Cousins Properties Inc (CUZ) 2010 Q4 法說會逐字稿

Good day, and welcome to the Cousins Properties fourth quarter 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 Trip Sullivan of Corporate Communications.

Please go ahead.

Thank you.

Good afternoon.

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 incomes for properties, as well as certain categories of expenses.

Actual results may differ materially from these statements.Please refer to Company's filings with the Securities and Exchange Commission, including its annual report on Form 10K 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 can be found through the quarterly disclosures and supplemental SEC information links on the investor relations page of its website at www.cousinsproperties.com.

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

Larry?

Good afternoon, everyone.

I'm Larry Gellerstedt, President and Chief Executive Officer of Cousins.

Thanks for joining us for the fourth quarter conference call.

On the phone with me today are Greg Adzema, our CFO and Craig Jones, our Chief Investment Officer.

Before I give you my thoughts on the business, I would like to welcome Greg to his first earnings call at Cousins.

Greg joined us in December and has been a fantastic addition to the team, and we're thrilled to have him.

With that, I'll hand it over to him for his inaugural review of the Cousins' financial results.

Thanks, Larry.

Good afternoon, everyone.

I'm going to try to use everyone's time this afternoon as productively as possible.

In that spirit, I'm not going to recite data from our financial tables.

It's all there in the press release in a much clearer presentation than I could ever achieve on this call.

Rather, I'm going to focus on specific issues and transactions that occurred during the quarter and that might benefit from more color.

I'm going to leave the majority of the time for Larry so he can focus on strategic issues.

With that, let me say it was a very solid quarter.

FFO before impairment and separation charges was $0.16 per share, driven by same property NOI growth of 3.3% over last quarter and good residential lot and condo sales .

We also benefited from the recovery of an impairment in some previously written-off pre-development costs.

The impairment recovery was related to Summer Creek, which is a residential project held by our Seal Realty joint venture with Four Star.

As a quick reminder, Summer Creek is located in Fort Worth, Texas and holds land tracts and residential lots.

In the second quarter of 2009, we recorded an impairment on our overall investment in Seal Realty.

$5.4 million of that impairment related to the Summer Creek project.

During the fourth quarter, Seal Realty sold 624 acres of Summer Creek for $20.3 million, and we reversed $3.0 million of that 2009 impairment.

On top of that reversal, the sale generated an additional $450,000 in pure profit over our original basis in this asset.

Recovery of previously written off pre-development costs related primarily to $1.1 million that we received from our former joint venture partner in the Oklahoma City project that we told you about last quarter.

These items were offset during the quarter by the recognition of four impairments.

The largest, Padre Island, is also held within our Seal Realty joint venture.

The impairment on this asset is driven by our change of intent on the project.

We and our partner have decided to market the property for sale rather than developing it ourselves.

This decision led to a write-down to today's fair market value.

The second largest write-down during the quarter is Handy Road.

This project has a non-recourse loan associated with it that matures March 30 of this year.

After an exhaustive analysis, we have decided to return this property to the lender.

Pine Mountain Builders, the third impairment, was a joint venture formed to construct homes in our Callaway and Blalock residential projects.

As part of this effort, we built six model homes.

The construction loan for these homes matures in June of this year, and we've decided to sell these homes and repay the loan.

We sold three of the model homes during the fourth quarter, recognized an impairment on these homes and wrote down the value of the remaining three.

Despite this write-down, we believe that proceeds from these sales should satisfy the construction debt.

We also wrote off some additional pre-development costs at Pine Mountain Builders as we reduced activity.

The final impairment, Creekside Oaks, is a residential property in Bradenton, Florida, and we simply marked it down to fair market value as it's complete and held for sale.

Please note that we, as well as our auditors, conduct a thorough impairment analysis of the real estate assets on our balance sheet each quarter.

Based on our internal review and our consultation with our auditors, we feel comfortable with our impairment analysis and the conclusions we've reached at this time.

We also recognized $742,000 in separation charges during the quarter.

These reflect our ongoing commitment to right-size our G&A to better align our costs with a simpler strategic plan going forward.

I'd also like to take a moment to briefly talk about two refinancings we completed during the quarter.

At Terminus 100, we modified and extended our mortgage with the existing lender, Northwestern Mutual Life.

From a macro perspective, this is a terrific refinance of this asset.

We borrowed $140 million on a non-recourse basis for 12 years at 5.25%.

This will likely prove to be a very attractive debt over that period of time.

The story is the same at the Avenue at East Cob, where we borrowed almost $37 million for seven years at 4.52%, again, on a non-recourse basis.

Before providing some guidance for 2011, I also wanted to highlight our recent return to an all cash dividend.

This decision was based on the stabilization and emerging improvement in our cash flows, as well as the strength of our balance sheet, backed up by a more a vigorous national economy.

With that, let me provide some data that should help you generate forecasts for our earnings in 2011.

As a reminder, we provide data for specific property assets where historical performance may not exist or may not be a good guide post for future performance.

We also provide guidance on G&A, as well as fee income.

