Cousins Properties Inc (CUZ) 2011 Q2 法說會逐字稿

Good day and welcome to the Cousins Properties second 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 Tripp Sullivan, of Corporate Communications. You may proceed, sir.

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 and property, as well as certain categories of expenses, along with expectations regarding development, acquisition and disposition opportunity. Such forward-looking statements are subject to uncertainties and risks and actual results may differ materially from these statements.

Please refer to the Company's filings with the Securities and Exchange Commission, including its annual report or Form 10-K for the year ended December 31, 2010, for additional information regarding certain risks and uncertainties. Also, certain items the Company may refer to today are considered non-GAAP under the meaning of regulation G, as promulgated by the SEC. For these items, the comparable GAAP measures and related reconciliations may be found through the quarterly disclosures in the supplemental SEC information link on the investor relations page of its web site at www.cousinsproperties.com. I'll turn the call over to Larry Gellerstedt. Larry.

Good afternoon. I'm Larry Gellerstedt, President and Chief Executive Officer at Cousins Properties. We appreciate you all joining us for our second quarter conference call. Gregg Adzema, our CFO, is on the line as well. Needless to say, the past couple of weeks have been discouraging from a macro economic perspective, and the recent volatility of the market certainly has an effect on all of us. Thankfully as it relates to Cousins' operating performance, things are far less dramatic. In summary, it was a solid quarter. Activity is picking up on both the acquisition and development front, and we continue to make positive strides with our leasing across the portfolio.

I'll begin with our investment pipeline and then provide some color on our operations and conditions within our core markets. Activity has picked up on the acquisition front, but, as I said last quarter, pricing is very aggressive and the pool of buyers remains deep. Generally speaking, the development opportunities we're seeing, though limited in quantity at this point, are offering better risk-adjusted returns than acquisitions. On that note, we are particularly excited about Emory Point, a multiple phase, mixed-use development adjacent to Emory University in the CDC in Atlanta. The $102 million phase one, consisting of 443 apartments and 82,000 square feet of retail broke ground a few weeks ago, and is scheduled to open in the fall of 2012. Facilitated by our long-held relationship with Emory University, the project represents an incredible infill opportunity within a supply-constrained submarket with very high demand. The Watkins joint venture we completed in the fourth quarter continues to reap benefits, as we are now in the due diligent process for Mahan Village in Tallahassee. This project, which was facilitated by Watkins, is a $24 million public taker development. It's over 80% pre-leased and we're hopeful to begin construction in the next 1 to 2 months. We're also making continued progress on University Square, a mixed-use project similar in scale to Emory Point located adjacent to the University of North Carolina in Chapel Hill. While the time frame for beginning construction is probably late 2012, we are optimistic about this project.

As I said before, we very much like the market dynamics and long-term demographics associated with universities and we will continue to pursue opportunities within the sector. Regarding the multimodal project in downtown Atlanta where Cousins was selected as the master developer earlier this year, I'm optimistic we will agree to a contract with the Georgia Department of Transportation within the next 1 to 2 months. The initial scope will be an extensive 12-month master planning effort. For those of you not familiar with the MMPT, it will serve as the hub for existing and proposed transportation networks serving Atlanta and beyond. In addition to its transportation functions, MMBT is expected to serve as the catalyst for one of the largest transit oriented development projects in the United States, which will include commercial, recreational, and residential mixed use development.

On the acquisition front, I think we'll execute at least 1 transaction before the year is over. However, as I said earlier, asset pricing remains pretty aggressive, and we will not overreach on our underwriting just to complete a transaction. For the right transaction, we may get an institutional partner, allowing us to enhance our returns through fees and a promote structure. We would also consider acquiring a more stabilized core asset if it brought other opportunities to the table, like a strategic tenant relationship or a complementary development pipeline. While the deep pool of buyers in today's marketplace has tightened the acquisition market, and pushed back some of our timing, it is very helpful, from a capital recycling standpoint. Strong pricing will make it easier to fund our near-term investment horizon through disposition of existing assets. One Georgia Center, our 97% leased office building in mid-town Atlanta is currently out for bid, and we hope to have it sold within the next 2 to 3 months. We are also preparing to market our industrial assets in Atlanta and Dallas with the goal of selling these by the end of the year. Proceeds of these sales will serve as a good source of capital while further simplifying our platform.

