使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good day and welcome to the Cousins Properties Incorporated second 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 Mr.
Tripp Sullivan of Corporate Communications.
Please go ahead.
- Corporate Communications
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.
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 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.
Larry.
- President & CEO
Good afternoon, everyone.
I'm Larry Gellerstedt, President and Chief Executive Officer of Cousins Properties.
On the phone with me today are Jim Fleming, our Chief Financial Officer, and Craig Jones, our Chief Investment Officer.
Welcome to our second quarter conference call.
Before Jim takes us through the detailed financial results of the quarter, I would like to take a moment to provide some general thoughts and observations on our Company.
As many of you know, since I became CEO last June, we've had three very clear areas of focus in addition to looking for investment opportunities.
Those areas are leasing, sales, and fees.
More specifically, leasing our vacant space, selling non-core assets, especially condos, and generating fee income.
The premise of this directive was simple.
Delivering results in each of these areas would not only serve to increase income, it would stabilize the platform, facilitate the de-leveraging of our balance sheet, and position us to pursue opportunistic investments.
One year later I'm very pleased with the progress we've made in each area in the face of very challenging markets.
On the leasing front, the office portfolio increased to 89% at the end of the quarter and is now over 90% leased.
We've improved our lease percentage from a year ago, despite the expiration of the large AT&T lease last year and an exceptionally tough office leasing environment.
One lease in particular has garnered significant attention here at Cousins.
A couple of weeks ago we signed a 52,000 square foot lease for our space on the 36th and 37th floors at 191 Peach Tree.
We plan to consolidate our corporate office on the fifth floor by early next year, reducing our square footage from 62,000 to 35,000 square feet.
As many of you know, we have two significant expirations at American Cancer Society Center coming in 2011.
We feel good about where we stand on these and actually hope to announce a significant extension and expansion in the coming weeks.
We're projecting 90% occupancy at ACSC in 2011 and hope to have the building back over 95% within the next year or two.
Our retail portfolio has increased from 77% leased at the start of 2009 to 86% leased at the end of the second quarter.
In the first six months of 2010, we signed over 210,000 square feet of new leases and over 95,000 square feet of renewals.
Our industrial portfolio has climbed from 44% to 85% leased, thanks in part to a 459,000 square foot Systematic's lease at Jefferson Mills signed in the second quarter.
We have more work to do in leasing up the other two properties, but we still plan to sell our industrial assets as they reach stabilizations.
With regard to the sale of non-core assets, 10 Terminus Place, our 137 unit condo project in Buckhead, has been the highest priority for us.
Since the end of the second quarter 2009 we've sold 88 units and currently have another 12 under contract.
Only 18 condos remain for sale and we expect to be largely out of the condominium business by year-end.
A couple of weeks ago we completed the sale of San Jose Market Center, a fully leased retail center in California for $85 million.
This was one of our key sales goals for the year and I'm pleased with the pricing we achieved on this asset.
While residential sales have remained very weak, particularly in Atlanta, we have generated $36 million in proceeds from the sale of land tracts and retail outparcels over the past 12 months.
The largest portion of these proceeds, over $29 million, was generated in the first half of 2010, generating a profit of $7.7 million.
Turning to fees, the our client services operation has proven a steady source of revenues in turbulent markets.
Many of you know we manage and lease more than 12 million square feet on a third-party basis for institutional loaners.
The vast majority of these assets are located in Texas and Georgia, with over half of them located in Texas.
We've added 300,000 square feet in Dallas in the second quarter and we plan to continue to grow this business in quarters ahead.
Among our recent fee development engagements include the 600,000 square foot build-to-suit office building for Cox Communications and the College Football Hall of Fame in downtown Atlanta.
We also recently received another consulting assignment from a national bank.
These projects, along with other projects like the Center for Civil and Human Rights, are expected to generate approximately $5 million in fees over the next few years.
Continued success in leasing vacant space, selling non-core assets and generating fees has enabled us to significantly strengthen our balance sheet.
Our leverage is down to 37% as calculated under our credit facility and our exposure to recourse debt has been reduced to $112 million, only $54 million of which is unsecured, down significantly from $581 million a year ago.
In summary, we continue to face a challenging market and there is much hard work to be done, but I am pleased we've significantly improved our position over the past year.
Our occupancy levels remain significantly better than our markets as a whole, where our solid assets, strong business relationships and long held reputation as the highest quality operator in our markets continue to work to our advantage.
We have a great team of dedicated and talented folks delivering solid results in a difficult time.
In a moment, I will provide some additional thoughts on recent personnel announcements, our market, and opportunities ahead.
For now let me turn it over to Jim for a financial overview of the second quarter.
- CFO
Thank you, Larry, and good afternoon, everyone.
This quarter our FFO before a couple of non-cash items was $0.10 per share compared to $0.14 last quarter.
The non-cash items were a pre-development write-off and an impairment charge that together totaled $2.5 million, which I will discuss in a minute.