We do not provide guidance on condominium -- excuse me, condominium, lot or land sales due to the unpredictable nature of these items.

However, I do want to point out that the revenues from condo and land sales should decline in 2011 from 2010 levels, simply because we only have a handful of condos left, and we had an unusually high number of out parcel land sales in 2010.

At 191 Peachtree, during the fourth quarter, we recognized $1.3 million in deferred income on two terminated tenants.

Going forward, we expect around $3 million in quarterly NOI from this asset in early 2011, increasing to $3.9 million by the fourth quarter of 2011.

At Terminus 100, the lease-up continues, and we expect quarterly NOI from this asset to be approximately $3.8 million dollars in 2011.

At Palisades West, the large Saint Jude's lease has commenced, and we expect quarterly NOI from this asset to be approximately $1.5 million in 2011.

At the Avenue Forsyth, we expect quarterly NOI in 2011 to be approximately $1.8 million as a result of continued lease-up.

At 600 University and Lake Shore Park Plaza, our Birmingham office properties, aggregate occupancy has declined a bit, and we expect quarterly NOI of approximately $800,000 in 2011.

Finally, with respect to our new Publix joint venture, we receive a preferred return from operating cash flows equal to 9% of our capital investment.

However, because the agreement provides that we receive at least a 16% IRR lookback on sale or refinancing before our joint venture partner receives any significant distributions, GAAP has us accrue that 16% return on our invested capital on a current basis.

We expect this amount to be just under $600,000 per quarter in 2011.

For G&A, we expect the total 2011 number to be between $34.5 million and $35.5 million.

This is down from $36.1 million in 2010, as our previous efforts to reduce overhead begin to flow through.

For fee income, net of reimbursed G&A expenses, we expect the 2011 number to be between $15 million and $16 million.

This is down from 2010 as a result of several items, including lower leasing fees at Terminus 200 following a huge leasing year at that property, and lower residential development fees due to the transfer of everyday management of our residential projects to Four Star.

I would like to close by saying how excited I am to be here at Cousins.

It's a terrific organization with hardworking people and a unique and compelling platform that really differentiates it in the REIT industry.

I look forward to reaching out and meeting all of our investors and analysts in the near future.

In the meantime, please don't hesitate to give me a call.

With that, I'll turn it back over to

Thanks, Craig.

As many of you know, our focus in 2010 was largely devoted to leasing our vacant space, prudently selling non-core assets as we work to simplify our platform and positioning Cousins for future investment opportunities.

The fourth quarter results provide a fitting conclusion to what we view as a very important and successful 2010.

I will touch on each of these areas and then provide some insight on how we're approaching 2011.

In a year where market conditions remain challenging, we captured a disproportionate share of our markets with leases signed for nearly 3 million square feet of space across the portfolio, a level of activity we haven't seen since 2006 and an increase of over 100% from our 2008 levels.

On a year over year same-store basis, the office portfolio increased from 87% to 92%.

Industrial went from 51% to 91%, and retail increased from 82% to 86%.

We will continue to push hard to fill remaining vacancies in the months ahead.

In terms of upcoming expirations, our only major 2011 expiration is Turner Broadcasting, which has 90,000 feet at ACSC.

Unfortunately, as most of you know, Turner has decided to consolidate its operations at another location.

Needless to say, backfilling this vacancy is a major priority, and we'll continue to work diligently on this front.

We do have prospects for this space, but nothing far enough along to report at this point.

Overall, we have relatively little rollover exposure in the portfolio.

Between now and 2015, we have no more than 10% of our portfolio rolling in any of those years.

Turning to the dispositions of non-core assets, for the year we sold $84.6 million of lots, condos, out parcels and land tracts.

We also sold San Jose Market Center for $85 million and 8995 Westside Parkway for $3.2 billion, bringing our total non-strategic asset sales for the year to $172.8 million As promised, we're almost to the finish line at 10 Terminus place.

At the end of the quarter, we had five units remaining for sale.

Today, only one of these units remains for sale.

With the exception of two units that were owner-financed which we can't officially book as sold, we expect to be fully out of 10 Terminus and the residential condo business in the next couple of quarters.

We also made progress in working down our land inventory.

During the quarter, we sold 624 acres, which is equivalent to 1,200 lots, at Summer Creek Ranch outside of Fort Worth, Texas, and sold 25 lots at our Lakes at Cedar Grove project in Atlanta for a slight profit.

Our client services business continues to generate a steady source of revenues in these very turbulent markets.

In addition to the tangible benefits this business provides, it also keeps the brand and the platform active in our core markets and serves as a valuable source for potential investment opportunities.

Our continued progress with leasing, selling non-core assets and generating fees has left us with a very sound balance sheet, with leverage under 40%, an attractive maturity schedule and recourse debt comprising less than 20% of our overall debt.

The Company is well positioned to do what it does best, which is invest in real estate.

On that note, while 2010 was largely devoted to the less glamorous blocking and tackling issues of leasing sales and fees, we did manage to find a few investment opportunities.

Our well publicized investment in the recapitalization, the Terminus 200 last spring, is well on its way to success with the building now 67% leased.

