Cousins Properties Inc (CUZ) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Cousins Properties Incorporated third quarter 2010 Earnings Conference Call.

Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference call over to Trip Sullivan of Corporate Communications.

Please go ahead sir.

Thank you.

Good morning.

Certain matters the Company will be discussing today are forward-looking statements within the meaning of federal securities laws.

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 filing 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 Company's quarterly disclosures and supplemental SEC information, on the Investor Relations page of its website, at www.CousinsProperties.com.

I'll now turn the call over to Larry Gellerstedt.

Larry?

Good morning.

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 And welcome to our third quarter conference call.

Before I give my thoughts on the business, I would like to call on Jim to review the financial results for the quarter.

Jim?

Good morning.

As we announced in last quarter's call, we sold San Jose Market Center in July, which resulted in a $6.6 million gain, as well as a $9.2 million charge in connection with the prepayment of our bank term loan.

Before this transaction, our FFO was $0.10 for the third quarter, versus $0.08 for the second quarter.

As we expected, we had no tract or out parcel sales in the third quarter, so the improvement in FFO came from a number of other items -- NOI from the lease up of our industrial and retail properties, increased fees from joint ventures and our third party business, lower G&A expenses, lower holding costs on our condominiums and lots, and no pre-development writeoffs or impairments.

We mentioned last quarter that we don't expect the San Jose sale to have any material effect on our ongoing FFO.

We believe after this sale our property, NOI will be reduced by $1.7 million to $ 1.8 million per quarter.

But our interest expense will be down by a similar amount as a result of the pay off of our $100 million term loan.

I'd like to give you a brief recap of the San Jose project.

We completed this development in 2006 at a total cost of $84 million.

Last year we made $12.5 million by prepaying a project loan at a discount.

This year we sold the project at a profit of $6.6 million, and our total NOI from the property from 2006 through 2010 was over $28 million.

So this has been a good investment, especially in today's market.

By prepaying our $100 million term loan with proceeds from this sale and terminating the interest rate swap connected to this loan, we incurred a one time charge of $9.2 million this quarter, but we expect to realize interest savings in excess of that amount over the next two years.

Excluding San Jose, our property NOI increased by $470,000 during the quarter.

The increase is primarily the result of small changes over multiple properties in our portfolio.

I'll highlight the significant differences from last quarter for a few of our properties.

555 North Point Center East decreased slightly in the third quarter.

However, we expect NOI to increase between $200,000 and $300,000 per quarter through the fourth quarter of 2011, due to a lease termination agreement with the tenant, who will vacate at the end of 2011.

We will recognize the lease termination fee ratably over the fourth quarter of 2010, and all four quarters of 2011.

Avenue Carriage Crossing decreased $107,000 from last quarter, due to a second quarter refund for 2009 property taxes, and collection of a previously reserved account receivable.

The third quarter amount was at the upper end of the range we gave you last quarter, due to a decrease in property tax expense, and lower than expected rent relief.

We expect NOI for the fourth quarter to decrease slightly, but still be within the $1.1 million to $1.3 million range we disclosed before.

Avenue Forsyth increased $180,000 from last quarter, due to the collection of a previously reserved account receivable, and several tenants emerging from co-tenancy.

We expect NOI for the fourth quarter to be consistent with the third quarter.

King Mill increased slightly in the third quarter and we expect it to increase to between $500,000 and $600,000 next quarter, as Briggs & Stratton has leased the remaining 119,000 square feet in the building, on a month-to-month basis.

Lakeside Ranch increased $97,000 in the third quarter, due to the commencement of the Owens & Minor lease during the second quarter.

The third quarter reflects a full quarter's effect of this lease, and fourth quarter NOI is expected to be consistent with the third quarter.

Jefferson Mill increased $328,000 from last quarter, because rent on the Systemax lease commenced in August.

NOI for the fourth quarter and future quarters is expected to be between $400,000 and $450,000.

And finally, 191 Peachtree increased slightly in the third quarter, but we expect NOI to increase to between $3 million and $3.5 million for the fourth quarter.

At the end of the quarter, 8995 West Side Parkway, our former AtheroGenix building, was under contract to sell, and the sale closed in October.

The sales price was $3.2 million, and we expect to recognize a gain on this sale of approximately $700,000 in the fourth quarter.

Because this property was under contract at the end of the quarter, its operations are included in discontinued operations, along with San Jose Market Center.

Leasing and other fees increased $466,000, primarily as a result of fees earned on leasing activities at Terminus 200, and an increase in our third party leasing business.