Moving on to operations. Leasing momentum remains positive. The entire portfolio remained 91% leased, and the economic occupancy increased from 86% to 87%. The office portfolio declined from 92% leased to 91% leased, driven by the expected departure of Turner at American Cancer Society Center and the Sandy Springs Police Department at Cosmopolitan Center. Due to the strong leasing performance over the past several quarters, economic occupancy increased from 85% to 88%. The retail portfolio increased from 87% to 88% leased, mainly driven by progress at Avenue Forsyth and Avenue Webb Gin, while the industrial portfolio remained 96% leased. In the office portfolio, Terminus 200 has continued its noteworthy run. At quarter end, this asset was 85% leased, up from 67% at the beginning of the year, and 36% at this time a year ago.

We've had significant activity in other parts of the office portfolio as well. Subsequent to the quarter, AGL Resources which occupies 224,000 square feet at 10 Peachtree Place, recently signed a major extension and expansion, taking their footprint to 238,000 square feet. This lease, previously scheduled to expire in March 2013, has been extended to 2026, and includes an additional 21,000 square foot expansion occurring on or before January 1, 2015, which will take their occupancy to 100% of the building. We also renewed Bombardier to 86,000 square feet at Points at Waterview in Dallas, extending the term through February of 2023. The successful renewal of these two tenants leaves the portfolio in excellent shape for the coming years. Among our top 20 tenants, our average remaining lease term is over 7 years and we don't have another lease maturity until 2014. 191 Peachtree and American Cancer Society Center remain our highest priorities on the leasing front. We continue to work on a variety of prospects. At American Cancer Society, the prospect we mentioned on our last call unfortunately decided at the very last minute to remain in their existing location. This came as a surprise to us, but as I mentioned, we have other prospects and are working diligently to get this space leased.

In the retail portfolio, momentum is steady as well. Avenue Forsyth continues to show particularly solid progress, ending the quarter 88% leased, up from 81% at the beginning of the year. On the residential side, which comprises only 10% of our business, we sold 108 lots in the second quarter, representing a slight uptick in activity from prior quarters. Generally speaking, residential lots remain steady in Texas and slow in Atlanta. Moving on to our markets, we remain well positioned in Georgia, Texas, and North Carolina, where our strong brand relationships and market expertise provide a meaningful advantage. From a long-term perspective, each of these markets stack up very well against the rest of the nation. Atlanta remains challenging, as its economic recovery has yet to gain meaningful traction. However, I think it's important to remind everyone that Atlanta still has one of the most diverse economic bases in the nation, and remains among its 3 fastest growing metropolitan areas. Experts are forecasting significant employment out performance in the upcoming years, driven by a business-friendly environment and a large pool of young, educated workers. Moody's and PPR, for example, are both predicting 400,000 additional jobs in Atlanta between 2011 and 2015.

Our markets in Texas and North Carolina continue to out-perform the nation by virtually every economic measure, while Austin, Texas and Raleigh-Durham, North Carolina showing particularly strong fundamentals. On the office side, it's important to remember that every asset and every submarket is unique, making it difficult to provide broad generalizations. Regardless, I'll try do to do my best to provide some color on what we're seeing. In Atlanta, although the class A market has shown 6 straight quarters of positive absorption, deal terms remain about level. Economics aren't getting any worse, but they aren't rebounding much, either, which makes sense given that class A vacancy is at 18.6%. The same is true for Dallas, where vacancy is about 18.4%. Deal terms aren't likely to improve in either market until we see a sustained return to job growth and an accompanying decline in vacancy. In Houston, where class A vacancy is now below 14%, rates are improving in certain submarkets. Deal terms are improving more broadly in Austin, where overall vacancy is down to 13.3%. In Raleigh-Durham, were a class A vacancy is 4.8%, deal economics also appear headed in the right direction. Lease economics in certain submarkets in Austin, Houston and Dallas are beginning to approach a level that would support new office development. For example, the Southwest market in Austin, where class A vacancy has gone from 17% to 9% over the past 30 months and effective rates were showing significant improvement.

On the retail side, leasing velocity continues to be steady, and we are starting to see an uptick in deal activity with national tenants. Tenant sales continue to improve, which is ultimately what drives deal economics. On average, terms for new leases are stabilizing, while renewal activity remains positive. That pretty much covers my thoughts on the quarter, and the conditions within our markets. In summary, I'm very pleased with the progress we've made in executing the plan we laid out for you all 24 months ago. We said we were going to do 3 main things; sell noncore assets, lease our vacant space, and opportunistically look for investments through acquisitions and new development. During this period, we've sold over $235 million in assets. Just recently, we sold the last of our condos. By the end of the year, we'll have sold the last of our industrial buildings.