More recently, in late December, our retail team, under the new leadership of Mike Cohn, recapitalized a four property portfolio of Publix anchored shopping centers.

This off-market $14.9 million investment is generating a solid going-in yield for us, while providing further upside upon lease-up.

In addition, we received the option to jointly develop two other sites in Florida at such time development as appropriate.The Terminus 100 recapitalization, which Greg talked about earlier, should also be viewed as a significant investment.

In our underwriting, we treated Terminus 100 as a completely new deal, bringing the same high level of scrutiny we bring to every other new investment opportunity.

Our decision to invest $40 million of capital needed to stand on its own, and we're quite excited about this transaction.

Before turning to 2011, I would like to give a little color on our markets.

As you all know, Cousins is a real estate company with an exceptional platform located in the highest growth markets in the nation.

No doubt the Atlanta economy was impacted particularly hard during this recession, and for this reason, it should be a little slower on the rebound, particularly compared to our Texas markets.

There will always be ups and downs in the short run, but we remain excited about the long-term trends in all of our markets.

Atlanta ended the year up approximately 7,000 jobs according to Georgia State University with unemployment remaining around 10%.

GSU is forecasting job growth for 2011 and 2012 to average around 50,000 jobs a year, placing it among the top 10 markets for job growth in the nation.

Dallas gained over 40,000 jobs this year and has its unemployment rate at a little over 8%.

Population growth trends for both Atlanta and Dallas remain among the top three in the nation.

Austin is proving to be one of the fastest recovering markets in the country with a 2.3% hike in unemployment growth in 2010 and an unemployment rate at just over 7%.

On the office side, transaction activity picked up significantly in 2010.

The class A markets showing positive absorption in all of our markets.

While the absorption is certainly a good thing, class A vacancies in Atlanta and Dallas still remain high at a little under 20% and 18% respectively.

Austin, however, has experienced significant momentum on this front with a class A vacancy decreasing by 200 basis points in 2010 and finishing the year at 17.8 %.

Excuse me, I had to take a drink of water.

I've been fighting a cold.

Transaction activity has felt a bit slower so far in 2011, but it's very early, and perhaps some of this can be attributed to the weather.

In Dallas and Atlanta, I would say that deal terms remain stabilized.

We're not seeing the economics get any worse, but aren't seeing them rebound either.

In our opinion, these markets are bouncing along the bottom and will continue to do so until we see a meaningful decline in vacancies along with a sustained return to job growth.

However, in Austin, where overall momentum is stronger, we're actually beginning to see rates improve.

As I mentioned earlier, Cousins continues to outperform its markets as a whole.

This pattern is more evident now than ever as tenants located in lower-quality buildings look to take advantage of the opportunity to trade up.

Buildings like 191 and Terminus in Atlanta, along with Palisades in Austin, offer the highest quality space in the market for solid value.

On the retail side, leasing velocity continues to be steady.

Although many of our deals over the last 18 months have been with local and regional tenants, we are starting to see an uptick in national deal activity.

On average, new rent deals are stabilizing in terms of economics, while renewal activity remains positive.

Tenant sales continue to improve.

Our centers were up 5.2% year over year, a couple percentage points ahead of the national sales trends.

In our lifestyle portfolio, we saw positive year over year comps every month for 2010.

In particular, we see strong sales improvements at Avenue Murfreesboro and Avenue Forsyth.

Additionally, our co-tenancy exposure has been largely eliminated throughout the portfolio.

The market for land and lots is showing some early signs of return to life.

We sold 371 lots in 2010, more than we sold in 2008 and 2009 combined, and this doesn't include the equivalent of 1,200 lots sold at Summer Creek Ranch.

Texas is further along in the recover than Georgia, but we're cautiously optimistic that both markets will continue to trend in a positive direction.

Now, turning to 2011, our mission can be simplified into three areas of focus, leasing, selling non-core assets and investing.

First of all, we will maintain a relentless focus on leasing vacant space.

We have a significant opportunity to create value for our shareholders by continuing to unlock the value within the existing portfolio.

To provide some context of this concept, in early 2010, we estimated that by taking the portfolio from about 85% to 95% leased over the next two to three years, we could generate approximately $20 million of additional NOI -- annual NOI.

By year end, we were already more than halfway there, but most of this captured income has yet to flow through our P&L.

No matter which calculation you apply to that $20 million in NOI future cap rate, the end result is significant value added to the portfolio.

It's easy to see why leasing remains our number one priority.

Second, we will continue to simplify the platform.

We will continue to reduce our land and lot holdings in a prudent manner.

And as you know, our goal is to sell the three industrial buildings as soon as they are fully leased.

The first of these assets, Jefferson Mill, is under contract, and we expect to close later in the first quarter.

This -- as capital (recycle) occurs, we may also look to sell certain non-strategic stabilized assets, especially if the market is willing to pay aggressive pricing.

Non-core dispositions serve a double purpose.

They simplify the business and allow us to focus intently on our core businesses of retail and office, and they also generate additional capital obviously for opportunistic value creation opportunities as we move into the next cycle.

