Cousins Properties Inc (CUZ) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Cousins Properties Incorporated third quarter 2011 earnings conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded, Thursday, November 3, 2011.

I would now like to turn the conference over to Mr.

Tripp Sullivan of Corporate Communications.

Please go ahead, sir.

Thank you.

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

For example, the Company may provide estimates about expected operating income from properties, as well as certain categories of expenses, along with expectations regarding development, acquisition and disposition opportunities.

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 on 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 financial measures within the meaning of Regulation G, as promulgated by the SEC.

For these items, the comparable GAAP measures and related reconciliations may be found through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of its website at www.cousinsproperties.com.

I'd now like to turn the call over to Larry Gellerstedt.

Larry?

Good morning, everyone.

We are very pleased with our third quarter performance.

We continued to deliver strong operating results while making meaningful progress towards our long-term strategic initiatives.

From a macro perspective, uncertainty has certainly returned to the floor and market and asset classes are being painted with the assumption that this is 2008, 2009 all over again.

While we can't do anything about market sentiment, we can offer some perspectives and continue to execute on the strategic plan that relies on Cousins' proven ability to position ourselves for success throughout the real estate cycle.

First, for the perspective.

Let's take a step back to early 2009.

The Company was 60% leveraged, our overall portfolio was 76% leased, and we were actively involved in five different product types.

All of this in the face of the worst recession in a generation and extraordinary volatility in the markets.

What did we do?

We took aggressive necessary steps to strengthen our balance sheet, focused intently on stabilizing our platform, our portfolio and simplifying our platform.

So, let's take a look at where we are today, two and a half years later.

Our leverage has being reduced by over a third to 42%.

Our portfolio is now 91% leased.

Net operating income on a same property basis through nine months has increased by nearly 15% from the same period two years ago.

Additionally, with economic occupancy at 88%, we believe there is incremental cash flow growth embedded in the portfolio.

Through all of this, we have taken significant risk out of the Company and not just in the balance sheet.

The weighted average lease term in our portfolio is eight years, generally with high credit tenants.

The average lease role for the next five years is roughly 5% a year, extremely low by any standard and well below that of our office peers.

We have some remaining vacancy, but that is limited to just a few assets, like 191 Peachtree and the American Cancer Society building.

Thankfully, these are exceptional buildings and we continue to find solid prospects that would bring the portfolio to full stabilization.

Regarding our efforts to simplify the platform, we continue to tighten the focus where we are strongest, Class A office and retail.

We have fully exited the condo business.

On the industrial side, our King Mill building in Atlanta is under contract for sale and we are in the final stages of negotiating a contract to sell our Lakeside Ranch building in Texas, along with the balance of our Texas industrial land.

We expect these transactions to close by year end with Cousins' share of the proceeds totaling around $65 million.

As we noted in the press release at the end of the quarter, we also sold one Georgia Center for $48.6 million.

We intend to invest the capital harvested through asset and land sales and real estate opportunities that provide attractive risk adjusted returns.

And we're seeing more of these every day.

As a matter of fact, just last week, we placed Promenade II, an approximately 800,000 square foot Class A office tower in Midtown Atlanta under contract to purchase.

We normally don't comment on transactions this early in the due diligence process.

However, this has been widely reported, and we've received lots of questions on it.

So let me tell you what I can.

Promenade II is a trophy tower in an excellent location.

The anchor tenant recently vacated bringing the building to 58% leased, presenting what we view as a significant value creation opportunity and this is where we are at our best.

With the addition of Prom II, our portfolio would have trophy towers in each of Atlanta's three major submarkets along the Peachtree corridor, Buckhead, Midtown and Downtown.

It's too early to share details on pricing.

But you can assume it will be below replacement cost and as is typical for value-added opportunities the going in yield will be fairly low.

We anticipate the deal to be leverage neutral, with the equity portion funded through asset sales.

Due to our confidentiality agreement, this is all we're going to be able to say on this particular opportunity.

Additionally, even with this acquisition we remain committed to reducing over time our overall exposure to the Atlanta market.

We intend to continue recycling out of mature fully valued assets and the high-quality assets where Cousins brings a competitive advantage.