On the leasing side, we've captured over $13.5 million in new NOI through lease ups since the beginning of 2010. In the last 3 quarters, we've announced over $150 million in new investments, which were all off market where relationships brought the opportunities. We are very well aware of the disappointing trends in the global and national economies, but we remain focused and confident in our ability to continue to produce compelling results. Now I'll turn it over to Gregg for a quick financial overview of the quarter.

Thanks, Larry. Good morning, everyone. Overall, as Larry said, we had a terrific second quarter. FFO was $0.11 per share. This compares to $0.08 per share for the second quarter last year. We continued to do well where we like to do well with property NOI. Last quarter, I highlighted the strong performance of our 4 largest office assets. Terminus 100, 191 Peachtree, The American Cancer Society, which are all in Atlanta, and Palisades West, which is in Austin. These 4 buildings together comprise over 40% of our total NOI. These assets had 9.2% year-over-year NOI growth last quarter. This accelerated to 9.8% this quarter.

As I said last time, these are core trophy assets that should and are continuing to perform well at this point in the cycle. Our two remaining industrial assets, King Mill in Atlanta, and Lakeside in Dallas, also continued to do well, generating 34% year-over-year NOI growth during the second quarter. This follows 55% growth during the first quarter. As Larry stated earlier, we intend to sell these assets in the near-term and believe their strong performance of late should increase the success of these dispositions. Overall, our retail properties saw same property NOI decline a bit less than 1% compared to last year. However, this is an instance where understanding the underlying components of this decline can be insightful. It wasn't revenues driving this decline. They were actually up 2.8% year-over-year. It was higher operating expenses. Specifically, it was the result of the reversal of nonrecurring expense accruals at 2 retail properties during the second quarter last year, which artificially lowered total same property expenses, and therefore negatively impacted the year-over-year comparison.

I'd also like to point out our continuing progress with G&A expenses. As you can see on our income statement, for the quarter, these expenses were down over 9% from last year, and now represent only 1.5% of our total unappreciated assets. This reduction reflects our ongoing commitment to right size our G&A, to better align our costs with our simpler strategic plan going forward. Earlier in the call, Larry discussed our new development project at Emory Point. I'd like to provide a little more detail on the structure of that transaction. The project is being pursued by a new joint venture named EP1 LLC that you'll see on our balance sheet. It's 75% owned by Cousins, and 25% owned by Gables. It's a pari passu venture with no preferences or promotes. We will lease the retail space, while Gables will lease the apartments and manage the entire project. Development fees are split 50% Cousins and 50% Gables. The venture obtained a $61 million construction loan from PNC at a rate of 185 basis points over LIBOR. It's a 3-year loan with two 1-year extensions.

Finally, in terms of guidance for 2011, I'd like to remind everyone that we only 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 fee income as well as G&A expenses. That being said, there are a few clarifications and changes from the guidance I provided on our earnings calls in February and May. First a clarification. Although it has bounced up and down a bit during the first two quarters, the NOI guidance I provided for the Avenue at Forsyth last February which called for an average of $1.8 million per quarter in NOI is still good for 2011.

Second, at the American Cancer Society building, we expect quarterly NOI for the balance of the year to be approximately $2.5 million, due to the expiration of the Turner lease we have discussed previously. Next, the second quarter NOI of approximately $450,000 at 10 Peachtree Place is a good run rate for the balance of the year, due to the lease extension with HEL Larry discussed earlier. Finally, strong leasing Larry talked about at Terminus 200 is starting to run through the income statement. Our portion of NOI should increase from the $67,000 we realized in the second quarter up to about $0.25 million by the fourth quarter. Other than these changes, we don't see any need to make any other adjustments to the balance of the year this time. With that quick summary, let me turn the call over to the operator for your questions.

Thank you, sir.

(Operator Instructions)

Our first question is from the line of James Feldman from Bank of America. You may proceed, sir.

Thank you. I was hoping could you give a little more color just on the Atlanta office market, and as we're thinking about the ACS building, as we're thinking about 191 Peachtree, how many big leases are out there in the market? Or do you think we're just kind of at a standstill for a while given what we're seeing in the broader economy?