The main difference from the first quarter was that outparcel sales and tax benefit contributed between $0.05 and $0.06 per share in the first quarter and, as we expected, neither of these occurred during the second quarter.
Otherwise, the trends were generally positive from quarter to quarter.
Rental property revenues, less rental property operating expenses increased by $467,000 during the quarter.
Office properties generated $243,000 of this increase, retail properties generated $100,000, and industrial properties contributed another $82,000.
The changes are primarily the result of small changes over multiple properties in our portfolio.
I will highlight the significant changes from last quarter for a few properties.
100 North Point Center East increased $140,000 from last quarter as a result of a collection of previously reserved accounts receivable.
We expect this office building will generate NOI of between $350,000 and $400,000 per quarter for the remainder of the year.
Avenue Carriage Crossing increased $421,000 because we received a refund for 2009 property taxes and we collected previously reserved accounts receivable.
We expect NOI for the remainder of the year to range between $1.1 million and $1.3 million per quarter.
Avenue Webb Gin decreased $270,000 as a result of a reduction in NOI from ground leased outparcels sold in the first quarter, increased rent relief granted to tenants and an increase in bad debt.
We expect quarterly NOI for the remainder of the year to be consistent with this quarter.
For Jefferson Mill we expect rent to commence in August on the recently executed lease for 100% of the building and we expect the building to be fully stabilized in the fourth quarter.
NOI for the fourth quarter and future quarters is expected to be between $400,000 and $450,000.
And at Lakeside Ranch Building 20, our NOI increased slightly this quarter due to a lease commencement that occurred during the second quarter.
For the remainder of the year we expect quarterly NOI to be between $350,000 and $400,000.
As I mentioned before, gains from outparcel sales declined in the quarter.
During the first quarter we recorded $4.7 million in gains on nine outparcel sales.
During the second quarter we did not sell any outparcel and as we told you last quarter we don't expect any more outparcel sales for the remainder of the year.
FFO from tract sales increased $361,000.
During the quarter we sold a tract at our King Mill project generating FFO of $876,000 and a tract at our North Point project generating FFO of $134,000.
Looking forward, we do not expect to have any tract sales in the third quarter, but we may have one or two more by year-end.
FFO from multifamily sales decreased by $413,000, but as Larry said, we continue to be pleased with the sales velocity at 10 Terminus.
We continue to work toward a goal of being substantially out of 10 Terminus by year-end.
Profits from lot sales decreased by $151,000, as we sold 83 lots in the second quarter versus 89 in first quarter.
Leasing and other fees increased $504,000, primarily as a result of fees earned on leasing activity at the Terminus 200 joint venture and an increase in the third-party leasing business.
Non-reimbursed general and administrative expenses decreased $1.4 million as a result of lower long-term incentive compensation expense, which resulted from lower stock price between periods, and an increase in capitalized salaries associated with successful leasing activities.
While we're on the topic of G&A, I'd like to provide some additional information.
We're forecasting $38 million to $40 million this year for total unreimbursed G&A before capitalization, which will be reduced by about $1 million of capitalization for a net of $37 million to $39 million.
Roughly $12 million of this is related to our fee business, of which approximately $8 million is attributable to Cousins Properties Services, as broken down on page 11 of our supplemental package.
So our total G&A, excluding costs associated with the fee business, is expected to be between $26 million and $28 million, less about $1 million in capitalization.
I would also like to point out that while we'll continue to work to make the business more efficient, we've eliminated more than $18 million in pre-capitalization G&A expenses since 2007, amounting to a 40% reduction in non-fee related G&A.
Interest expense for the second quarter was up $505,000 to $11.2 million, which was in line with the quarterly run rate we gave you on last quarter's call.
Pre-development expenses were $2.2 million this quarter.
$1.9 million of this amount represents the write-off of all capitalized pre-development costs on the Oklahoma City project, which we elected not to pursue.
Our partner in the Oklahoma City project has begun site work and is seeking a financial partner in order to complete the project.
We've entered into an agreement with our partner that will allow us to recover a portion of the amounts written off in the event our partner secures a financial partner and the project continues to move forward.
Finally, in the quarter we recorded a $586,000 impairment loss on our 60 North Market project as a result of a downward revision to our projections of retail unit selling prices in the project.
That concludes my comments on the quarter and I will finish with some observations about where we stand financially.
First, we've accomplished quite a bit on the balance sheet lately, both by reducing debt and by extending loan maturities.
We talked last quarter about our restructure of Terminus 200 and if you didn't pick one up at the June NAREIT meetings in Chicago, we can send you a fact sheet that shows how this transaction was structured.
The loan on that asset is now fully nonrecourse with a maturity of December, 2013 along with two one-year extension options.
Since our last call we've also announced that we modified the Murphy's Borough construction loan and extended the maturity to June, 2013 and we have refinanced Meridian Mark with a new loan that matures in August, 2020.
With those done our loan maturities are now in great shape except for our small share of the Avenue East Cobb loan.
We have no operating property loans maturing before the second half 2011.