Nonreimbursed general and administrative expenses decreased $480,000, as a result of lower long-term incentive compensation expense, and an increase in capitalized salaries associated with successful leasing activities.

Interest expense for the third quarter was down $1.3 million, as a result of the prepayment of the term loan with the proceeds from the San Jose sale, as I mentioned before.

Last quarter we told you that we had decided not to pursue the Oklahoma City project, and wrote off $1.9 million in previously capitalized pre development costs.

We also indicated that we had entered into an agreement with our partner, that would allow us to recover a portion of the amounts written off, in the event our partner secures a financial partner and the project moves forward.

In October, our partner secured a financial partner, and we received $1.1 million pursuant to this agreement.

This reimbursement will be recorded as a reduction in pre development expenses in the fourth quarter.

I'd like to make a few observations on our balance sheet.

As you can see in our supplemental package, the current leverage ratio under our bank credit facility, has been reduced to 38%.

This test generally uses an 8.5% cap rate on operating properties.

Our total recourse debt is now down to $127 million, and our debt to EBITDA ratio, using our bank calculations for the last four quarters, is now at six times.

The value of our unencumbered income producing properties under our bank credit facility test, is over $700 million.

Also, we have $280 million of undrawn capacity on our $350 million credit facility.

All this puts our balance sheet in very good shape, and gives us a substantial amount of access to capital to pursue opportunities.

We've had very good success this year in addressing our loan maturities, including Mufreesboro, Terrminus 200, Meridian Mark and our bank term loan.

We're focused on one more significant loan at this point.

Our $180 million Terminus 100 loan with Northwestern Mutual, that matures in late 2012.

We are in discussions with Northwestern about making a partial pay down on this loan, and extending the maturity for an additional ten years at a favorable interest rate.

Terminus 100 is our largest remaining loan, and a ten year extension would put our overall loan maturities in excellent shape.

Although the extension isn't finalized yet, it may happen before year end.

We are aware that most REITs have returned to cash dividends.

Our next board meeting is in early December, and I'm sure the dividend will be a topic at that meeting.

We are working now to finalize our budget for 2011, so the board can set the dividend level at the same time it decides whether or not to return to an all cash dividend.

We will of course keep you posted on this.

As most of you know, I will be retiring from Cousins at the end of the year.

I'm planning to stay fully engaged through December, and I'll see a number of you at the NAREIT meetings next week, and then some other visits later in the year.

But this will be my last conference call, and I want to tell all of you on the phone, that I have enjoyed the relationship we've had over the years, and I look forward to staying in touch with you.

Cousins is fortunate to have all of you as analysts, bankers and investors, and I want to thank you for your support of me and Cousins.

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

Thank you, Jim.

Before I go any further, I would also like to thank Jim for all he has done with Cousins Properties over the past decade.

And, Jim, we wish you the best for many years to come.

As the third quarter illustrates, we continue to execute with a high level of success across our three main areas of focus -- leasing, sales and fees.

I'll briefly highlight the progress on each, and then provide some general observations on our Company and the opportunities ahead.

On the leasing front, the office industrial portfolio eclipsed at 90% lease market at the quarter's end, while retail finished the quarter at 86%.

Our momentum in the office and industrial assets has been particularly impressive considering the challenging market conditions.

The retail percentage, which we expect to reach over 90% by mid next year, would have been 87% if we hadn't removed San Jose Market Center from the data.

All said, we've leased over 2 million square feet of space across the entire portfolio over the last nine months, and the team continues to push very hard.

History has shown that in good economic times strong assets with strong owners are able to push rental rates.

In weaker times, strong assets with strong owners are typically able to capture disproportionate market share.

Cousins' performance the first nine months of 2010, provides a solid illustration of this trend.

Although we have only a 5% share of office space within the in-town Atlanta markets, Cousins has signed three of the four largest leases, half of the ten largest leases, and nine of the top 20.

That equates to more than 50% of the square footage among the top 20 in-town deals we've captured so far this year.

And this is not just related to our Atlanta assets either.

In Austin, Texas, our Palisades West project is now over 97% leased, in a submarket with 17% vacancy rate.

Our leasing team is working hard to ensure that we continue to grab our disproportionate share.

As we intended, this leasing success has allowed us to make significant progress towards our key objective of generating $20 million additional retail and office NOI, over the next two to three years.

I'm happy to report that we've already captured nearly 50% of this goal.

Of the $20 million, approximately $1.4 million is already represented in the third quarter NOI, and over $8 million has been captured by signed leases not yet included in our numbers.

This income will begin showing up in our results as tenants take occupancy throughout 2011 and 2012.