I think a couple things on the ACS and 191 Peachtree, both those are fairly unique assets, as you know, the ACS with the large floor plates and our cost structure -- just to give you a reminder the Turner lease, which expired, was a $17 gross rent. So it was a very low rate that we had on that space, and it's an attractive space for future use. The deal that we thought we had, that we were already through the end of the pipe on was a GSA lease, that I think, actually, the reason that it went away was not anything to do with buildings. It had to do with what was going on in Washington. And 191, once again, we've got in a very positive position. The bottom line in terms of the deal flow is, on 191 Peachtree, you'll continue to see through the balance of the year us chip away every quarter with what you'd expect, the 10,000, the 20,000, the 30,000 foot tenants and activity is decent there. We do have a large block of space that's very attractive that a user could come in and take the whole thing up. We still think that we're on track to get this thing stabilized at the end of 2012.

On ACS, that's really a bigger tenant kind of building just because of the floor plates. And we've got some interest in it, but that may take a little bit longer time just to find the right tenant for the right building for those floor plates, but the rate's pretty attractive. Overall in the Atlanta market, you're not seeing job growth show up in the numbers yet, but the projections, as I said in my speech, were pretty positive about that. We are beginning to see, although nothing has materialized, some relocations to Atlanta that some big users are considering. That, I think, just given the cost structure of Atlanta, the airport, the talented pool here, I'm optimistic we'll start to see some reloads that start to drive these vacancy rates down as well.

In your work in the community, are you hearing of new companies that want to come to town? Are they near, or are you talking bigger picture?

We're actually seeing them. I'm on the executive committee of the Chamber and was at a meeting this week and these are real things. You saw last quarter it wasn't in one of our buildings, but Porsche North America made a commitment to build a new facility here. And you've got some other growth. You've got a company here recently, RockTenn, that doubled in size, that's gone from 500 to 1,000 employees, that's leasing space, and others. There's been some press about Time-Warner possibly relocating a division here, where they already have a significant presence. I can't say that it's a ground swell of stuff that I think will happen in the next few weeks, but it's encouraging to see the type things that are out there.

Can you talk a little bit more about the expectations for pricing on the industrial assets and what kind of buyers are interested?

Well, the industrial assets are interesting to see because a year ago, when we were getting ready to sell the building we had up at Jefferson Mill north of Atlanta, we were initially told that we would probably get something in the 8% to 8.5% cap rate range and we ended up selling it for a little bit below a 7%. The thing that's been really interesting on our industrial buildings along those lines, because both of them are over 90% leased, is in the last 30 days we've gotten 3 unsolicited offers. We don't even have these buildings in the market to sell. We've got unsolicited offers from them. We're optimistic in terms of predicting a cap rate. You'll see a different cap rate, we expect, in Dallas than you would be in Atlanta. Our Dallas asset is right near DFW and very attractively located, so you probably see 50 basis points difference in those 2 assets, but we certainly would think in the low 7%s would be a reasonable expectation.

Finally, you had mentioned at the outset some potential additional development projects beyond Emory Point. Can you talk a little about the magnitude and what it would mean for earnings for Cousins if it got under way?

I think the most immediate, we've got a phase 2 of Emory, which certainly wouldn't start this year, but may be ready -- it's probably about an $80 million second phase of that, that could be ready to start looking at late in '12. We mentioned the Chapel Hill thing. Interestingly, and what I tried to cover a little bit in the speech is, for instance, in Austin, where we've been 20 years and as you know, have had a fantastic track record out there, the rents and the vacancy would say that somebody will probably have a new building to start at downtown Austin, I would guess in the next 12 to 24 months and likely as well in the southwest market. Whether we're able to capture that, time will tell. You've got some similar dynamics and some other markets in Texas where we remain really, really tightly focused. I also mentioned, we're seeing some things on the acquisition side that's more challenged in terms of pricing, but, we're seeing 1 or 2 off-market things that we think might be fairly compelling.

So are you saying you'd start spec in Austin?

No. Any office we do would have substantial preleasing. The Cousins model, with Terminus 200 being a notable exception, has typically been to have lease commitments, signed leases of 40% to 50% at a minimum before we start and would I think we would have that type of discipline at a minimum on a go-forward basis.

All right. Thank you very much.

Thanks, Jamie.

Our next question is from the line of Sloan Bohlen from Goldman Sachs. You may proceed.

Good afternoon, guys. Larry, I wonder maybe if you could start -- you talked in the early part of the year of $20 million of additional NOI that you guys feel like you could realize, and I know that we've already gotten some of that, but can you talk about that in the context of the broader macro economic environment today and just what your thoughts are for pacing of realizing that NOI gain?

Sloan, I'm going to let Greg take that one. I might add something at the end.