And for the next five years after that the maturities are of pretty modest size except for the $180 million loan on Terminus 100, for which we have only $5 million of recourse liability.
I'm very pleased with where we stand.
We've also continued to make good progress on our bank debt.
Because of the sale of San Jose we were able to pay off our $100 million bank term loan and we now have only $54 million outstanding on our $350 million revolving credit facility.
This has freed up capacity for us to pursue opportunities.
I would like to give you a little color on our recent San Jose sale in light of our goal to sell assets without reducing our future earnings.
In 2007 we obtained a $100 million term loan along with our revolving line of credit.
We had expected to keep the term loan outstanding through its maturity in August, 2012 and to hedge our interest rate exposure we executed an interest rate swap to convert the LIBOR portion of the loan to a fixed rate.
As you can see from the debt schedule in our supplemental package, the all-in rate has been just over 7%.
We used the proceeds from San Jose and other asset sales to pay off the term loan and to terminate the interest rate swap.
Because of the swap settlement, we will incur a onetime charge of $9.2 million in the third quarter.
But going forward we've eliminated about $7 million of annual interest expense, which will offset the lost NOI from San Jose.
So that sale is not expected to result in any dilution of FFO.
As you may know, the $9 million swap charge will be included in FFO under the NAREIT definition, although the $6.5 million gain we anticipate on the sale will not.
We also had a gain last year of $12.5 million when we paid off the original loan on San Jose, so the results of this investment have been favorable overall.
This year we're going to have our annual board strategy retreat at the end of September.
We're in the process of updating our financial modeling for all our properties, which we'll review at this meeting.
I also expect our dividend policy will be discussed at this meeting and possibly at the next board meeting in early December.
We are aware that most REITs have moved away from stock dividends, but this has been a good way for us to de-lever a bit over the last few quarters.
We will let you know where our board comes out on that subject.
As many of you know I'm planning to retire from Cousins at the end of the year.
Cousins is a great Company with a lot of smart people and it's been a good place for me for almost 10 years.
I'm excited about moving on to some other things, but I want to make sure you know that I'm still around and fully engaged.
I have one more quarterly call in November and I'll see a number of you at the NAREIT meetings later that month.
I'll be working closely with Larry through year-end and helping wrap up the year after that.
As always, please don't hesitate to call if I can help you with anything.
With that I'll close my remarks and turn it back over to Larry.
- President & CEO
Thanks, Jim.
Jim will certainly be missed by all of us, but we respect the decision and his desire to pursue other opportunities.
Jim has played a very meaningful role in strengthening Cousins financial position and helping lead us through this past year's capital markets transactions.
We thank Jim for his contributions and leadership over the past decade and his willingness to stay on and effect the eventual transition.
While orally I'm also pleased to say that the prospective list of potentially candidates is very encouraging as we start the search.
We also announced that Mike Cohen is back at Cousins, where he is now running all facets of the Company's retail portfolio, including leasing, asset management, strategic planning, and new growth initiatives.
Mike has been senior managing director at Faison Southeast since October, 2002.
At Faison he was responsible for procuring and executing all new business for Faison Southeast, as well as running the region's day-to-day operations.
Under Mike's direction, Faison developed approximately 3 million square feet valued in excess of $300 million.
Some of you knew Mike in his prior tenure at Cousins, where he played a central role in a remarkable run with the Avenue and Market Center brand.
Mike brings a broad range of experience and expertise to the team and we look forward to introducing him or in many cases reintroducing him to all of you over the coming months.
Looking at our markets in general, we expect office, retail and residential fundamentals to remain challenging as long as job growth remains stagnant.
On a positive note, Georgia State University and Rosen Consulting Group, two groups we consider reliable, both recently revised their Atlanta employment projections upward.
They now expect employment to remain around level this year and to add approximately 50,000 additional jobs in each of the next two years.
Needless to say, this would be a welcome change of the tide.
While we have yet to experience any significant improvement in deal terms, we have seen stabilization in our markets and a nice bounce in activity over the past several months.
Businesses are finally coming off the sidelines and making long-term commitments, albeit at less favorable rates.
Terminus 200 serves as a perfect example of the resurgence in activity.
Since restructuring the capital structure in May, we have signed leases or are in final negotiations for over 315,000 square feat.
The asset is now over 40% leased and we are in lease negotiations that will take it to over 60% leased.
In terms of market specifics, we remain well positioned in Atlanta, Austin, Dallas, and Houston.
While each of these markets stacks up well in terms of long-term potential against the rest of the nation, right now we still see Atlanta as more challenging in the near-term compared with our Texas markets.
In our opinion, employment is the key metric to follow as we slowly work our way into the next cycle.
While Atlanta is showing early signs of job growth, unemployment remains at 10.6%.
The Dallas market has already shown a return to job growth, the unemployment rate is holding steady at 8.3% and expected to end the year below 8%.
Austin's economy has remained pretty solid throughout the downturn.
The unemployment rate peaked at 7.3% at the end of '09 from 5.5% 12 months earlier.
