense is, is that it's going to be more of the value-add opportunity like a 191 Peachtree where we buy a great asset that is not only in distress because of leverage, but it's distressed because it's not operating at the lease levels that it needs to be.
And then the combination of our capital and our operating platform and the relationships and development skills we can bring to the project.
And our sponsorship will work that lease percentage up.
At 191, we were at 20%, and now we're between 75% and 80%, making great progress on it.
That's where I think our opportunities will be.
And I think that the -- we will underwrite them conservatively.
But the value will be in terms of what you could do from an operating stand point of improving the underlying fundamentals of it.
We certainly also are very comfortable, I think our retail team has shown just how strong it is, both in good markets and poor.
And we look at retail assets that provide opportunities where our skill sets fit, and retail is not as geographically sensitive, but those would be the two primary areas and geographies in which we're looking.
- Analyst
Okay.
And did you -- the 90,000 square feet lease with Turner, did you say that was in American Cancer Society as well?
- President and CEO
Yes, it is.
- Analyst
Okay.
Thank you.
- CFO
Thanks, John.
- President and CEO
Thanks, John.
Operator
Thank you.
There appear to be no further questions.
Mr.
Gellerstedt, I will now turn the call back to you for your closing remarks.
- President and CEO
Well, we appreciate everybody's continued interest in Cousins and thanks for joining the call today.
And know that we will make ourselves available at any time that you've got any follow-up questions or ideas.
And we'll look forward to seeing a lot of you in Chicago next month at the NAREIT conference.
Thank you very much.
Operator
Thank you ladies and gentlemen that does conclude the conference for today.
Thank you for your participation and ask that you please disconnect your line.
Have a great day.