Sloan, we've captured about as we calculate, 70% of the $20 million so far. About $13.5 million. And about 70% of that number, about $9.5 million, is actually in the P&L already in the second quarter. We think we'll get remainder of it, the remaining 30% of leasing and then the remainder running through the P&L over the next 12 to 18 months.

Just for the next 12 to 18 months, has there been any change to the assumption for how that manifests itself? Is that releasing it at market rates? Have you seen anything happen with regards to the market rates?

Most of it is -- 70% of it is captured. What I would anticipate with market rates in our projections is they stay about the same. One thing that's always important to remember in markets like Atlanta and Dallas and some others is, although there's been a ton of vacancy and a ton of stress in the market, rates don't tend to roll up here, even during good times much. The main place you see the stress in the market is on concessions, tenant improvement, and free rent. Rates tend to stay fairly flat and that's what we've assumed. I expect that our leasing volume, I mean, the 1 place that we really sort of had an extraordinary performance was just the last 12 months dealing with the pent-up demand for Terminus 200. But the rest of the portfolio I think will continue to lease up in a fairly steady way.

Larry, 1 more for you. You've talked in the past about having discussion with banks about potential stuff that might come off of their balance sheets. Could you give us an update on what you're seeing out of those portfolios, obviously some high profile ones are coming to market?

We are. The exciting thing is that some of the things we've tracked for a long time are coming to market. Sometimes they're coming to market on a fully marketed asset by asset basis, sometimes they coming on a more select marketed portfolio basis, and then there are other assets where we've initiated it and gone direct to the banks on 1 that we know are under some degree of financial and operational distress. The encouraging thing in the market is, we waited so long for the opportunities to start coming and the conversations to start and they just weren't happening. Certainly, I think anybody you talk to would say although it's not a huge wave, there's a steady amount of opportunities. Our people are very busy underwriting different kinds of opportunities, and that's encouraging. The cloud on that is the pool of folks that raised a lot of money to be able to go after these opportunities are also deep. I think it's going to take a while for what's going on in the national economy -- these assets coming out and these big pools of buyers, for pricing to sort of shake out to a level that makes some sense.

Okay. That's helpful. Thank you, guys.

You bet. Thanks, Sloan.

Our next question is from the line of John Guinee from Stifel Nicolaus. You may proceed.

Couple things. First, Larry, I guess you would be the right person here. Forsyth, I just looked back for year end 2009, and it was listed then at 472,000 square feet. Today it's listed at 523,000. So first the question is how do you change your methodology on that? Then second, it was 66% occupancy then, you've got it at 68% now. I think we both know that someone's master plan was 150,000 square feet of largely dysfunctional around the corner retail space. Is that something you should really look at as ever getting much above 70% occupied?

Well, let's tackle those questions one at a time. I'll let Larry tackle the increased square footage.

The increased square footage, John, is because the Academy Sports deal that we did is actually taking the empty Circuit City box, and is expanding that box by that amount of square footage. In fact, what we did is we tore the box down and are rebuilding the Academy Sports deal. That's the reason square footage went up. I'll let Gregg talk about the second 1.

I'm looking at our earnings supplement right now on page 13 where we list every property. Right now, Avenue Forsyth is 88% leased and 68% occupied. The occupancy picked up from 67% last quarter. We've signed a bunch of leases in Forsyth recently and you are seeing those start to use through and go from the leasing stage to an occupancy stage.

My question is does somebody else just go out the back door, or do you think you'll actually get traction?

I mean, eventually if nobody else goes out the back door, occupancy will catch up to leasing, and it will be in that upper 80% range. These avenues -- these lifestyle centers, they're active. That's 523,000 square feet of space in there. I don't know the number of tenants, but I imagine it's a bunch. There's a lot of comings and goings.

I've been there a few times. Second question is, I greatly admire your effort at 191 Peachtree and American Cancer Society and trying to anchor that downtown market, but every time I have a conversation with leasing people down in Atlanta, you hear the same thing, and you hear that people are going over the gulch to midtown. I know you priced 191 Peachtree at about the same pricing as the better buildings in mid-town, and as I recall, Brooks Brothers after 60 years just closed right around the corner from you at 191 Peachtree. Is that a market that can get some positive traction or is it just going to continue to lose tenants to midtown?