Which brings me to the third area of focus for 2011, investments.

As I've mentioned before, we believe it's still very early in the recovery cycle.

A vast majority of the assets most aggressively financed during the credit bubble of 2005 to 2008, have yet to come back to the market.

With approximately $1.4 trillion of commercial real estate debt maturing during 2011 through 2013, we're just now getting to the point where opportunities should begin to surface.

A large percentage of these loans will not qualify to refinance without substantial equity infusions.

While some of these will be worked out with the current owners, we believe a significant number of them will require outside capital, as evidenced by both our investment in the Publix portfolio and the steady number of calls we're getting from private developers and building owners.

Cousins will seek opportunities to invest its capital, along with its expertise in these assets.

While we've only seen a handful of compelling opportunities to date, the volume is increasing, and we're hopeful to see more activity in the balance of 2011.

Competition for these opportunities will no doubt be intense, but we're determined to remain patient and disciplined in our underwriting and are comfortable in the knowledge that we won't always emerge as the highest bidder.

Regardless, through hard work, creativity and our proactive approach, we feel we'll land more than our fair share of deals.

One final note on the development front, we remain excited about the prospects for Emery Point in Atlanta.

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

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

Phase one comprised of 440 apartments and 82,000 square feet of retail appears to be on track for a start later this year.

While it will be a long time before the market supports significant redevelopment activity, we do hope to see additional niche opportunities like Emery Point.

Although not big in terms of numbers, off market investment opportunities like Emory and the Publix portfolio where our brand and relationships are key, as well as our investments at Terminus 100 and Terminus 200 show that we're not just sitting on the sidelines waiting out the storm.

We're proactively out in our markets, doing deals and creating value.

With that, I'll close and turn it back over to the operator for questions.

Thank you.

(Operator Instructions)One moment, please, for our first question.

Thank you.

Our first question comes from the line of Dave Aubuchon from Baird.

Please proceed.

Thank you.

I apologize if I missed this, but the NOI increase in 191 Peachtree from Q3 2010 to Q4, was that related to just some free rent burning off or a combination of additional occupancy in the building over the past couple of quarters?

This is Greg.

A good chunk of that was a termination of a tenant we received compensation for.

Okay.

So net that termination, occupancy is --

Occupancy was down a percent from the third quarter, really attributable to two tenants.

A restaurant in the lobby and an office suites tenant called Broadway Executive Office Suites, I believe.

Okay.

And so run rate going forward, net the termination fee, or can you disclose the termination fee so we can get an idea?

Yes.

No, the termination fee, it buried in our numbers.

Termination fee, I believe was about -- just under $500,000.

And the run rate going forward, we disclosed in the opening remarks.

NOI from 191 will start in the low 3s at the beginning of the year and get just under 4 by the end of the year.

Okay, thanks.

And there is a pretty big -- Larry, you mentioned the great job you've done on leasing and you have this year, but there is still a pretty significant spread between that leased percentage versus the occupancy.

When do you think that starts to narrow pretty -- is it over the coming quarters this year, or will that stretch into 2012 as well?

I think most of it you'll see this year.

Some of it will stretch into the first couple of quarters of next year, but you ought to see most of it bleed in through the first four quarters of this year.

Okay.

And then on the Turner Broadcasting lease, can you give some metrics about where that rent is for that specific lease and sort of where market is and how you -- right now, how you're sort of thinking about marketing that space?

Sure.

David, as you know, that is a very unique building, and the floor plans in it are about 130,000 square foot floor plans as opposed to 25,000 or 30,000 for your normal office building.

So, it really tends to attract users that like to be able to get a lot of people in open space platforms, and that's where Turner broadcasting uses it.

The second type user you'd see, which is the exact opposite of that, is due to the building's unique infrastructure in terms of power grid and redundancies.

It attracts a lot of high-tech users to put their computer backbone systems in there.

So, they have a lot of equipment in the space with relatively few people.

So, two different types of users at opposite ends of the spectrum.

But it's sought-after space for those types of users given its location, and we also have an extraordinarily attractive cost structure in that building.

And actually, the Turner lease was a below-market lease.

So, it was $17.50 or something like that, right in that area gross.

So, we would hope as we're able to release that building that we would be able to improve on that rate.

We do have some prospects for it, but nothing that I would say is imminent.

And then relative to CapEx, should we think differently about how much you may have to spend, just given the uniqueness of the space and the potential tenants?

We had on the income deal that we did, as you've seen, we had to have some higher CapEx on that deal because we actually expanded the footprint of the building by actually doing concrete construction to be able to service their computer needs.

But generally I would think in that building, we see it falls in line $40 a foot or something like that should be the target.

Okay.

And my last question is, Greg, appreciate the comments regarding the reversals and just sort of how you went about calculating the impairments on the absence that you took in the Q4, but you have had a couple of reversals.

Without going into great specifics, how should we -- is it likely that you may see a reversal in some of these projects, or what has to happen from a market perspective for potentially seeing some reversals there?