That's all I'll provide on Promenade II transaction for now, but I look forward to sharing more at the appropriate time.

As you know, we've executed some other attractive investment opportunities in recent months, including Mahan Village development in Tallahassee and the $100 million Phase I at Emory Point in Atlanta.

Both of these projects are off to an excellent start.

Earlier this week, we announced several noteworthy leases at Emory Point, including CVS and Jos A.

Bank.

The project is doing so well, we've actually begun pre-development work on Phase II.

Just as a reminder, there is three phases total in this project.

The exact program for Phase II isn't fully finalized, but we expect it to include approximately 200 apartment units and 40,000 square feet of commercial space for a total cost in the $40 million to $50 million range and we hope to commence construction by late 2012.

All of these opportunities are exciting to us.

However, as stewards of your capital, we always have and always will take macro conditions into account and we'll continue to conservatively underwrite new investment opportunities.

We will also take whatever actions are necessary to drive value for our shareholders.

And speaking of shareholder value, as a practice, we do not dwell on short-term fluctuations in our stock price.

Our time and energy is much better spent running the business and creating value.

However, given the recent volatility in the overall equity markets and our stock price, I'd like to offer some thoughts.

Relative to our own performance, based on numerous conversations we've had with many of you, there are four themes that are frequently mentioned about Cousins.

One, the misconception that exposure to Atlanta is a major weakness.

Two, that Cousins' platform is too complex.

Three, the Cousins exposure to land.

And four, the lack of visibility on future growth prospects.

I'd like to address each of these.

Regarding point one, there is no question that Atlanta is a tough market in general right now.

However, real estate always has been and always will be about location and quality of the assets, no matter the market.

Our Atlanta assets are currently 90% leased and trending up compared to an overall Class A office market that is 82% leased.

The performance is driven by the top-quality nature of our assets, our strong business relationships, and our unparalleled leasing expertise.

We believe that most of our Atlanta assets will command strong pricing if we were able -- if we were to decide to realize value, as we have done many times before.

There have been notable purchases in recent months some by our REIT peers with cap rates in the high-6s and low-7s for high-quality office buildings like those within our portfolio.

And as I mentioned earlier, our plan is to decrease our overall exposure to Atlanta over time.

Regarding point two.

We've made significant strides in simplifying our business.

As I mentioned earlier, at the beginning of 2009, we were active in five different product types.

We've exited the condo business, we're well on our way to exiting industrial and we continue to work down our residential land holdings.

Moving forward, our portfolio will concentrate on two product types we know best, Class A office and retail located within high-growth markets.

Regarding point three.

Our land portfolio is viewed by some as an anchor on our Company's progress.

To the contrary and even in this tough market, our land has served as an important source of capital.

Over the past year alone, we have sold $21.4 million of land and lots for a book profit of $5.8 million and we expect an additional $10 million to $20 million of sales by year end.

Regardless, we recognize these land holdings remain a burden on overall valuation as well as earnings.

Therefore, we continue to actively explore a variety of options to ensure valuation is realized for these assets.

This effort remains consistent with our strategy to decrease land holdings as a percentage of our assets and redeploy this capital and acquisitions and development.

Finally, with point four.

If there is one thing Cousins has been known for for 50 years and counting is creating new growth opportunities.

We continue to demonstrate the ability to source attractive development and value creation opportunities, as well as unlock the embedded NOI in our existing portfolio.

The Emory Point and Publix transactions are a good example and we hope to add Promenade II to that list very soon.

We're working everyday to capture attractive investments and we remain very confident in our ability to generate attractive returns for our shareholders.

With that, I'll pass it to Gregg for an overview of the financials.

Thanks, Larry.

Good morning, everyone.

Overall, we had a clean, solid third quarter.

FFO was $0.14 a share.

This is up from $0.01 in the third quarter 2010 and we haven't had a larger FFO number since the first quarter of 2009, two and a half years ago.

The comparison to last year's third quarter is a bit unfair, since we took a $9.2 million swap termination charge then.

But even adjusting this out, FFO rose from $0.10 per share last year to $0.14 per share this year.

So what's going on?

First and foremost, we continue to lease space.