Well, I think a couple things on that, John. One is the -- a couple of facts. I think downtown as an overall market is absolutely still challenged vis-a-vis mid-town, but if you also look at recent numbers, downtown, because there hasn't been any product built in downtown in a long time has led the market in terms of absorption. 191 Peachtree -- the Commerce Club, which we opened last year, the third quarter of last year, now has over 2,000 members. That Brooks Brothers store did close but by year end -- it's already under construction. We'll have a Joseph Bank store opening, and space that we have here at 191 Peachtree, as well as a restaurant that'll be moving into the old El Molino space. Just because at 191, the quality of the building, and really when you look at the downtown market on the class A side, there are 3 towers that compete for the types of tenants that we're looking for, Sun Trust Plaza, 191 Peachtree, and the Georgia Pacific building, and all those buildings are over 80% to 85% leased. You bring up a point. Mid-town, certainly, in terms of the most preferred submarket, vis-a-vis downtown, we certainly have to compete hard against mid-town and have a solid value proposition, and I'd love to own some more buildings in midtown. Certainly an area we stay aggressive hunting that.

My last question is, Cameron, you did a wonderful job I'm sure working with Gregg on improving the supplemental and made things a lot easier to understand and see. I'm looking at page 19, which is your commercial land holdings, and just doing some quick math. Your Peachtree Street, 2 acres and 1 location, 1 acre I think 1 block over, you've got those things still on your books at $21 million for 3 acres. That's $7 million an acre. And my question is, isn't it time to just bite the bullet and write that down? Same thing at Avenue at Forsyth. You've got 15 acres up there at $700,000 an acre. You got your King's Mill and Jefferson Mill, your 2 industrial parks at just under $100,000 an acre. You've got Round Rock land a long way from downtown Austin at $285,000 an acre. You've got the Research Park in Atlanta at $833,000 an acre. These are just big, big numbers. And wouldn't it be a good idea just to revisit this portion of the balance sheet?

Hey, John, it's Gregg. The idea of looking at what's on our balance sheet and exploring it for impairment is something that we are laser focused on, as is our auditors, both internal and external. At the end of the day it all has to do with your intent. What do you intend to do with those parcels? If we intended to sell those parcels today and held them for sale, that would provide 1 answer, but if our intent is to develop them over the long haul, it's a different answer. It's not something we're making up. It's something that GAAP requires. We're not in a position to really bite the bullet unless we're in a position to sell them tomorrow, which we're not. We're following GAAP rules in terms of evaluation here. And you've seen that the 3 quarters that I've been here, I can tell you that we explore every asset, every quarter in the appropriate manner and adjust it when necessary. And you've seen us do that.

John, I think one of the things that's important to do on the commercial land held is always to keep in mind what the FAR, what it's zoned for, which is -- I'm not saying that some of the numbers you might still want to challenge, but I think if you roll back and look at the amount of FAR on the property versus just what price per acre is, it gets a lot better color on how we have that valued. I made a commitment to work our land value down -- the amount of land holdings that we have down overall over time, but this commercial land, you have to balance that with the FAR, and look at the development potential of it. Trust me, Deloitte is, I think, on every client they have every quarter, harder each quarter in terms of looking at land impairments. We continue to look at it.

I do understand the FAR concept and we also understand that land values for industrials are more a function of what infrastructure's been built, i.e. operator utilities, water, sewer, and roads, et cetera. I didn't want to get into all that level of detail. On the publics in Tallahassee, is the developer going away, and you're just taking over the development of that project?

Basically, the developer that had been sponsoring this, Watkins, came to us to be their equity and financial partner. As the deal has progressed, we will be the lead developer in it, and they will have an opportunity to get some of their investment back and hopefully earn a return on that investment through a promote structure.

Got it. Thanks a lot. Good quarter.

Thanks, John.

(Operator Instructions)

Our next question from the line of Cindy True from JPMorgan. You may proceed.

Hi, guys. Just wondering in terms of your land bank. Is any of the land suitable for apartment development given the strength of that market?

Yes. You know you have to go through tract by tract, but in a lot of cases you've got land that you're able to transfer the FAR between product types, and in some cases you can't and where you can't, we have looked at some of it and have taken it through a process to get it re-zoned so that it can be, but yes, there's some large tracts. One of the tracts that John was mentioning, La Frontera in Austin, for instance is a large tract that it very much could be the multifamily. So you have to really look at it on a tract by tract basis, but where we have land that we don't plan on needing for our development needs in the short run and where we can reposition it for multifamily, that's something that our land guys are doing all the time.

Let me add one thing, too. We actually have a specific parcel of land in our residential bank that we're in discussions with a multifamily developer right now to sell and redevelop it, not all of it, but a portion of it as a multifamily site. So what you've asked is actually happening.