Or should we just assume that that -- the impairments are done with and it should be pretty clean going forward?

Dave, let me -- since this is Greg's first call, let me take that one, at least first swipe that, and I'll let him clean up behind me if I mess up.

We do have $250 million plus or minus worth of land in the portfolio, both commercial and residential land.

And obviously that land, in terms of the impairment analysis that we go through every quarter is something that gets a whole lot of scrutiny internally and with our auditors.

And particularly in residential as the home markets across the country remain very uncertain and slow to recover.

You're having to go back through every quarter and challenge lot velocity sales, home building -- estimates of home building, new home building starts, all those kinds of things.

And so by nature, it does have a little bit -- the potential for a little bit more volatility just because those markets remain relatively volatile.

Having said that, we certainly wish there weren't any impairments, and we hope every quarter when we looked at this that we've been thorough and we don't have future ones.

I would call on the context of in the 15% or so of our assets that are land, I think with all of the impairments this year, it totals up to about $6 million, or about 2% of the overall portfolio.

So, there's certainly something that we wish that we didn't have, but we welcome all the scrutiny and I hope we don't have any go forward.

But really, until you see the underlying users of this land being the home building industry starting to show a little bit more stability in growth, I'm sure that they'll continue to get a lot of scrutiny, and there's just some volatility still on housing starts.

I hope that answers the question.

It does.

Appreciate it.

Thanks for the commentary.

You bet.

Thank you.

Our next question comes from the line of Brendan Maiorana from Wells Fargo.

Please proceed.

Thanks.

Good afternoon.

Larry, in terms of the capital recycling activity you highlighted, some of the assets that you would like to dispose of and been pretty clear about that over the past several quarters.

And then also talked about new investment activity and some of the stuff that's underway today.

As we think about that for 2011, should we assume that dispositions on a dollar basis will roughly equal the investments that you're going to make in 2011, or would you feel comfortable deploying more capital into acquisitions versus sales?

The main thing that -- when we look at them is ideally, for a period of time, you would love to be able to time those things just right.

That you make the dispositions at about the same time that you need the money to invest.

And that's certainly one of our objectives as we look.

But we also don't want to be where we are taking risk in terms of, if we start to feel like the market is moving against us or interest rates are moving against us, where we're costing ourselves on getting the best price on a disposition before we've got an investment opportunity.

So, it's a discipline we want to have, but we also want to be mindful of getting the best price we can for the disposition of the asset.

I still think that the main thing that we and others are seeing in the market is, we're still talking more in terms of our hope and expectation for opportunities in terms of this distressed market versus our actual velocity that we're seeing.

And we have seen a pickup in velocity.

But I wish our pipeline were more full with specifics at this point versus banks and lenders saying, you're going to get a call from us next quarter on this asset or that asset that we've been tracking.

But we do try to balance those.

I don't know, Greg, if you want to add anything.

No, I think that was accurate.

But then just in terms of dispositions, we've seen a couple of sale comps for buildings in your markets that are stabilized buildings that have been at pricing that seems like it's pretty strong.

And I think you mentioned that you might think about monetizing some assets that are, I think you characterized it as non-core assets or non-strategic.

But if you could get pricing that's pretty strong for some of these stabilized assets, would you consider maybe a little bit more aggressively monetizing some assets in the form of JV or something like that to pull some capital out?

Yes, absolutely.

And we have gone through, as I think I've said in last quarter's call, if you're not a buyer, it rates your (inaudible) then you certainly better look at being a seller.

And we went through in the fourth quarter as a management team and relooked at every one of our assets, and we do have some assets that we are very carefully moving toward the disposition stage.

And we're not going to -- what I tried to say to your first question, I didn't say it clearly enough, is we're not going to be so disciplined on waiting for the specific new investment opportunity to be there to go -- potentially miss a sales market that we find very attractive right now.

And I think there are some specific sales that all of us have seen in the fourth quarter that point to what you're talking about in this question.

Yes, okay.

Understood.

And the loan to value on Terminus 100, was that in line with what you guys communicated last time around, which I think was 65%?

6 -- 60, six-zero.

60%, okay.

Great.

Brendan, I think it's important that you recognize, those loans are typically underwritten first and foremost.

The governor on those loans is first and foremost, typically coverage gets service coverage rather than LTV.

And the debt service coverage in that loan was 1.2 times, which is right down the middle of the fairway.

Okay.

And then just last one for me.

Can you just give a rough number on what the pricing was of the Cedar Grove lots that were sold in the quarter?

They were right on top of what our book value was.

I think we had a $40,000 gain on them.

Okay.

The book value as disclosed in the supplemental?

Yes.

Okay, great.

Thank you.

Thank you.

Our next question comes from the line of Jamie Feldman from Bank of America Merrill Lynch.

Please proceed.

Thank you, and good afternoon.

Hi, Jamie.

I was hoping you could -- Hi, how are you?

Good.

I was hoping we could talk a little bit more about 191 Peachtree.

I know you had said in the guidance that you'll see a ramp-up there in the third quarter.