During the third quarter alone, we signed almost 800,000 square feet of leases, both new leases and renewals.

It was split pretty evenly between office and retail.

Specifically, we signed over 300,000 square feet in renewals at 10 Peachtree Place here in Atlanta, and The Points at Waterview in Dallas.

That's two large, re-leasing risks we have now taken off the rent roll.

And as Larry stated earlier, our rent roll scheduled for the next several years is outstanding.

We also signed some new leases at two of our properties that, although relatively small on their own, really highlight our ability to create value, even in today's tough market.

First, the Avenue at Forsyth, which is our largest wholly-owned retail property and the biggest contributor to retail NOI.

There we signed 17,000 square feet of new leases during the third quarter.

This caps a two year run of leasing at this property.

In mid-2009, Avenue Forsyth was only 55% leased.

Today it's 91% leased.

Equally important, we expect economic occupancy to jump from 72% to 91% over the next couple of quarters as the recently signed tenants take occupancy.

Next I'd like to talk about Galleria 75, a 110,000 square foot suburban office building we own here in Atlanta.

It was originally purchased in 2004 as a future development pad.

For years, in order to keep our redevelopment options open, we only signed short-term leases here, deliberately keeping the property under leased.

We've recently changed course and decided to focus on maximizing the value of Galleria 75.

We put our team on it earlier this year and they've quickly filled the building.

Just four months ago, Galleria 75 was 67% leased.

Today it's 91% leased, and we accomplished this in a submarket that's 82% leased.

Our team's ability to lease also showed up in the fee income line item on our earnings statement, which was up 12% over last quarter.

This line item includes the fees we generate through services provided to our joint venture partners and our third-party partners.

The vast majority of the 12% growth you see was driven by leasing activity.

Other than leasing, I'd like to provide some details surrounding the transactions that Larry discussed earlier.

First, as Larry stated, we started construction on Mahan village in September.

This is a 147,000 square foot Publix and Academy sports anchored shopping center located in Tallahassee, Florida.

Although it's a reasonably small investment of $25 million, it represents the types of opportunities you are paying us to discover.

It was a non-marketed deal brought to us by the Watkins Group, one of our retail partners.

This deal was not shopped by any of the big brokerage firms; it was generated by relationships.

We also sold One Georgia Center, a high-rise building here in Midtown Atlanta for $48.6 million.

This was a 43-year-old building that was just 36% leased five years ago.

We sourced a major tenant, the Georgia Department of Transportation, and executed a long-term lease for over three quarters of the building.

At closing, One Georgia Center was 97% leased.

This is another example of our leasing capabilities as well as our willingness and ability to sell once an asset is ready to be harvested.

As Larry mentioned earlier, we expect to sell our two remaining industrial buildings by year end.

I'd like to provide a little color on how much progress we've made with these properties to set them up for this sale.

As recently as mid-2009, King Mill and Lakeside combined were about 50% leased.

We're selling them today at 96% leased.

That's over 700,000 square feet of new leases in just the last two years.

Finally, the last transactions I wanted to bring to your attention are our residential lot sales.

During the quarter, we sold 126 residential lots, generating net profit of $519,000.

Doesn't sound like much and it really isn't, but a little perspective might help.

126 lots are the most we've sold in a single quarter, since the second quarter of 2007.

That's four years and a huge residential cycle ago.

One additional note related to our fee business.

This week our venture with Forest City officially agreed to terms with the Georgia Department of Transportation to serve as lead developer of the multimodal terminal in Downtown, Atlanta.

The initial scope will be an extensive 24 month master planning effort.

While we expect this will only generate about $1 million in fees for Cousins over the next two years, we believe the long-term opportunity is very significant and very positive.

Before getting to guidance, I wanted to point out that there was a typo in the year-to-date 2011 debt-to-EBITDA calculation in our earning supplement on pages seven and 26.

This typo has been fixed and a new earning supplement has been posted on the Investor Relations page of our website.

With that let me update our guidance for the remainder of 2011.

Before I start, 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 guidepost for future performance.

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

That being said, there are just a few changes from the guidance I have provided on previous calls.

First, based on our leasing success at Galleria 75, we anticipate NOI increasing to approximately $180,000 in the fourth quarter at this property.