Turning to our sales efforts, as Jim mentioned, we sold San Jose Market Center in the third quarter for $85 million, generating a net gain of $6.6 million.

Subsequent to the quarter, we also sold 8995 West Side Parkway for $3.2 million, generating a net gain of approximately $700,000.

Sales at our 10 Terminus condominium project remain strong, and we expect to have only a couple units left by the end of the year.

We sold 18 units in the third quarter, generating over $6.6 million in proceeds.

That brings us to over $24 million in proceeds since September 30th, making 10 Terminus the number one grossing project in Atlanta.

Subsequent to the end of the third quarter, when we had 23 units remaining for sale, we've closed five units, and put another eight under contract.

As Jim mentioned, we have no out parcel or land track sales in the third quarter.

But we have been pleased with the $36-plus million in sales completed this year.

Our goal is to continue trimming down our land holdings in a disciplined manner.

As a matter of fact, Summer Creek Ranch, a 624-acre JV landholding in Fort Worth, is now under contract to a fund for approximately $20 million.

Which means our share would be approximately $10 million.

The closing is scheduled for December, and while we can't be certain that it will close, we expect to book a material profit on the sale when it does close.

While residential lot sales are expected to remain weak in the near term, particularly in Atlanta, there are some reasons for optimism.

Texas appears to be well on its way to a healthy recovery.

And new housing inventory in north Atlanta, where the vast majority of our Atlanta lots are located, is down by 38% year over year, and down 70% from its peak in 2006.

Our industrial assets continue to improve with leasing.

Putting us that much closer to our goal of selling these properties as they reach stabilization.

We expect to sell Jefferson Mill, which is now fully leased, in the first half of 2011.

King Mill is also fully leased, but 15% of this is on a month to month basis, and we're hoping to convert this to a long-term lease before taking it to market.

At Lakeside Ranch, our 749,000 square foot project in Dallas, we are in final negotiations with the tenant that will bring the building to 90% leased.

And we plan to move toward disposition of this asset as soon as we bring it to full stabilization.

The fee business, our third key area of focus, had another solid quarter, and continues to provide a steady source of income for the Company.

We recently added a couple of assets to our management portfolio in Texas, and hope to continue to grow this fee platform in the quarters ahead.

Our focus on leasing vacant space, selling noncore assets and generating fees, has not only enabled us to drive future NOI growth, it has also enabled us to significantly strengthen our balance sheet.

As Jim highlighted earlier, our leverage remains below 40% as calculated under our credit facility, pending debt maturities have been largely mitigated, and recourse debt is now just 8% of our market capitalization.

This represents a significant improvement from the state of our balance sheet 18 months ago.

Before wrapping up, I'd like to provide some general observations about our Company and the opportunities ahead.

The past several quarters have been largely devoted to playing defense.

Fortunately, Cousins' reputation is the highest quality operator in our markets.

Along with its solid capital position, strong assets, and longstanding business relationships, have proven to be invaluable in this defensive mode, and allowed us to significantly out perform our markets as a whole.

That being said, those who know Cousins well, recall that we prefer to measure our success through the value we create.

Playing offense has helped us generate that value in the past, and we're pleased to gradually be returning to that mode.

It's still very early in the cycle, but we are closely tracking our markets, specifically Texas, North Carolina and Georgia for opportunistic investments.

Our priority remains on assets that are operationally and financially distressed, for our development expertise provides a significant advantage.

We're exploring a variety of structures, both on the debt and the equity side.

We have bid on a handful of properties in recent months.

Most of them in Texas.

And while we have been in the hunt, we have ultimately been out bid each time.

Terminus 200, which we approached and underwrote as a new investment, provides an example of our preferred type of opportunistic acquisition.

Since recapitalizing this asset with Morgan Stanley in May, Cousins has executed over 350,000 square foot of leases, taking the building from 9% leased to 65% leased.

And we continue to have great leasing momentum.

Our retail team is considering a variety of opportunistic investments, as well.

One opportunity under consideration, is the recapitalization of a portfolio of grocery anchored shopping centers for a private developer.

Since our founding, Cousins primary means of creating value, has been through the department of commercial real estate.

For this reason, we are particularly excited about the prospects for Emory Point in Atlanta.

A planned three phase mixed-used development, adjacent to Emory University and the Centers for Disease Control, in the heart of the high-barrier-to-entry sub market.

Our long-held relationship with Emory University, facilitated this off market transaction.

Phase I, comprised of 440 apartments and 82,000 square feet of retail, appears to be on track for a 2011 start.

And we're in discussions with a reputable apartment developer, to co-invest and co-develop this phase.