But what is that assume in terms of year end occupancy and more color on discussions you're having and how you guys are feeling about leasing up space?

We continue to feel good about 191.

Our goal is to have 191 85% leased by year end.

That would be leased, not occupied, with some leases probably coming in a little later than that.

We just continue to have a lot of success at 191.

One of the things that has happened since we had our last quarterly call is the Commerce Club, which we announced and opened on top of the building in November.

Just as a sign of the activity of that building, that club has been open now two months.

When it opened, it had 1,700 members.

Today, it's got 2,000 members.

At least the last three times I've tried to go up there for lunch, I haven't been able to get a reservation, and I'm president of the club.

So, maybe we've been cash-flowing them on my dues statement or something here.

But we're getting a lot of interest and the tenants are -- we get some full-floor tenants, but a lot of the tenants are the 5,000, 10,000 footer that just finds the quality of the building, the amenity package with the fitness center and the club and all of the other things very positive.

We hope to have some good news to announce on the retail front in the next quarter with maybe a couple of users looking at the restaurant space down there as well as the other retail space.

So, I don't think that at 191 we feel any less bullish about the building.

It's just that in this downtown market, 20,000 and 30,000 footers are relatively big tenants at this point in the cycle, but I think we'll continue to move the needle on 191.

Okay.

And then based on your -- based on the guidance you laid out for some of these projects, what do you think your 2011 CapEx looks like in terms of TIs and leasing commissions and maintenance CapEx?

It's not a number that we've historically provided, but I will say that based upon the leasing velocity that we saw in 2010, you should assume that our CapEx number goes up significantly in 2011, which is a good thing.

Okay.

And then just per foot, what are you thinking in terms of office versus retail?

I think -- I shouldn't say think.

They are typically about the same.

I think Larry told you earlier in the call 40, 45.

Okay.

And then in terms of investment activity or opportunities out there, is there any chance you guys are looking outside your core markets?

Or are you still just very focused?

Well, our core markets being the southeast and Texas, we are very, very focused on Texas, particularly in the Houston, Austin and Dallas markets.

We continue to own assets and are involved up in North Carolina.

We own a significant asset.

In Charlotte, we've got a future development deal we're doing with the University of North Carolina we've mentioned before.

So, Virginia, North Carolina, Tennessee, Georgia, Texas are the primary areas for focus.

So -- and I think we'll see plenty of opportunities in those markets.

We're not quite as sensitive on the geography sense for the retail side.

That's not as geographically sensitive.

So, for instance, those Publix deals we did, the four centers, one was in Florida and three are in Tennessee, and the two development opportunities, those two are in Florida.

Okay.

Alright, thank you.

You bet, Jamie.

Thank you.

Our next question comes from the line of [Ethnay Palone] from JPMorgan.

Please proceed.

Thank you.

On the acquisition front, can you maybe put some parameters around what your pipeline looks like in terms of, are they larger deals, small onesies?

And also things like cap rates, how you're underwriting on IRRs, things like that, just a little more detail there.

Well, I think in terms of the pipeline you have to really look at the pipeline, or we do, in several different ways.

One is you look at the pipeline in terms of the marketed deals that you get through the investment broker channel.

And the investment broker channel is primarily on the office and retail side, putting assets for us to look at on the type of assets which tend -- as you know, we're looking for class A assets that tend to be larger.

They're tending to put those out, onesies, twosies at a time .

It's rare that we would get a portfolios.

We see portfolios, but they tend to be smaller, suburban office park type portfolios which are not usually something that we're interested in.

So, that's one front.

The second front would be where we get opportunities like the Publix deals for off market transactions.

And those -- I hope we gave enough conversation in the call to -- those are a pretty exciting opportunity, because there you've got, in many cases, very stable, good private developers that just defend themselves on a leverage position on good quality assets, that they need some equity to come to the table.

And they're as sensitive about the quality of the partner that they're going to have as they work through this period of time as they are about the economics about what the partner is going to want on that capital return.

And we're beginning to see those kind of calls picking up where developers that we've known, private real estate owners we've known are asking us to come in and look.

Sometimes that's a portfolio, sometimes that's a one or two building at a time.

In certain cases, it's a whole platform that they come to.

And then the third would be where we have a research team that is constantly tracking the debt markets and other markets where we try to proactively get in front of a portfolio of assets in addition to single buildings where we think there may be an opportunity for us to get involved.

So, we really hit it from three different perspectives.

The one that's the most predictable of those is what comes out the investment brokers, They can usually give you a pretty good heads up of what's in their pipeline for the next two or three quarters.

So, I hope that answers the

For instance, in that bucket, the investment brokers, what are the sorts of cap rates and IRRs that you're looking at in those types of situations?

Of the three channels, that's our least favored, the fully marketed transaction.

And I think our experience today would be similar to others.

On the big trophy things that have come across, most of those are core, and so they're 95%, 96% leased assets, which have not tended to be the type asset that we are the most competitive buyer for.

Doesn't mean it won't -- that we won't always be in that position.