Also due to new leases being signed, we expect NOI of about $900,000 in the fourth quarter from our two Birmingham office assets, Lakeshore Park Plaza and 600 University Park Place.

And we expect $2 million from the Avenue at Forsyth in the fourth quarter.

Finally, you probably noticed our G&A costs during the third quarter were below previous quarters and below my previous guidance.

Some of this is driven by our continuing efforts to manage costs and some of it was driven by a reduced accrual for long-term compensation driven by a lower share price.

Looking forward, we expect G&A costs for all of 2011 to be between $24 million and $25 million.

Other than these changes we don't see a need to make any other adjustments at this time.

With that quick summary, let me turn the call back over to the operator for your questions.

(Operator Instructions) James Feldman, Bank of America.

Thank you and good morning.

I was hoping you could talk a little bit more about Atlanta, just market conditions, in terms of the major three submarkets now that it looks like you'll have a major presence in the Class A market in each.

Just -- what are tenants saying, what are you -- what's your outlook for the next year or so in terms of demand, are things tightening up, or are they kind of stagnant?

Just a little bit more color.

Good morning, Jamie.

I hope you're doing well.

The three submarkets that we talked about, obviously Buckhead, our two assets in Buckhead are -- Terminus 100 is virtually 100% leased and Terminus 200 is 85% leased and a lot of the -- that remaining 15% we're continuing to get interest in.

Some of it is encumbered with opportunities for expansion that are on the existing leases.

So we're fairly full in Buckhead, although there is certainly some vacancy in some of the other newer towers that were built during the last cycle.

Midtown, the important thing to look at in Midtown and Downtown is really -- you look at the Class A, but then you really look at the trophy towers and you look at the occupancy in those trophy towers.

So Class A vacancy in Midtown would show in the 20% range, but if you look at what we would consider the competitive towers to Prom II, it's better than that, and Downtown as well.

So the quality assets in those markets are usually maybe in the 85% to 90% range, just depending on any recent lease expirations or whatever.

I would say the tone in Atlanta is steady.

It certainly isn't getting -- it's not getting materially better in terms of lease rate, although, we certainly have seen the ability not to have to be as aggressive as we were a year or 18 months ago on the concession side, the TIs have come in some and the free rent has come in some.

But there is a steady flow.

And overall, I think in Atlanta is in other Sunbelt.

You are continuing to see some tenants that -- particularly the larger corporate tenants that are, maybe out and outside the belt line that are looking to come inside the belt line just for the more urban experience that their workforce is generating.

So, I would say overall, Jamie, it's pretty steady.

We didn't have a lot of leasing activity that showed up in 191 in the quarter, but we've signed another 16,000 foot lease after the quarter and we got another one -- about that same size that I would expect we'd sign here in the next week or two.

So, fairly steady, but a little bit better on the TI and free rent side.

Okay.

And then I guess you gave a little bit of an update on 191 Peachtree, can you talk about ACS also, just kind of where -- how things -- where your outlook is there, how things -- where things stand?

Well, we didn't have -- we've got some good prospects on American Cancer Society.

I don't see anything that's probably going to hit in the fourth quarter, but we do have some good prospects.

One of the things, as you know, you've seen that building that is a real advantage for it is the high-tech companies.

I mean, part of the -- about half the businesses in there are -- would be -- look like normal office, kind of, tenants like the American Cancer Society itself and others.

About the other half are primarily the technology infrastructure, a lot of machines and stuff running a lot of these high-tech businesses, because of the infrastructure and the building and where it sits on the grid in Atlanta.

So we really are able to market it to users that are looking at it for both people and users that are looking at it for their IT technology and support things, which should be like US South, that's going to primarily be machines.

So we -- given the cost basis and location of both 191 and American Cancer Society, we still feel confident in our ability to get those leased up.

Okay.

And then, just final question on Atlanta.

We're hearing across other markets that tech and new media are really driving, kind of, outside demand and maybe even compensating for loss in financial services.

Are you guys seeing that in Atlanta?

Yes -- what we're really seeing in Atlanta is the Georgia Tech here is one of the largest and best engineering schools in the country.