Healthy employment growth in 2010 is projected to bring the rate in Austin down to 6.7% by the end of this year.
So supply-demand characteristics in Texas are much more encouraging than Atlanta across all property types, at least in the short run.
I also want to take a minute to give you our impressions of the acquisition opportunities in our markets.
We have a system in place tracking our markets on a very detailed level.
And while we have not seen many compelling opportunities to date, the volume has increased.
Our priority remains on assets that are both operationally and financially distressed, where the pool of buyers will be smaller and our development expertise provides a significant advantage.
The few deals we have pursued to date ended up going to more aggressive bidders.
This can be frustrating, but it's early in the game and we're confident additional opportunities will present themselves.
We will remain patient and disciplined, both on asset quality and our underwriting.
At this point, as I said, we're getting the sense that people are paying higher prices than our normal underwriting would support.
If this remains the case, it may be prudent to engage co-investment partners similar to what we've done on Terminus 200, where we can underwrite the investment as a minority partner.
Oftentimes the rink adjusted returns make more sense in these structures where Cousins receives a promoted interest and a significant guaranteed income through management and leasing fees.
As a final comment I would like to reiterate some key objectives we established earlier this year.
Some of these we've already achieved and others will take some time.
These objectives have been communicated throughout our organization and we have complete buy-in and focus on meeting these goals.
First in terms of leasing.
We are targeting retail and office to reach 90% by year-end, with the exception of Terminus 200.
Office is already there.
We're also working to increase NOI within the existing portfolio by $20 million within three years and we expect to stabilize the existing portfolio at 95% or higher within that timeframe.
Second, for sales we will focus on leasing and selling the industrial portfolio, selling the remainder of our condo units, and over the next two to three years reducing the land and lot holdings from 15% of book value to less than 10%.
Third, our fees -- third, for fees our objective is to grow client services revenue by 10% a year, while continuing to expand our fee development platform.
Finally, on the balance sheet we are targeting leverage below 40%, reducing our debt to EBITDA multiple to 5.5 times and recourse debt at less than 25% of overall debt.
As I have said before, some of these goals have already been achieved, but we have relentless focus on executing each of these goals and we'll work diligently to translate this progress into exceptional returns for all our shareholders.
With that I'd like to turn it over for questions.
Operator
(Operator Instructions) Our first question coming from the line of Dave Aubuchon from Baird, please proceed with your question.
- Analyst
Thank you, good afternoon.
Wanted to get an idea of what, since it was the latest comp that we have seen probably, the lease that you signed, the 52,000 square feet lease at Peachtree Tower, what sort of rent numbers are you looking at there?
- President & CEO
Dave, we always are careful not to talk about a specific lease, just because that lease is well-known in the local market.
But I would say that the terms of that lease would be similar to the one that we signed a couple of quarters ago, where we brought in a law firm of about the same size.
It's down a little bit on the tenant improvement side, since they will be coming into our space.
But we aren't seeing rates improving, but we're seeing them stabilized even though they're at a low level.
- Analyst
And the pool of deals that you are seeing, again, you got a pretty favorable cost basis at that asset.
The pool of prospects looking for space has -- is still increasing, stayed the same, or getting worse from earlier in the year?
- President & CEO
In terms of 191 Peachtree?
- Analyst
Yes, sir.
- President & CEO
191 Peachtree continues to be a great value.
It's probably the best building in the southeast, just from a quality standpoint.
So although the markets are under a lot of pressure, 191 continues to compete really well and we're pleased with the prospects that we see in the pipeline.
- Analyst
And timing on that lease becoming rent paying?
- President & CEO
It is first quarter of next year.
- Analyst
Q1 next year.
Okay.
- President & CEO
We've filled our new space out first.
- Analyst
Okay.
I know it's a fairly small asset, but 8995 West Side Parkway, no leasing on that?
Can you just kind of give an update there?
- President & CEO
Yes.
That's where we had a -- that was basically a build-to-suit for one tenant who has down sized and now has vacated the building.
We're very close to putting that building under contract to a potential buyer.
And assuming that were to go through, we would anticipate perhaps a closing as quick as next quarter on it and so that's where we are right now is pursuing that sale opportunity.
- Analyst
Would you anticipate any impairment there?
- President & CEO
Not at this time, no.
- Analyst
Okay.
On the capital side, any interest in -- several REITs over the past few months, couple of quarters, have issued additional preferreds.
Securities under their existing -- sort of securities that are out there.
Any interest in the preferred market at this point in time to raise capital?
- CFO
Dave, this is Jim.
We really haven't felt the need to do that.
It's either cheap equity or expensive debt, depending on how you look at it.
But it is a fixed cost and it's -- generally, we've been trying to get away from the fixed cost as much as we can by paying down debt.
So we sort of been moving in the other direction.
I think it -- what we have out there is a good part of the capital structure and if we see, when we see some good solid opportunities that could be something that we would expand, but really we paid our regular debt down low enough I would think we could add to that, which would be cheaper, first, and then think about preferred down the road.
- Analyst
Right.