And so those cap rates, if we apply the cap rate to the large class A building that traded in this market in Buckhead in the fourth quarter of the 33, 34 Peachtree, it's about a 6.5 cap rate or maybe even a little bit below that.

So, at those cap rates, that's obviously -- not saying that the quality of that investment decision, because I'm sure it's fine, but that's a pretty aggressive cap rate for these markets and for our underwriting.

What we tend to look at on our value add and our new investment opportunities is we, for years, on IRRs and stuff, it's hard to guess on exit cap rates and be as accurate.

We tend to look at our cash on cost yield.

And depending on product type, that cash on cost yield also varies some.

But for your office and retail sector, we have tried to underwrite to about a 9% or 10% cash on cost yield.

And we think that's an appropriate balance of risk and return.

Got it.

And so when you mentioned, I think in your comments, in terms of investing this year, that you felt like you'd -- you felt comfortable that you'd end up with at least your fair share of stuff.

Is that $50 million to $100 million?

Is that $500 million?

What would make you come away from 2011 feeling like you had a strong investment year versus not that great a year?

I don't want to put a number on that, because I think it's the quality of what we turn out and certainly, I would hope that we have more investment opportunities in 2011 and that those returns can look as attractive as some of them that we made in 2010.

I will assure you that we have got the team out focused and hawking our markets on those three avenues, and I'm encouraged by what we're beginning to see come through the door.

Okay.

And then a question on the residential land.

You mentioned there were some signs of life you were starting to see out there in the lot business.

How far away are you from seeing some larger tract buyers where you could potentially reduce your exposure quicker, or is that market still a ways off?

I think in our case, it's two different answers.

In Texas, you've seen it this past quarter.

That was a -- that user may use it for lots, may use it for a commercial point of view.

But that's been an attractive 600 acres for the last two or three years.

We've had a number of buyers approach us about selling it.

And we just happened in the last 60 -- six months or so, we got it under contract to get to a point to where what they're willing to pay and what we're willing to sell for net.

So, Texas is much healthier home.

We actually have developments in Texas where we've run out of developed lots and we're having to go create more developed lots to sell to builders, and you've got people coming in and making offers on tracts.

Georgia is further behind in that regard.

It dropped further behind, but we were encouraged to see a private builder come in and take 25 lots down at Lakes at Cedar Grove.

Although not much above our basis, a little bit above our basis.

I think you'll continue to see Georgia is the one lagging, and that's probably the one that's got a little more volatility yet in it, because Georgia is not as far along on the recovery and home building.

Okay.

And then just question for Greg.

The Publix properties, I couldn't tell.

Are those consolidated, or are those going to be unconsolidated going forward?

They'll be unconsolidated.

Okay.

Thanks.

Thank you.

(Operator Instructions) And our next question comes from the line of Sloan Bohlen from Goldman Sachs.

Please proceed.

Good afternoon, guys.

Got most of mine, but maybe just a question with regards to the balance between the sales and acquisitions going forward.

Presumably, a lot of the value-add type of stuff that you'd look at would have some amount of lease term versus some of the stuff you would be selling has some current amount of NOI attached to it.

I'm wondering if you could frame the opportunity for lease up over a longer period of time versus what losing the NOI may mean for, say, coverage of your dividend.

I think what you'll see us sell is a combination of opportunistically hitting a strong bid on a stabilized asset, along with assets that are producing no cash flow to cover the dividend.

And so the mix of those two should help alleviate any cash flow concerns by buying something that requires a year or two of fixing up or leasing up.

Okay.

Is it fair to say that in terms of better coverage of the dividend over time, to Larry's point earlier about lease up of the broader portfolio being the primary driver?

Yes.

I think, Sloan, when you look at it, the continued opportunity to sell non-core and the continued lease-up in the core in the existing portfolio, there's a lot of opportunity in there.

And to the degree we decide to sell an asset that has a fair amount of NOI on it, we feel like we set the dividend, one, at a very sustainable level, that hopefully after 2011 we can grow from.

And if we sell an asset with a lot of NOI on it, then we'll be looking to certainly take that into account, all of our financial stuff, and it may be to buy an asset in a different market that's got a lot of NOI on it.

We may want to sell an asset in Georgia, buy one in Texas, just because of the better short-term economics going on in Texas.

So, that's the type of thing that we probably would be looking at.

Alright.

Thank you, guys.

Thank you, and our next question comes from the line of John Stewart from Green Street Advisors.

Please proceed.

Thank you.

Larry, I was hoping you could give us a bit more color in terms of what exactly you would characterize as non-core at this stage.

I'm trying -- I was thinking -- I was going to give you sort of a joke as an answer, and then I thought of the way it would read in this print stuff, so I'm going to keep it straight on the phone.

No John, I think we certainly -- the residential land business, I think I've been pretty clear about that that's non-core and we'll continue to try to harvest.

We actually did an analysis of our commercial land, and I would say that about $40 million of that land I would consider is core to our business for development purposes.

And so that may help you on a relative basis, know that as commercial land values are improving, we should be able, and they are beginning to improve, we should be able to find some opportunities to harvest some of that commercial land.