We also continue to move forward on University Square, a mixed use project, adjacent to the University of North Carolina in Chapel Hill.

However, the time frame is further out on this project.

We are optimistic about the market dynamics and long-term demographics associated with universities, and we'll continue to pursue opportunities within this sector.

As I mentioned earlier, we believe that we are still very early in the cycle.

Inexpensive debt, coupled with massive amount of capital allocated to real estate acquisitions, which CoStar estimates to be approximately $200 billion, has led to a dramatic improvement in asset pricing across all product types.

Unfortunately, this increase in asset pricing has not been driven by underlying fundamentals.

Lackluster job growth have kept rents low, and concessions high in most markets.

These capital market dynamics simply mean, that we must work harder than ever to source deals that meet our strict underwriting standards.

It also means that we'll need to be creative in the way we gain control of assets.

And I'm confident that our team is well equipped to meet this challenge.

Moving forward, our core mission remains the same.

Continue to stabilize the platform through a relentless focus on leasing, sale and fees.

We're also excited to be in the early stages of a disciplined return to the offensive side of the ball.

And getting back to what we do best -- create value through the acquisition, development and redevelopment of real estate.

Finally, I'd like to say how excited we are to bring Gregg Adzema onboard as our new CFO, beginning on November 30th.

Gregg has spent most of his 23-year career in senior financial, investment and advisory roles in commercial real estate.

He was with Summit Properties, a publicly traded REIT from 1996 to 2005, the last four years of which he served as Executive Vice President and Chief Financial Officer, prior to Summit's highly successful sale to Camden Property Trust.

Most recently, he served as Chief Investment Officer and Executive Vice President, to two real estate investment and advisory firms in Charlotte.

I'm confident we've landed a great addition to the team, and look forward to introducing him to you all in the coming months.

Now, with that, let's take some questions.

(Operator Instructions) Our first question comes from Brendan Maiorana with Wells Fargo Capital, please go ahead.

Thanks, good morning.

Jim, just maybe to start with you.

For the Terminus 100 debt that you guys are looking at, you probably can't talk specifics, but where do you think a loan to value or debt yield is a fair number for a stabilized office building today?

I can't talk specifics about the loan proposal.

It's a big enough loan that we'll put out a press release if we get that done.

But, obviously, it's highly levered right now.

And we might be in a position to keep it a little more levered than you would see in the open market, because we have an existing nonrecourse loan and a good relationship with the lender.

Okay.

And the balance I guess would be funded either through some of the dispositions that you are looking at or on the line of credit?

Yes, on a temporary basis we could use the line of credit.

The existing loan matures at the end of 2012 anyway, so it's to our advantage to go ahead and get a longer-term extension on the bulk of the loan.

I think, just to come back to your question, 65% loan to value or so would be a fairly normal loan to value in today's market.

So you might use that as a benchmark.

Okay.

And then the line of credit, I think has the $50 million swap that I think expired in October.

So should we just assume that that goes to floating, or for the remainder of the term?

Yes, the swaps are all gone, you are correct.

We did a swap on the term loan, because we expected to have that outstanding for the full five years.

And of course in delevering, we paid that off.

The other pieces of the swap, we did hedge a portion of the floating rate exposure we had, as the floating rate exposure increased.

Our floating rate exposure is very low right now.

So it will be up to the next CFO, but I would think, given the low level of floating rate exposure, there's probably no reason to do any interest rate management.

Okay.

That is helpful.

Then Larry, you mentioned that you are halfway to the $20 million NOI growth target.

Obviously have done a very good job of leasing up the portfolio in Q3.

In terms of the cost, I think you guys have maybe previously mentioned it would take around $40 million of TIs, at least in commission.

How do you think you're tracking on that number thus far?

Brendan, we continue to track that closely and I think your number's probably pretty close.

We are averaging about $45, $50 a square foot and we have about 900,000 square feet left yet to do.

So I think you are pretty close on that.

If you apply 8.5% cap rate to it, it is a pretty nice value creation, even on that increased level.

We are not seeing the concession numbers go up at this point.

I wouldn't say there is a trend that they are going down, they are probably flat.

But where you are seeing some landlords make their first attempt to try and obtain the market a little bit is in the tenant work side of it.

Okay.

Then just in terms of the pace of lease up, it's obviously been pretty significant over the past couple of quarters.

Are there still a lot of large requirements that are out in the market where you may be able to gain a little bit of share as you have done over the past couple of quarters?

Yes.

You have actually had three straight quarter in Atlanta, although the numbers haven't been real strong, of that absorption in the Class A market.