You've got Emory, you've got University of Georgia, you've got Georgia State.

And the number of undergraduates being produced and graduate students that Atlanta is generating is attracting a lot of businesses.

I was at a meeting recently and because of that actually certain areas in Atlanta, there is a real shortage of workers.

So if you're a medical technology person that can do IT support and IT engineering and software development in the medical area there's a huge shortage of workers.

So there is no question that when you look at unemployment statistics in Atlanta or any other market, you have to dive in deeper than that and start unpeeling where the unemployment really is.

And in Atlanta, a lot of that unemployment and job displacement was in the construction and real estate areas, other areas, the high tech and other service types of things, quite frankly, employment is pretty tight in those areas.

And that's where we're seeing some of our tenant growth.

Okay.

All right.

Thank you.

Thanks, Jamie.

Brendan Maiorana, Wells Fargo.

Thanks.

Good morning, guys.

Question, I think, Larry, you mentioned that the transactions that you're looking at are neutral to an equity basis.

I just kind of wanted to ask a technical question.

If that includes from the 9/30 balance sheet or are you including your sale of One Georgia in that relative to -- so it would be One Georgia plus the industrial sales offset by Prom II.

Is that the way we think about the leverage neutral?

Hi, it's Gregg.

Yes, whatever we purchased, whatever we invest in, start development, acquisition, we'll do in a leverage neutral basis.

And for that -- us that means selling assets, both land and properties.

Specifically, we've sold as is mentioned, we sold $50 million at One Georgia Center and we'll have proceeds of about $65 million on the industrial assets.

So we're sitting on recent proceeds that will be generated, September 30 for One Georgia Center and sometime in the fourth quarter for the industrials.

The $150 million and $120 million available to invest on a leverage neutral basis.

Yes, so I understand.

But if I'm looking at your 9/30 balance sheet, you already have the capital associated with One Georgia, right?

So I'm just thinking about the credit facility, which is $120 million today, you've got $80 million, kind of, Cousins pro rata shares spent left on the development pipeline, now that's going to be funded, and based on kind of just rough estimates, it seems like half of that you can fund with the credit facilities that you have or the construction facilities that you have there, but there's probably $40 million that needs to be funded out of -- outside of those facilities.

And then if you're taking Prom II down at -- press reports of, call it, $125 million, that -- you still get a roll forward on your credit facility, that's probably going to be $225 million, kind of, give or take offset by -- so, I'm just trying to understand how you guys think about that credit facility balance, which would be moving up, would you put mortgage financing on some of the assets that are out there or just how do you kind of get that balance down to what might be more of a normalized level?

Let me take a first swing at it, and I'll let Gregg add something to it.

I think if you -- in my remarks, I tried to be fairly clear that there are other well-leased assets that we got in Atlanta with long-term leases that we will continue to recycle out of.

And so there may be a quarter or so that's between asset sales and purchases that the leverage moves a little bit, while we execute that.

But overall, it's a strategy to decrease office in Atlanta, continue to push very, very hard on land sales and we are on our new development between Emory and Mahan Village, because both of those have construction loans on them, we are well on our way to having funded our equity requirements on those.

So, we feel pretty confident just looking at our sources and uses that leverage neutral is fairly easy to achieve.

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

Just to provide specifics, I think you'd said $80 million of exposure on our development pipeline.

Our equity commitments for both of those projects, Emory and Mahan Village total about $35 million after you deduct the construction debt on them.

And of our $35 million commitment, we've already spent about $25 million.

So the future equity commitment, future cash that we need to come up with to fund those two developments through stabilization is about $10 million.

And Larry is right when it comes to -- I mean, we cannot time nor can really any of our peers time perfectly the purchases and sales of assets.

We're going do our best and so over the course of quarters you may see the line pop up or pop down a little bit.

But, over the course of several quarters, over the course of the year, you'll see us manage it, both on a leverage neutral basis and on a line of credit neutral basis.

Okay.

That's helpful.

And Gregg, how do you -- when you think about running the balance sheet, what do you sort of think of as the level of line balance that you're comfortable kind of having, understanding that it is going to move around quarter-to-quarter, but on a long-term basis, it is kind of the $120 million or so that you've got outstanding at 9/30, just kind of a rough number relative to $350 million capacity?