Sort of reading into your comments regarding the dividends still being paid and majority of shares, it would seem, again, that the preferred equity would be much cheaper than issuing equity at these levels, correct?
- CFO
Yes, the dividend -- really, there two are ways to look at that dividend.
One is to look at it as a sign of weakness in the balance sheet and I would not take it that way.
I know a lot of people have viewed it that way just because that's sort of the way the market tends to think of it.
The way I'd look at it really is just a way to de-lever in the purest sense, which is not to have any debt, not to have any more preferred, to be able to retain cash.
Now, you are correct, we could issue preferred instead of that and that would be less dilutive, but that's something to look at for the future.
- Analyst
Okay.
Just a couple more questions.
Jim, I got -- when you were talking about the G&A, I got lost in the detail, but you had said there's $12 million of the $37 million to $39 million, I believe, was from the fee biz, then you quoted an $8 million number.
What was that, again?
- CFO
What we've done there, Dave, is we've broken out $8 million and you can see about $4 million for the first half of the year.
It's in the supplemental package on page 11.
The other $4 million that makes up the total of $12 million is not broken out, because it's the same people that do a lot of REIT activity, so we've not -- we've really not been able to break that out as a discrete item, but I wanted to point out that the Cousins Property Service business, which is about $8 million of G&A cost on an annual basis, it's about two-thirds of our fee work, the other one-third has another $4 million roughly of G&A associated with it and so that gets you down to the $12 million reduction to get to you to $26 million to $28 million.
- Analyst
Okay.
And then last question is on the Oklahoma City deal, the write-off there, I had thought that retail center was 75% pre-leased.
Was that no longer the case?
Does that tend to fall out of bed.
- President & CEO
We had several preconditions to doing that deal with our partner and they were a level of pre-leasing before construction started that had to do with a going-in yield and then it had to do with the length of time that we felt comfortable to deliver the center for the tenants in terms of their occupancy date.
And as we -- as it took more time to get closer to the leasing hurdle, the time to delivery for the tenants grew shorter and the yield grew a little bit more stressed.
I still think that it's a good deal and I'm very encouraged that our partner will get it financed, but it just became something that we got -- those three variables got us to a point where we just -- it wasn't the right deal for Cousins to do, but I'm optimistic we will get back our cost basis of third party costs we have got in it.
- Analyst
Which would be the full $2 million or something less?
- President & CEO
About half of it.
- Analyst
About half of it.
Okay.
Thank you.
Operator
Thank you.
Our next question coming from the line of Brendan Maiorana from Wells Fargo.
Please proceed with your question.
- Analyst
Hi, yes, thank you.
It's actually [Young Courier] with Brendan.
Just wanted to touch upon second gen CapEx for this quarter.
It was a little bit higher at around $6 million.
First, could I get a sense on what drove the cost up this quarter?
- CFO
Young, that's a very good question.
It was higher, it was about $6 million versus $1 million for the first quarter.
It was mostly build-out at 191 Peachtree.
And as we go into future quarters it is a little hard to me to predict the timing, but I would predict that those numbers would actually go up and not down.
And that's a result of the leasing activity that we've been seeing lately, where we've been able to fill up space in the retail portfolio, the industrial portfolio and the office, specifically 191.
And I do want to comment on that, because it's -- CapEx is an important metric as you look at a REIT and I would say most of us would be used to a typical REIT that has a portfolio that has some roll periodically and you would normally take FFO and subtract CapEx to get an FAD or an AFFO number.
What's going on with Cousins right now is really a different phenomenon and that's at 191 when we bought this building it was 20% occupied and we knew we were going to have to do some substantial tenant improvements and spend a substantial amount of money.
If you go back and look at our old supplementals, you will see estimates of how much we thought it would be when we were reporting it as a redevelopment property.
Same thing is true for our retail.
We have got several retail centers that didn't get fully up to stabilization because of the economic slowdown and we are now getting there.
Same thing with industrial.
So really most of this, it's called second-generation because it's in the operating portfolio now, but it's really a onetime item and it's really not something that's going to be recurring, so it's a little tricky to consider it like you would a normal subtraction when you come up with FAD.
- Analyst
Right, fair enough.
So once the assets are leased up, for example 191 is fully leased, and the other under leased assets are fully occupied, then where can we expect that normalized CapEx level to go, perhaps as a percent of NOI?
- CFO
Clearly it will go down, because we won't have this large amount of really first generation stuff involved.
If you look back, Young, at the historical numbers, which are in our supplemental and they go back about five years, you can see that the levels were $15 million to $20 million or so per year and the '06, '07, '08 range, even that involved a fair amount of lease-up, because as you may recall we sold a lot of assets in the '03 to '06 timeframe and what we were left with were assets that had a lot of rollover or had some substantial vacancy.
So even those numbers were artificially high in those years.
So I can't really give you a prediction expect to say that it ought to go down substantially.
- Analyst
Okay, that's helpful.
And you guys commented about potential to increase your NOI by about $20 million over the next three years.