Obviously, the industrial is non-core, both on the building and the land side of that.

One of the assets, actually, I think is supposed to close this month into the first part of next month.

It's under contract by Jefferson Mill.

The other two projects are both within 5% to 10% in terms of leasing to be ready to go into that sale.

And we may decide on one of them to actually take it a little earlier and see how much we're giving up by that 5% or 10%.

But those are clearly non-core.

And some of the commercial land actually may have buildings on it that are earnings some income right now, and those may or may not fall into that.

But I think between the commercial land, the residential land and the industrial and the industrial land, that would be my definition of what I consider non-core.

Okay.

That's helpful.

Can you -- I would like to try to drill down a little more on the $20 million of NOI or $10 million, I guess, most of which you expect to come online this year.

And just given the significance, hope you can maybe give a bit better visibility in terms of whether, I guess number one, when you say most of that has yet to contribute how much are we talking?

We have got $8 million that has been leased that has yet to come on, and if you could just give us some framework in terms of whether that's ratable throughout the year, or it will all come online in the first half.

And then finally, whether that is consolidated NOI or your share of total -- obviously, a lot of the leasing that you have done has been on unconsolidated properties.

Okay.

Well, let me start and then I'll let Greg fill in some of those things.

Basically, as you know, we set out $20 million of NOI, and we say that we're about halfway there.

So, that's about $10 million.

And of the $10 million, we've got $2 million or $3 million that started showing up in the numbers through the end of last year.

We anticipate that most of the balance of the $8 million will show up in the four quarters of 2011, with a little bit of it dragging over into the first two quarters of 2012.

So from a broad perspective, that's sort of the timing on the 50% of the $20 million that we have captured to date.

And is it -- I guess should we just assume that the $8 million is sort of ratable throughout the year?

Yes.

I think for these purposes, it's probably a little bit more -- just slightly more heavy on the third and fourth quarter, just because of free rent burnoff.

But I think for these purposes, ratable is probably as good as anything.

Okay.

And then can you give us any historical perspective on the Padre Island investment?

Do I have to?

(laughter) Actually, Padre Island was -- is a piece of land right on the coast at Corpus Christi.

About five years ago, Corpus Christi was evolving as a second home market, beach-front market in Texas.

And ourselves and Four Star, at that point, Temple-Inland, our venture partner, decided that we were going to participate in a residential development being planned for that area.

And the first piece was Padre Island, which gave us beach access for the development, and we acquired the property for that purpose.

Subsequent to that, we decided and Four Star decided not to pursue the residential development.

And so that's the piece that remains.

It's a beach-front piece of property.

We had held it after that period to -- in hopes that the residential market would come back in that area.

But it's always had use as well as a commercial site, and so we decided, since we weren't in the business of condominiums or hotels, which is probably what it will be from a commercial standpoint, ourselves and our partner reached the conclusion that we put it up for sale, and that's what led to the impairment when we had a change of intent.

And so what's your written-down value -- book value?

The book value combined is $7.5 million.

So, we have half of that.

Got it, okay.

Thank you.

Thank you.

And our last question comes from the line of John Guinee from Stifel.

Please proceed.

Yes, thank you.

Larry, on 100 and 200 Terminus, essentially, I think what you were saying on 100 Terminus when you agreed to pay the loan down, rebalance the loan by $40 million, the last dollars by my math was about $274 per square foot.

So, you implicitly and explicitly are saying you think 100 Terminus it is worth more than $274 a foot?

I'm not going to comment on your math, but yes, if your math says $274 a foot, we think it's worth more than $274 a foot.

If the loan had been higher and had been up at say $325 a foot, would you guys have still paid it down?

Or what was the breakpoint on that analysis?

Well, what we really looked at was we looked at what's the return on the new money, first of all.

That building, as you know John, doesn't have any roll until 2018.

And so, first of all, the new money in, we think is a very compelling story.

And as you go through -- if you back through the numbers, I think you'll see that you're in agreement with us.

We actually came to a valuation that wasn't at the $345 a foot that 3344 Parkway ended up buying.

It was well below that that we thought -- we made this decision before 3344, even we had any idea what it might trade for.

If it had been $325 a foot, I don't know what we would have done.

I wouldn't want to speculate.

Okay.

And then --

We feel very good about what we redid it for with having 12 years and no rollover, we feel good about the investment.

And it looks to me like, quick back of the envelope, your in place net rents on 100 Terminus were about $22 or $23.

Where do you think your in place net rents will be on the 200 Terminus?

Yes.

The in place rents are probably between $21 and $22 on -- closer to $22 on Terminus 100.

The in place rents on Terminus 200 will be $20.50 to $21.

Both net numbers?

Yes.

Okay, great.

Thank you.

Thanks, John.

Thank you.

Mr.

Gellerstedt, there are no further questions at this time, I'll now turn the conference back to you.

Please continue with your presentation or closing remarks.

I appreciate everybody's interest, and I appreciate all the questions.

Have a good day, and we look forward to seeing you soon.

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

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