Okay great. Thank you.

Operator. Our next question is from the line of Brendan Maiorana from Wells Fargo. You may proceed.

Thanks. Good afternoon.

Hey, Brendan.

Hi, guys. Gregg, you mentioned the 4 main office buildings that you have were up 9.8% in terms of same-store NOI, yet at the same time, the overall office same-store NOI was down almost 2% on a cash basis year-over-year. So what's the difference that would drive that number down if the 4 main ones were up so significantly?

I believe a lot of it has to do with those specific assets. Those are by and large denser, more CBD-like assets, and the balance of the portfolio is lower density, more suburban-like assets. I think it's kind of what I said in my prepared remarks, which is, those are the assets that you would expect would do well at the early stage of the cycle. Terminus 100, 191 Peachtree, American Cancer Society, these are mid-high rise, structured parking, by and large dense CBD deals. And they are outperforming suburban deals.

Yes. I mean, I guess maybe to get the follow-up on Sloan's question about the NOI growth potential. You guys have done a good job realizing the growth potential, and that's adding to the NOI run rate, but is there some of the NOI from the more challenged part of the portfolio that's falling out of the bottom so that $20 million target, maybe you're going to get some of that, but you're going to lose some of it as well. How would you handicap the upside potential versus what might be at risk?

Well, I think, Brendan, in terms of the $20 million -- I'm glad you asked that question because you do have to be careful of -- at Cousins, unlike some, we do recycle capital. So that number could always move based on us selling an asset and putting those proceeds into a development deal. In terms of assets that we're concerned about them backing up in terms of losing major tenants, I think, we've talked about our top 20 majors that we've basically gotten all renewed. The 2 places outside of the 2 assets we've talked about, that you see vacancies and numbers perhaps backing up would be, Cosmopolitan Center and Galleria 75. Both those are really, if you look at the sites, they're both assets that we bought for the development potential of the sites. The assets provide some current income while we're holding them for development. Cosmopolitan Center, for instance, is in Georgia 400 and it's just had a brand new interchange put in and can support 600,000 or 800,000 square feet of new development from an FAR standpoint. Galleria 75 has some similar dynamics. Those would be assets that could continue to be stressed in this market. I wouldn't expect the vacancy to back up a lot, but we may not regain some of the vacancy that has happened recently.

Sure. That's helpful. Okay. And then Gregg, the G&A level has, as you mentioned in the prepared remarks it has come down nicely. When you look at it today, do you think this is a good run rate going forward? Do you think there is a little bit more that could be trimmed out of that number? How should we think about that?

In the last quarter's conference call, I provided guidance on G&A and we stick to that guidance. It's come down 9%, 10% year-over-year. So we've lowered the run rate. And that was after a decline the previous year as well. I think you're looking at a good run rate for the balance of the year.

Okay. Thank you. Then just lastly, looking at it, can you guys provide a little more color on the land sales in this quarter, where they were, maybe what are the total proceeds or the total cost? Last question, the Handy Road, it looked like that dropped out of the supplementals. Is there something that happened with that one as well?

Hi, it's Gregg. I'll handle Handy Road first. We gave Handy Road back to the bank in the first quarter, and satisfied the loan on that. It took the bank over quarter end to complete the foreclosure process. So although we initiated the process in the first quarter, it wasn't complete until second quarter, so we couldn't take it off our books until it was complete this quarter. So that's the story on Handy road. In terms of land sales, the 108 lots that we talk about selling during the quarter on the residential side, the vast majority of those, I believe 102 were in Texas. On the residential side it's mostly Texas residential lots that are being sold.

Thank you.

Our next question from the line of John Stewart with Green Street Advisors. You may proceed.

Good morning, guys. It's Jed Reagan here with John. Quick question. Just to maybe ask Brendan's question a slightly different way. In terms of the cash same-store NOI number, would you describe first quarter or second quarter numbers as sort of a better run rate as we look out for the rest of 2011.

First quarter same-store retail and specific -- that's the number that really moved and drove the overall number down this quarter. First quarter same property retail numbers were affected by a couple large accrual reversals that artificially deflated expense numbers in the first quarter on the retail side. That has now wound its way down so we're back to a run rate in the second quarter. That's the big driver. It's coincidental that we had some expense reversals in both the first quarter this year, so the sequential change was high, and expense accrual reversals in the second quarter last year, so the year-over-year was high. But that's what's driving the retail decline. Not the revenue side. Revenue on a GAAP basis on the retail portfolio was up actually 2.8%. So it's not the revenue side. It's some expense timing adjustments, which happen.