Is that a cash number and could we get some of the components or some of the expectations that are baked into that number?
For example, what amount of that is just occupancy gains versus rent growth expectations and what amount of that is say free rent burning off.
- CFO
We'd be glad to work with you on that.
That really is -- that ultimately is a cash number and it's based on occupancy gains not rent growth.
And it's to get us from where we were at the beginning of this year up to 95%.
But we'd be glad, Cameron or I or both, we can walk you through some of the way you could get there.
- Analyst
Got you, thank you.
And are you guys seeing any transition or migration from other submarkets into Buckhead, Midtown or Downtown.
- President & CEO
I think that throughout the Atlanta market, if you take a 10-year perspective, you certainly are seeing some migration from suburban to urban submarkets, urban submarkets primarily being Buckhead, Midtown, and Downtown.
That's reflected by the fact that the city of Atlanta's population has grown in the last 10 years for the first time in 30 years as part of the metro region.
But I would say most of the, having said that as an overall context, I would say most of the demand that we're seeing thus far is tenants relocating either within their own submarket of Buckhead, Midtown, and Downtown, or they're relocating within one of those three submarkets.
So a downtown tenant may move to Midtown or we've had Midtown tenants move Downtown, so those markets, particularly Midtown and Downtown, but also Buckhead to a lesser degree, they're beginning to act not as distinct and separate as they have in the past.
But there is some migration from the suburbs, but it's not really the driver.
- Analyst
Okay.
And lastly, I think, Larry, you talked about potential acquisition opportunities out there and you stated that you were outbid on a number of deals that you guys were looking at.
How are you guys thinking about financing those investment opportunities and secondly what kind of size in investment opportunities are you looking at?
- President & CEO
Well, we've said before, our -- from a geographic standpoint, we feel like where we have our operating platform is the strongest competitive advantage we have in terms of our operating and development skills, so we're -- right now we're primarily focused on Atlanta and then the three markets that we have talked about in Texas.
Retail is not as geographic specific.
We haven't seen much in retail, but really we're fairly comfortable evaluating retail throughout the Sun Belt.
The thing in terms of looking at the debt, the partner issue versus doing it off your own balance sheet and then what your sources of funds would be for that, so far I think we almost, at least what we're doing at Cousins, is we're having to look at it on an asset by asset basis.
We're having to evaluate the asset, the submarket that it is in, where it is in terms of stabilization, and then where we think that the market may price it and come up with the most competitive structure on each asset once we evaluate that.
Thus far I would tell you that I have been surprised and wrong that the number of people that are going after, there haven't been that many so I wouldn't reach a conclusion on trend on this, but the number of people that are going after what I would consider some operationally distressed assets, operationally and financial distressed, just appears to me that there is a lot of money chasing that.
And at least from our underwriting, I think that it's pretty aggressive and I don't really see the macro drivers in the economy as to how that justifies itself.
So I think we have to -- it's never -- real estate developers aren't good at discipline, but we've got to really stay disciplined in our underwriting and creative in the way we structure the deals.
- Analyst
Okay, thank you.
Operator
Thank you.
Our next question coming from the line of Sloan Bohlen from Goldman Sachs.
Please proceed with your question
- Analyst
Hi, good afternoon, guys.
Kind of to the question on CapEx.
Just wanted to ask it more in a broader sense as to what the market is bearing right now.
Jim, I understand the idea that you expect more of that lease-up CapEx as you guys do the leasing, but do you feel like in terms of what tenants are looking for the market is stabilized, or are tenants pushing back even more?
Kind of give us a sense there maybe.
- President & CEO
I think what you are seeing in terms of when you look at the velocity of deals, even though most of those deals are moving tenants from building to building, as I said, you are seeing that the tenants are comfortable that they think they've got the best pricing that the market is going to offer them.
And so whether it's Buckhead or Midtown or Downtown or North Point or others, and this would apply to Austin and Dallas as well, people are making decisions and so I think there's really been a firming of where people will transact deals.
It's still a lot of pressure as compared to where we all had hoped to be two years ago, but I'm not seeing a whole lot of increase need to try to get more aggressive on things.
- Analyst
Okay.
And then, Larry, maybe just sort of a general comment or maybe an update on where you think mark-to-market on renewals are for office in general in your portfolio and then retail in general.
And then specifically where you think the mark-to-market is on the role in the American Cancer Center.
- President & CEO
Well, the -- in terms of the sort of mark-to-market on the office side, one, in terms of renewals we're doing very, very well on renewals just getting them done.
And we continue to make a lot of progress on that.
I think we'll have another 100 plus thousand of renewals on the office portfolio the balance of this year.
But generally, if you sort of look mark-to-market, I think that our rents have stabilized.
They probably on the -- and they change from submarket to submarket and whether it's a new building or existing building, so it's sort of hard to do it.
Probably the easiest place to do it is Buckhead just because it's a new building and maybe I can just give you some broad metrics there in that when we finished Terminus 100 lease rates were, base rates were in the 22.5 to 23.5 range.