If you look back at the history of the Company, it's consistently over the last two or three years, hung around there.

So I would say that for modeling purposes if that's where you want to stay, that's fine.

But I'll tell you, internally we look at what our future development opportunities are or -- excuse me -- investment opportunities are and we make sure that we have enough capacity on the line to fund anything that might be coming down the pike.

Sure.

That's helpful.

And then maybe for Larry, how do you guys kind of think about the returns for projects where you've got to take some lease up risk, given that there does seem to be a little bit more uncertainty in the macro out there and maybe leasing decisions are going to get delayed a little bit in some of your markets on these large leasing decisions.

So, if you look to take some leasing risk, how do you think that translates into returns that you're expecting today versus maybe what you would have expected three or six months ago?

Well, we certainly keep that in mind, but we also look at the asset very closely, we look at the asset pricing, if it's an acquisition, we certainly look at the pricing versus replacement cost.

We look at the asset in terms of location and quality.

And we certainly factor in when we stress our underwriting.

In times like this, we stress it in terms of, okay, well if the market is going to be fairly subdued the next couple of years, what happens if we push the leasing assumption out 12 months, 18 months, 24 months and see what that does in terms of our returns.

But generally, on new development, we look for a cash on cost going in yield of over 9%.

We like to have a couple of hundred basis points spread over where we think the exit assumptions may be.

And on a value-add acquisition, you've got -- generally you try to get to the similar types of things.

But on the Prom II, as we mentioned, it's a fabulous asset on Peachtree in a very, very attractive submarket with significant lease-up opportunity, and that's really what we do.

So when you look at it, once we're able to get in the numbers, you'll see that it's well below replacement cost with a relatively conservative lease-up schedule.

So it sounds like -- and maybe you don't want to answer this, but it sounds like maybe that return, because of the asset location and discounts or replacement cost et cetera.

Maybe it's a little bit lower target stabilize return than you guys are seeking on a development project?

Well, I think the risk profile is a little bit different, but it's so sensitive to what you're trying to look in terms of what your exit is and when your exit is, but we look at it both ways.

We certainly are sensitive in terms of returns, but we also look at it in terms of 800,000 square foot towers on Peachtree and that particular submarket is a pretty good real estate bet.

This particular asset is right across the street from the Woodruff Arts Center, where the Symphony, High Museum and the Theatre are.

It's right next to a MARTA station.

It's got good location.

So you keep all those things in mind.

And certainly, the -- it was a -- there was a lot of interest besides just us in that asset.

Sure.

And then just a last quick one, if I could.

The land sale that's going to get associated with the Lakeside, industrial sale in Dallas, do you guys think that the attribution on the land is in line with your current book value or above or below?

I think we ought to just let that deal close, so we can look at the -- we get it under contract and let it close in the fourth quarter.

I don't think I ought to give a lot of color on the land price at this point, Brendan.

Sure, okay.

All right.

Thanks.

You bet.

Dave Aubuchon, Baird.

Thank you.

Good morning.

Larry, you did mention that your lease expiration schedule over the next few years is fairly low, but you do have about 209,000 square feet expiring this quarter.

Can you just remind me where that is and what the opportunity is there in terms of re-leasing?

Yes, Dave.

The part of it in terms of the expiration this quarter is on Kids II, out at North Point, which is -- Kids II is moving to Terminus 200 and actually expanding.

And their space, we've already re-leased about 20,000 square feet of it and we've got a prospect that they've signed here in the fourth quarter that would take the rest of it.

The other is US South and US South is staying in the American Cancer Society building.

So the only one that we're losing is Regions Bank, which is -- they are consolidating all their operations in Midtown.

So that's 21,000 feet that will be leaving 191 Peachtree.

Okay.

The US South space is how much?

It's about 80,000 feet.

Okay.

And then the balance of the Kids II space, you already had 20,000 -- you think you can re-lease 20,000 -- already have re-leased 20,000, what's the balance of that?

It's about 45,000 feet and we think we're pretty close to having that leased.

Okay.

And in terms of rent of that space that has expired, what sort of -- should we expect a roll down?