And various economic advisors are thinking Atlanta is on pace to probably gain between 30,000 or 40,000 jobs this year and get the unemployment number out of the double digits, which is still nothing to brag about.

But we are seeing tenants for large blocks of space that are looking in the market.

And with the high vacancy number, one of the things that you always see at this stage of a recovery, is although there is a lot of vacancy, there is not as many large blocks of space as you would expect.

And I think that will continue to be the case.

There is really two kinds of tenants we are seeing.

One is still the tenants that have the 12 and 13 maturities that want to lock in at nicer buildings in attractive rates right now.

Then the service side of the business, even the public sector GSA is in the market for a fair amount of space.

And we are staying very aggressive.

We are known as a landlord that's stable and can get deals done and we'll run the projects right.

We are not going to back off staying aggressive in the marketplace.

What's the largest block you could offer at 191 now, with the leasing that you've done this far?

We've got about 100,000 square feet in a continuous block.

And we actually had a group that we came real close to -- I don't think we are going to end up making the deal -- that would have taken all of that.

So we've got that block.

And we've got, at American Cancer Society Center, Turner in May of next year expires for 90,000 feet and we still don't know if they are going to take that or not, although they have not exercised their renewal option.

So we are working hard to try to get an extension with Turner.

It is not a case of that space competing against another building, it is a case of possibly that space consolidating in some other space they have in town.

So that would be the other block that would become available if Turner doesn't do it.

And then the third block would be Kids Too, which is moving to Terminus 200.

That space would become available in January of 2012, and that is 65,000 feet.

Right.

And then, just on the American Cancer, lastly, is the Turner, the 90,000, is that the hold over space that is there?

Or is that another tenant?

I'm sorry, I'm blanking on the name.

That's another tenant.

Okay, and that was around 50,000 square feet?

36,000.

That was Encom which we did last quarter, which was a stay and expand.

Right.

May that hold over space move to permanent, or has there been no update on that?

Yes.

Yes, Brendan, that deal is done and it's now, we haven't got them in possession yet, but the lease is signed and that's now a permanent arrangement.

Okay great.

Thank you.

(Operator Instructions) Our next question comes from Jamie Feldman with Bank of America, Merrill Lynch.

Please go ahead.

Thank you and good morning.

Back to the concessions and TIs question.

Can you give us a sense of what your net effective rents are for some of the bigger office deals and also what you are getting for retail?

Let me take a stab at that, Jamie.

This is Jim.

We look at a number of metrics and net effective rent is not one we tend to calculate.

As Larry said, $45 to $50 is the range we are seeing on average.

And average lease terms would be, I would think, across the portfolio, would be seven to 10 years.

If you just back that out of the net rent, you would get to the net number or pretty close to the net number.

Now, the net rents are going to vary from project to project, from the low 20s in Buckhead to the low double digits, $10,000 or $12,000 at some of our -- Larry just said $15,000 or $16,000 average, and I think that's pretty close to right.

If you look at it across the portfolio, I would say seven to 10 years, $15,000 to $16,000.

And maybe $5 a square foot you would take off that for the amortization of the CapEx which is both tenant improvements, building improvements, as well as the leasing commissions.

So you are paying $40 to $50 in TIs for both office and retail?

Yes, they are pretty close to the same number.

And the lease durations are about the same?

On average, yes.

Okay.

And the net rent in retail are $15,000 to $16,000?

Net rents in retail are a bit higher than that.

The fixed expenses are a little lower.

So what do you think your average net rent is, in retail?

It is close.

I would say it is in the high teens there on a net basis.

We have analyzed it to look at the total number, because really the operating expense pass through, substantially all of that will fall to the bottom line because we have largely operational buildings and there are not a whole lot of variable costs.

The answer for both on a gross basis is that they are very close to the same number.

In the mid $20s.

But the net rent on retail would be in the high teens with lower operating expense and it would be in the mid-teens with the higher operating expense, to get you to the mid-$20s on the office side.

Okay.

What are free rent periods?

On a 10 year deal, the free rent is going to be somewhere in the 12 to 18 month period, just depending on the lease and the project.

And of course, free rent's not a part of the retail leasing.

That is just an office phenomenon.

Okay.

And is that the same in Austin as Atlanta?

Austin would be less.

Austin would be more on the 12 month side.

Atlanta would be more on the higher side.

Okay.

And then you had mentioned passing on some acquisitions in Texas.

Can you give us a sense of what types of assets those were and what prices they actually went at?

I can give you a little bit of color on that, Jamie.