Today they would be about 10% below that.
The tenant improvements would have been in the $40 to $50 range.
They now vary from $70 to $90, just depending on the size of the lease and the length of the lease.
And the free rent has moved up from six to nine months gross free, net free on a 10-year deal to closer to 12 to 18 months gross free on a 10-year deal.
But that would be where Buckhead would be, which is where you would see the biggest amount of change, the more stabilized properties, second-generation properties in terms of things you wouldn't see that degree, but those would be rough numbers to give you some metrics.
On the retail side, we -- if we look at where rents are versus where they were at the peak in '08, they're about 15%, maybe a little bit north of that, off of that peak.
But what we really look -- but they're not getting any worse and you see we're making a lot of progress on new lease-up and renewals.
The encouraging sign on the retail is not just the lease-up, it's sort of the first stage you look for to get some improvement in rents is sales increase and our centers overall are about 6% up year-to-date, which is better than the industry average and we feel like that rent concessions are also down significantly from rent concessions we were giving on the retail side in '09, over 50% down on that front.
So those are the early stages to starting to get some rent recovery, but we're not at rent recovery yet in those markets.
- Analyst
Okay.
And just on the American Cancer Center?
- President & CEO
American Cancer Society Center remains a very competitive priced asset just like 191 Peachtree.
Our basis in that is so low and it's a special use building.
So it just doesn't get under the same price pressure just because of the low basis and the special use nature of it.
It's tough pricing, but it's holding its own in terms of the new activity there.
- Analyst
Okay.
And then just maybe a couple of tack-on questions.
Larry, you mentioned as one of your goals kind of building out the fee business a little bit, I think it was 10% a year.
Is that just all organic or do you expect that you are going to build out platforms and people and would there be G&A tied to that, too?
- President & CEO
The goal certainly is to grow both the G&A to the degree you have to grow it at the same time that you are bringing in the fees, the additional fees, but we think our platform both in Georgia and Texas with the current leadership that we have is expandable and can absorb most of that without increased G&A.
The main place that you see G&A hit a third party business is if you have to bring leasing people on in advance of having assets to lease and our folks have done a very good job of generally to the degree we have to expand the leasing team, timing those at the same time we bring the new business in.
- Analyst
Okay.
And then one last question for Jim.
Just at North Point you talked about the one tenant whose rents were or accounts receivable were being reserved and that changed and I think there might have been another one in there, too.
Could you just maybe tell us who those tenants were, if you can, and then just why those were brought off of reserve?
- CFO
Yes.
I'm not going to name the tenant, Sloan, but let me give you an observation about that.
I did mention some, a number of properties where we collected previously reserved accounts receivable and then I mentioned one or two where we had some bad debt expense.
And those are kind of -- it's a little bumpier.
We're still seeing some of that and we're still seeing it go both ways.
But just in a general, as a general measure, if you look at the office side we reserve for any questionable accounts receivable and we went -- that number jumped up substantially from '08 to '09, and it went up a little bit in the first quarter, but it's now come down a little over 10% from where it was at the peak.
And I'd say it's too early to say yet, but I think that number is now finally trending down.
On the retail side it was already at a pretty high level in '08 and stayed there in '09.
It's since come down 25%, the amount we have reserved for questionable accounts receivable.
So clearly on the retail side we're seeing a positive trend and I think we're starting to see a positive trend on office as well.
- Analyst
Okay, that's very helpful.
Thank you.
Operator
(Operator Instructions) Our next question coming from the line of John Stewart from Green Street Advisors, please proceed with your question.
- Analyst
Thank you.
Larry, I can appreciate that when you took over a little over a year ago, you were dealt a tough hand and have spent the first year and a bit kind of getting your arms around the business and putting out fires, so to speak, but would not have expected to see the charge on the Oklahoma City project this quarter and now we've got the $9 million charge on the write-off of the swap in the third quarter, and also during this quarter the announcement that you are replacing Jim and Steve Yenser.
So I guess the question is can you give us a sense for what the percentage completion is in terms of the moving through both the charges and the personnel changes?
- President & CEO
Okay, John, the -- let's start with the charges.
The impairment charge on Oklahoma City that is a very viable development deal and for underwriting standards we made a decision not to proceed with it and we've got actually very, which you could either view as good news or not as good a news, we have very little other development pipeline exposure at Cousins.
We have $1 million in Frisco and Dallas, North Dallas, for an office building that we feel is still probable in the mid-term to long-term and we've got the $5 million of investment at Emory, which we feel very good about that pre-development and the probability of that project.
So we don't have a lot of other exposure there.
I view the thing in terms of the swap charge and relative to the San Jose sale, I view that more as a positive that we're continuing to de-lever, we paid off the term debt, and if you look at the interest expense saved over the next few years, it's a fairly neutral deal in terms of Cousins shareholders.
So I really view that as more of a financing item that has, from accounting purposes, has to show up in one quarter than something that should fall in the sort of the impairment category.
In terms of the team.