The other thing that happened on the retail side expenses also was often times retail expenses are seasonal. As you enter spring, you incur more expenses than you might otherwise have. In terms of kind of trying to forecast out our individual property NOI, summing that up to come up with a good earnings rate, the guidance that I provide on an asset by asset basis really is, I hope, used and very helpful as you guys try to drive both earnings in an NAV model for us.

Certainly it is. And on the office side then, you touched on retail office 1Q versus 2Q. Is there sort of a blended number, a good way to think about second half of '11?

I think, again, I would refer you to the specific asset by asset guidance that we provide as kind of being the best tool to use.

Okay. How would you guys peg your mark-to-market rents in the portfolio at the moment?

Well, as you know, as we said a little bit earlier, I think even though the market remains -- hasn't shown any improvement, I think that the mark to market would probably not show a lot of change just because rents don't roll up a lot, and I think they would be about right. What we are seeing in Atlanta is we are seeing ourselves and others be able to begin to push back a little bit on the concession side. Not as much as we would like, but if I look at some deals that were being done 6 months ago versus today, you are beginning to see landlords push back on the free rent and push back on the TI. And it's not 100% successful, but you are beginning to see a little bit of traction on that side.

That's helpful. And Larry, are you seeing any impact at all from the debt uncertainty, and sort of general economic overhang in terms of tenants making space decisions at this point? Does it seem like folks are sort of pushing out decisions, or have you not seen much in the way of impact so far?

It's hard to say. The national economy has got to have an impact. There's just no question that any of us, when we see the stock market fluctuating and dropping as much as it has, and all of the fluctuations going on and uncertainty, I think it is just human nature. So I'm sure the impact is there. Typically in our business, summer is a bit slower anyway, just because a lot of the decision makers and stuff aren't here as much, and when they are here, they're focused on their businesses versus the space needs. I can't say that we've seen a cliff edge like we did a few years ago when the markets were more volatile and everybody just stopped. As I said in my speech, we're not deaf to the fact that it's got to have an impact. We just haven't been able to quantify or see it yet.

Great. And last 1, as far as the preleased tenant for the Emory Point retail project, are you table to disclose who that tenant is, or what sort of industry they're in, and any expectations with regards to additional pre-leasing going forward for that project?

The 82,000 feet of retail in Emory has got a tremendous amount of interest in it. When we broke ground, we had about 35% of the space with actual signed leases on it, but we had another 20% plus of letter of intents that were fairly far along in the process, and we plan on making an announcement sometime in the fall to really unveil that tenant mix, but it will be a combination of service providers, drug stores, those types of things. It'll have a heavy restaurant and entertainment component, and then it'll have a healthy component of regular merchants that are serving that population. It's hard to believe, but there hasn't been a retail project built in that trade area in 30 years, and you've got about 40,000 daytime employees within in a half mile between the CDC and Emory. The demand for the retail space is very, very encouraging. We're just trying to make sure we get the right mix of retailers so long term they can all be successful. We're not as pressured to have to go out and try to drum up leases, just given the market dynamics of this asset.

Got it. Great. Thank you.

You bet. Thank you.

We have a follow-up question from the line of John Guinee from Stifel Nicklaus. You may proceed.

I apologize, Aaron asked me to mention this. You had about $6.4 billion of TIs and leasing commissions in the second quarter. Is that an aberration or is that the start of a trend? How should we look at that?

We signed about 3 million square feet of new leases last year. All those people are now moving in. So you've seen especially up front TIs increase. You're going to see that continue to increase until we get that whole 3 million square feet of tenants moved in. So it's not a 1-quarter aberration. We've got to get all those people moved in. So Cap Ex, second generation Cap Ex, and therefore the calculation of our FAD will be affected for the balance of the year.

Should we look at the same sort of number or escalating a bit, Gregg?

You know, we don't provide guidance on that, but in general, I say it's going to escalate through the balance of the year.

Okay. Then Larry, I am very fond of you and I appreciate your honesty, and it was nice of to you tell us once that you can't raise rents in Atlanta, but you don't need to tell us twice.

Thanks, John.

All right. Bye-bye.

Mr. Gellerstedt, There appears to be no further questions at this time. You may resume with your presentation or closing remarks.

Well, we appreciate everybody's continued interest in Cousins, and we look forward to answering any questions you all may have and follow up. We'll, as always, be available and happy to take your calls. Hope everybody has a great day. Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Have a great day, everyone.