I understand that they're going to Terminus and then you got the different rent there to think about, but just space-to-space what should be the rent differential?

I don't think on North Point, we -- I would imagine that the in place rents are about what you'd expect on the new leasing.

In American Cancer Society, we've had very low rents in that building in general.

So, certainly, not roll ups, but I don't think you'd see significant roll downs.

Okay.

You did mention, obviously Promenade II is a pretty big acquisition for you guys.

And you have reiterated your desire to, sort of, rotate out of Atlanta or just reduce exposure to Atlanta.

How deep is the investor interest in that market right now?

How deep is the investor interest in Atlanta?

Yes, sir.

At times I have to sort of hit myself on the head, because when I'm talking to the market and going to conferences and all, I see Atlanta listed on the bottom end of the list in terms of investor interest and all concerns about various things going on here.

And then every time an asset gets priced, we see whether it's institutional interest or private equity interest, we see a lot of people chasing assets.

I think, so the -- in terms of what we're seeing on the ground, it doesn't quite match to what the headlines are in terms of competition.

And we were pleased with the sale for King Mill here in Atlanta and we feel good about a couple other assets we'll take to market next year in Atlanta because the interest continues to be pretty deep.

Okay.

And then just obviously you also want to expand in Texas and still haven't seen a deal there.

Can you just provide an update on what you're seeing in those markets and to maybe the pricing pressure that you're seeing?

Well, we have gotten close on a couple of deals in Texas and we just haven't -- we haven't gotten there.

We have focused most of our efforts in Texas.

We've been in Austin a long time and we continue to look at deals in Austin.

We also -- Austin is probably the only market from an office perspective that -- there'll be some new office development in Austin in the next year or two.

And we certainly are trying to position ourselves to take advantage of that opportunity and so a lot of effort is being spent there.

We certainly have been active in the Houston market, looking at things.

We like Houston's dynamics over the next few years.

But there's a lot of investor interest in Houston.

And so we just haven't felt -- found something that worked for us.

And then on a point, in certain submarkets in Dallas, we look Atlanta -- we've been in Dallas a long time as well.

So, the lack of having found something to buy in Texas isn't, because we haven't seen a fair number of assets to price.

Some of the assets we priced in Texas, the portfolio just hadn't moved, they hadn't -- they haven't made a sale on it.

And as you know, Dave, we're very focused not only at getting into Texas, but making sure we get the right asset with the right risk profiles as we do.

So, we've -- our team is very active out there looking for stuff.

Okay.

Just a few more questions, just be clear.

The $65 million of proceeds, Gregg, that's just the industrial assets, not -- it does not include any land that you may sell in the next couple of quarters?

That $65 million in net proceeds to Cousins includes the two industrial buildings and the industrial land in Dallas.

Okay.

But not land outside of that's attached to that?

No.

Correct.

Okay.

And then just last question.

What's your due diligence expectation for Promenade?

We would hope that the Promenade would close sometime between now and mid first quarter, it might close in the fourth quarter, it might go into mid first quarter of next year.

Okay.

Thanks.

Sloan Bohlen, Goldman Sachs.

Hi, good morning guys.

Larry, could you maybe elaborate a little bit?

You talked about having things -- or attempting to do more on the land sale side for your residential portfolio.

Is it -- should we think that it's going to look a lot like what we've seen in terms of the pace or are you trying to do something bigger?

Sloan, I -- when I look at land and I've talked to you all about this for the last year or two.

It has served as a good source as we sold a lot in that portfolio.

But it is something that's not producing any income.

So it is an income drag on the Company.

And as the -- the land is very sensitive to economic cycles in terms of how you look at the land.

So we're constantly having each quarter to reevaluate what's going on in the housing business from a macro perspective and local perspective, what's going on even on the commercial side in terms of when do we think this land would be ready, commercial land for development and are we the right user for it.

Some of the commercial land and the residential land and markets like this change purposes.

It may be commercial land that we held for an office that now looks like it may be better for a different product type and maybe that's a product type that we're not in.

And so we would be a seller.