The team that we have here at Cousins we wouldn't be performing as well as we are if we didn't have great folks.
Jim is -- we certainly are going to miss Jim, but we also are excited about the candidates that thus far have raised their hand and I'm convinced that that's going to be a strong move for Cousins.
And Mike Cohen is a huge talent to have back here at Cousins.
I've been having a conversation with Mike over a year and I think the clear distinction is Mike doesn't only bring leasing and asset management capable, but he brings a proven track record with development, both with us and with Faison.
So I'm feeling good that as we get the new CFO in place, which I hope we will between now and the end of the year, that we've got the right team on the field to execute and do well in our markets.
- Analyst
Okay.
I take your point that certainly from an earnings perspective the selling San Jose for $85 million at call it a 8.5 cap and paying down a term loan, $100 million term loan at a 7% coupon is essentially earnings neutral.
But I guess the $9 million cost to get out of that out of the money swap, was that a cash charge or a non-cash write-off?
- CFO
John, let me -- this is Jim.
Let me address that.
Yes, it was cash.
And, yes, it is to terminate the interest rate swap and it's really analogous to a prepayment penalty if we had a project loan on the property.
- Analyst
Right, but my point is that it's a wash between the interest expense and the NOI on San Jose, but then you still this have $9 million cost.
- CFO
Yes but the other way to look at that, and that's really what I was trying to get at, is we sold a bunch of assets in the '03 to '06 timeframe and the accounting rules say that your any -- and accounting rules really changed during that timeframe, but by '06 any loan we paid off that had a prepayment penalty, we wound up having to take an FFO hit for the prepayment penalty even though the gain on the sale didn't count in FFO.
And the same thing is happening here.
We're anticipating a $6.5 million gain on the sale, but a $9.2 million charge to get rid of some debt and the way the FFO, the NAREIT FFO definition works it's sort of a one-sided thing.
You are correct, it's cash, but then so is the $85 million that we received and the de-levering.
So it was -- this was a choice and I think it was the right choice for us to make and going forward, it's going wind up being FFO neutral.
- Analyst
Okay.
Can we get a sense for the rent on the industrial lease at Jefferson Mill?
- CFO
I believe I gave you -- let me just to put in the same terms, I think in my speech, let me go back to it for just a second, Jefferson Mill we said the NOI for the fourth quarter and future quarters is expected to be between $400,000 and $450,000.
It's a 459,000 square foot building so you can get to the -- .
- Analyst
Got it.
Sorry I missed that.
- CFO
No problem.
- Analyst
And then lastly, Jim, can you give us -- you referenced the fact that you don't expect any tract sales in the third quarter and that you essentially expect to be out of 10 Terminus by the end of the year, so what sort of magnitude should we expect in terms of additional tract and condo sales over the balance of the year?
- CFO
It's hard to say for the balance of the year because these things -- things could move around.
I did comment that we may well have one or two in the fourth quarter.
We have some that we're working on, tract sales, potential tract sales, and so what I would hope we could do would be able to give you some good color on those when we get to the third quarter call.
What we wanted to do on this call was let you know not to anticipate any tract sales or any outparcel sales for the third quarter.
So we'll try to -- .
- Analyst
Right.
But as we put together our numbers for the full year, what should we think about in terms of if -- what you are working on hits, then what are we looking at?
- CFO
We really have tried not to give guidance on things that are this lumpy a part of our FFO, John, and I'm sorry to appear to be a bit evasive.
We've done that on the operating properties where we feel reasonably comfortable about what the NOI levels are going to be, but these tract sales can either happen or not happen.
I think if you look back at the beginning of the year we had the two industrial tract sales to the Weeks Robinson venture.
Those would be a pretty good benchmark.
Like I said, we may have a couple more in the fourth quarter.
Larry.
- President & CEO
You could -- John, those things are very unpredictable, but I think if you also could, without giving guidance, if you look at our FFO goals, not our FFO goals, but our bonus goals for the year, that's what we're shooting for.
- Analyst
That's very helpful, thank you.
- CFO
Go ahead, I'm sorry, John.
- Analyst
No, I was just going to ask about 10 Terminus.
- President & CEO
I think at 10 Terminus we've said we're now down to 18 units for sale.
Some of those units out of the 137 are being rented, but I certainly would expect at 10 Terminus that we wouldn't have more than five, ten at the most left by the end of the year.
I hope we don't have any.
- Analyst
And at similar pricing relative to what you've been able to achieve to date?
- President & CEO
Yes.
- Analyst
Okay.
Thank you.
- CFO
Thank you, John.
Operator
Thank you.
Mr.
Gellerstedt, there are no further questions at this time.
I will now turn the call back to you.
Please continue with your presentation or closing remarks.
- President & CEO
Well, we hope you share our enthusiasm for where we are and Jim and I and the rest of the team are always available to answer follow-up questions and we appreciate your interest in Cousins.
Thank you very much.
Operator
Ladies and gentlemen, that does conclude the conference call for today.
We thank you for your participation and ask that you please disconnect your lines.
Have a great day.