We have priced assets, and are pricing, as we speak, assets in Houston, Austin and Dallas.

In Austin, there was very similar to the Campanile transaction we talked about here, was an existing building that had done a corporate headquarters, was only about 20% occupied, about 350,000, 400,000 square feet.

Very attractive sub market.

But it was a 20-year-old building.

We were going to have to reposition it.

It had been built for a single user.

And we went after that building and we were actually the best bidder.

We lost it to a user that bought it and we were about at $100 a square foot on that.

We were the top bidder.

I think the user paid an extra $20 or something like that to buy.

Really, it's an interesting market.

We are seeing, on what we would call the value add side, where they are building in Austin and Dallas, that are new buildings in submarkets that have a lot of vacancy, that have zero or very little leasing in them.

We are being very, very careful on those to make sure that there is something that we bring to the table on getting those leased up, other than just a logo and then price.

Because it takes a lot to reposition those buildings.

We, quite frankly, think that some people are being too persuaded by the price versus replacement cost rents which is a dangerous game to get in.

We look at those.

And then we are looking at acquisitions.

Usually we bring in a partner on these that would be a little bit closer to core like investments that maybe are 60% to 80% leased.

And those are going, just depending on the percentage leased, you are seeing those things trade in the high sixes, low sevens off in place rents and cap rates.

And a lot of people chasing those deals.

There is a lot more activity, I think, just due to the health of the Houston market and the relative health of the Austin market.

There is actually more assets churning there that we see than in the more stressed markets, being Atlanta first and Dallas second.

Okay.

And do you have partners lined up if you were to find those core investments?

Yes, we've got partners that, we don't have an exclusive relationship, but we are in daily contact with partners as we see opportunities to try to fit our capital with other people's capital if that is the best thing to do.

And as I alluded to in my speech, and I noticed some of the other folks are talking about this on their calls too, we are also seeing, quite frankly, more productive activity where we are looking at deals like T200 that aren't our deals where before they get to a fully marketed process through the brokers, you're in conversations with the existing debt holders about bringing new equity into the deal and is there a way to structure a T200 type of deal.

And those require a little bit more work to find, but I think they probably have more viability, in some cases, because it is more like an off market transaction than a fully marketed transaction.

Okay And are you focusing on the retail side at all?

Or it sounds like it is primarily office?

I'm glad you mentioned that because I really hope that you will focus on our retail numbers, they are really outstanding.

I just continue to -- the number one thing that kept me awake on retail a year ago was our co-tenancy exposure where we had 7% of the portfolio, over 300,000 square feet.

We had 7% of the portfolio in co-tenancy and therefore not rent paying.

And today, that's down to less than 1% of the portfolio.

Our sales numbers are up, so the retail is doing well.

As you know, last quarter we announced we brought Mike Cohn in.

The thing I referred to in the speech is there is a very well-known and good private developer that has done grocery anchored centers with one of the major grocers in the southeast.

They have brought us a transaction that we are considering right now which would be like T200.

They need some fresh equity to rebalance their debt structure with the lenders.

They are not in a position to do that.

Grocery anchored centers, we think, are a pretty solid place to be at this stage in the economy, and we are certainly looking at that with enthusiasm.

We'll see how it plays out.

If it plays out, it will play out between now and the end of the year.

Finally, you had mentioned some university development.

Is that office or retail and how big do you think that --?

That's really an exciting thing.

We've had a relationship over the years with Emory.

We've co-developed a 0.5 million square foot medical office building, we did a conference center, we just did an expansion on the conference center.

What we are seeing with several universities, Emory and UNC among those, but others as well, is they are looking for partners to come in and help develop adjacent landholdings for the campus they may have.

In Emory's case, they are doing it in the form of a long-term ground lease to us.

And it will be a combination of office, retail and housing.

The housing will not be student housing.

It's right across from Emory and the CDC in Atlanta.

In about a half mile stretch, you have about 45,000 daytime employees in a totally protected environment in terms of other development.

So the housing, the apartments, will be geared more to the young professional, graduate student, as will the retail.

But that is a three phase development.

The one in Chapel Hill, which has probably got a couple years to get fully entitled with the city of Chapel Hill, will probably be a three or four phase development.

What is the competition for those?

Emory was an off market transaction.

North Carolina, we went through what I would call a beauty pageant.

The main thing they are looking for is a stable partner who has done it before.

So once you are in the loop with those groups, performing and having great product, I think it will continue to be a good opportunity for us.

In the short run, it is probably more of it on the housing side.

But that's not a bad place to be right now either.

We would, like at Emory, where we have a big multi-family component in the first phase, we certainly would look at bringing in a multi-family partner who has experience in doing that.

Although we would want to participate in the deal on the apartments, as well.

Okay.

And then finally, you had mentioned your fee business is growing.

As you look forward to 2011 how big do you think that income stream could be?

Jamie, we are just finishing up our 2011 numbers.

We are a couple of weeks from doing that.

I think the deals I alluded to in the call, we probably added $500,000 worth of fees of run rate already just in those pickups.

The thing that's always hard to do on that fee business is a lot of that income is lease fee, leasing commissions we get.

And that adds a variable to do it.

But we ought to be able to give you a little bit more color on that in a quarter or so.

All right.

Thank you.

I'm still working to get you more comfortable in Atlanta.

Our next question comes from John Stewart with Green Street Advisers, please go ahead.

Thank you.

Jim, maybe you could give us a bit of background in terms of the mortgage that was placed on Meridian Mark Plaza during the quarter.

I'm specifically wondering if that was negotiated awhile ago.

Just looking at a 6% coupon for 10 year money.

Can you give us some color in addition on the LTV?

I just would have expected to see a lower coupon in this environment.

So wondering if that was struck some time ago?

John, it was.

It is amazing how the debt markets change and have changed.

At the time we looked at that, that looked like a very favorable deal.

Craig is here.

He may remember the loan to value.

But that 6% coupon looked like a very favorable rate given where the debt markets were.

It was priced early in the year and then we closed in the second quarter.

Originally, we had looked to the original lender, and this was probably nine months ago, the quote was 7.5%.

So it rapidly went down.

But we actually cut that deal probably the end of the first quarter.

There is no question it's dropped more significantly.

Since then we are in the midst of finalizing another loan now for a retail project for similar terms and it is 4.62%.

And so it's amazing how dramatically it has dropped within the last year.

So we can certainly expect you to be inside of that on Terminus 100?

We don't try to time the market, John, on those.

We try to do what makes sense and try to get long-term fixed rate, non-recourse debt where we can in appropriate levels.

So it blends out to a reasonable deal.

But the answer to that is, we should get a favorable rate on Terminus 100.

But just to be clear you are still in the market in terms of the terms on Terminus 100?

We are talking to the existing lender, we don't want to get ahead of ourselves.

But yes, we are in serious discussions with the existing lender.

And we're looking at a longer term there.

No, I understand.

Larry, I was wondering, we spent quite a bit of time today talking about the investment landscape.

Was wondering if you could touch on potential dispositions.

You obviously referenced industrial, and, of course, you sold the AtheroGenics building, but what else is potentially in the cards in terms of culling the portfolio going forward?

John, I think you hit on the right.

If you think the market is too frothy in terms of people buying, then you ought to look at being a seller and relook at that, which we have done.

There is a couple of assets that I would probably be able to give more color on in the next quarter, but that we've gone back and looked at in the last month or so and said, guys, if this pricing is real then we ought to look at doing that.

I think you can probably look through the portfolio and tell which ones might be good ones to sell that are fully leased and we can have that capital to deploy elsewhere.

The other thing that we are trying to do is we look at acquisitions, as well.

We certainly, I want to emphasize, given equal deals, we are looking to rebalance the portfolio more with the Texas being the gainer in terms of our percentage.

Just because of the dynamics, they're being healthier, at least for the next two or three years than Georgia appears to be.

How about some of your smaller markets, what's the prospect to move out of some of the markets that are really just a rounding error altogether?

Certainly on the retail portfolio, there is a different dynamic that drives those.

But the second tier market -- I hate to call them second tier markets -- but the second tier markets, like a Birmingham and things, are ones we are looking at.

We've got a little bit of leasing to do on one of the Birmingham assets.

Our focus is, on the offensive side, is primarily Austin, Dallas, Houston, Atlanta, and then North Carolina, Charlotte, which we are already in, and we are up in the RDU market, because we are there with the UNC assignment.

Trimming some of the other markets where we don't have much market share is certainly something that is on our radar screen as time becomes right to harvest those assets.

Then I'm not looking for guidance, but can you give us a sense for what we might potentially see in terms of dollar volume if everything you are thinking about comes to fruition?

Dollar volume of what, John?

Dispositions.

I would imagine the dispositions that we've talked about are the ones you would see sooner, the Jefferson Mill, which we are thinking now will trade at certainly below a 7.5% cap.

Some people have said below a 7% cap.

So you can do the math on that.

I would hope the Briggs & Stratton would convert over.

That is why we did the lease amendment with them that they are doing month to month.

But hopefully that gets that over, so you'll see us move on that.

And I would think that would probably trade a little bit higher, but probably 7.5% cap just because it's got the shorter term rates on it.

So then we mentioned the land tracks we've got that we closed in the fourth quarter.

And then, as I say, there is one other asset that we are really going through our underwriting right now with our investment brokers just to validate what we think the pricing of it would be.

That would be about a $40 million asset sale that we would commence.

If we get the guidance we expect, that would probably be a first quarter event.

That is helpful.

Thank you.

Thank you, and your next question comes from Sloan Bohlen with Goldman Sachs.

Please go ahead.

Good morning, guys.

Just a couple of quick ones.

The opposite of John's questions, just on the acquisition opportunities you were looking at in Texas, could you give us a sense of what the sizes of those were?

And then I've got a follow-up.

Sloan, the size of it varies a lot.

But generally, the size of the building on the small end would be 300,000 to 400,000 square feet.

And large end up to over one million square feet.

And we are seeing a fair amount of activity in both.

The smaller ones tend to be the high value add type of deal where the building is either empty or 20% occupied, where our sweet spot has been in terms of putting our development skills to work.

And so on those, you could see us do those by ourselves.

Or depending on the deal we may bring a partner in.

The larger ones, the 1.2 million, generally are more the 60% to 80% leased deals, where we feel real good about being able to bring our skill sets to the table on the vacancy and the rolls.

Those would be the ones you would probably more than likely see us with a partner.

We've had a lot of partners express an interest in underwriting deals with us.

We are probably in that conversation on two or three assets every week, working them through.

Okay.

Then Larry, just a question on the underwriting between the two.

Say, for the bigger deal you would bring a partner in on, what kind of time frame over which do you think you could stabilize that asset?

Is there a return expectation differential between that bigger project and, say, something a little bit more opportunistic?

Yes, there has to be, Sloan.

You really have to look at it on an asset by asset basis because there may be one that you think you have a tenant in your hip pocket going into.

But what we try to do on these is underwrite them to a yield and stabilization because we think guessing to our game on exit caps, although we do it, that is not our main deal and we primarily look for something that is north of 9% in terms of the yield on our stabilized NOI.

And we vary that just based on what we think the risk dynamics are.

Obviously you would see that.

If you had a 1.2 million-foot building, and let's say it is 80% leased, you would move down that scale below that.

But there we would probably be in a deal like we are at T200 where we might be 20% of the equity and when you bump our equity piece with management and leasing fees, if it would bump back into that range, it wouldn't show the range on just the deal itself, underwriting.

The smaller deals we may be in by ourselves and we may be 50/50 with somebody and that would be generally how we underwrite them.

Okay.

Do you have a general time frame over which you think stabilization could occur, say, if it was a 60% leased asset?

Most of the folks we are talking to that look at that, anything that gets beyond two or three years it gets to be problematic.

The vast majority of the ones we've got that we are pricing aggressively, we have a lot of confidence that we can get them there in that time frame or shorter.

That is helpful and maybe just one question for Jim.

On the same store data, it looked like maybe the same store expenses for the retail assets dropped by a little bit in the quarter.

I just wondered what drove that.

There is a fair amount of noise, Sloan, in our same store numbers, especially on the retail side because we've had a pretty small portfolio.

Really, what happened this quarter, this quarter versus last quarter was not very significant.

On the office side we had some true ups and some adjustments for bad debt.

On the retail side, we had some tax refunds and lower tax numbers calculated in the second quarter.

So we had some of that going on.

Just in terms of the overall trends, Larry talked in his speech about how much we've captured from the signed leasing.

It is a pretty small number.

We've captured, as Larry said, about $1.4 million and there is over $8 million to go from signed leases.

So there will be, over time, some NOI increases that will help some of those same store numbers on both the office and retail.

And then on bad debt, really, that's trending in the right direction.

That's been down for two quarters in a row, our reserves for bad debt.

So I feel good about where we are with that.

And our credit watch list is a pretty small list for both office and retail right now, compared to where it was 12 months ago.

That is helpful.

Thank you guys.

Mr.

Gellerstedt, there appear to be no further questions at this time.

I'll turn the conference back to you.

Please continue with your presentation or closing remarks.

Thanks to everybody for your continued interest in Cousins.

We look forward to seeing most of you next week in New York, and discussing more about where the markets are, and where Cousins Properties is headed.

And we appreciate you listening in today.

So thanks very much.

Thank you.

Ladies and gentlemen, that concludes our conference call for today.

We thank you for your participation and ask that you please disconnect your lines.

Have a good day.