So I am very, very focused on trying to make sure that we're getting the maximum amount of liquidity out of the land and working that portfolio down, so that we can put it to work on our core businesses for the future, and that's a major focus for us.

So we look at existing strategies and we look at new strategies and we're very focused on it.

That's probably about all I ought to say at this point.

I guess, maybe just asked a different way though.

The interest level for those parcels of land, is it still mostly at the local homebuilder level or is it quite at the private equity level or maybe give us an update there?

Well, on the residential side, for instance in Texas, we're actually have got developments in Houston and Fort Worth that we've run out of lots.

And you -- so there you've got regional homebuilders taking lot segments down and we're actually creating some new lots on some of the land held out there.

So Texas is relatively healthy, if we look back at this year, we have sold lots to builders in Georgia.

But we certainly do also have some land funds that at times approach us about the land, which have different perspectives and viewpoints on it and we talk to anybody that wants to talk to us about how they may like to look at our land portfolio.

So it's a little bit of both.

Okay.

And then maybe if I could switch gears to your capital allocation strategy.

You talk about being leverage neutral and I know you guys don't give earnings guidance, but how should we think about selling fully leased or stabilized assets and then redistributing those proceeds and assets that have some period of lease up?

Is there a way that we should be thinking about what that does to your earnings, is there a way that we should be thinking about how that impacts your coverage ratios as well?

We are attempting to match fund appropriate uses of capital with sources of capital.

So in the case where we might buy a core existing asset that's kicking out stabilized cash flow we would feel comfortable selling a core existing asset that's generating a stabilized cash flow.

And to the extent that we're investing in something that's kicking out less than a stabilized return, we would try to sell a mix of assets that would mimic that return.

Keep it -- you can't do it perfectly, but you can try to mimic the FFO impact.

And that's what's nice about this land portfolio that we have is that -- in terms of weighted average cost of capital, it's not just zero, it's actually negative, because we have between $4 million and $5 million of annual cost just to carry that portfolio of land and that's excluding interest expense, that's home owners fees, that's taxes.

So, when you balance out the sale of land with some existing buildings, you can match fund a development opportunity or you can match fund a Promenade II and do it actually on a reasonably FFO neutral basis.

Okay.

I guess that's probably [what had] driven the question is if you're making acquisitions like the Promenade building where there is a lease-up period of time.

Should we think that more of the proceeds to fund projects like that, come from that land portfolio?

To the extent we can do it.

Yes.

Okay.

All right.

Thank you.

John Guinee, Stifel Nicolaus.

Hey, good morning.

It's actually Erin Aslakson here at Stifel.

Larry, just wanted to talk -- go back to Midtown and just talk about the current lease terms in Midtown.

What are asking rates, what are the net effective rates for your typical 10-year deal?

Where TI is currently today, where is free rent, et cetera?

Yes, the Midtown deals, it varies a lot building to building, but I would say in general, the Midtown deals would look fairly similar to the deals we do at 191 Peachtree.

Maybe a little bit more on the rental rate $0.50 or $1, but TIs would be about the same.

And concessions would be about the same.

There is not a lot of difference in those two markets, but if anything, Midtown would be just a little bit stronger than Downtown.

All right.

Do you have any dollar figures for the TIs and concession fees today?

The TIs and concessions, once again it depends on the size of the deal and the length of the deal.

But $50, $60 is probably about the right number for first generation (multiple speakers).

And then how much [are on] free rent?

Free rent on a 10-year deal is going to be somewhere around 12 months.

Okay.

Great.

And then in terms of -- are there any large requirements currently kicking around Midtown or Buckhead or Downtown that might go to Midtown?

We'll look forward to talking to you about that once we get this deal closed.

That's certainly something we're very -- that's something we're very focused on, but I just need to be careful about commenting much on that.

Sure, sure.

And then, would you imagine, I guess the -- I don't know if I can -- would you imagine filling a large vacancy in Midtown with multiple small deals or big deals?

We'll fill them up with anybody that can pay rent.

So, no -- I mean, listen, Midtown is a market that -- we'll certainly see both, there'll be big user requirements and there'll be small user requirements.

Midtown is, as I said, it's a very, very strong submarket.

It's been a market where the two assets that we've had in Midtown, One Georgia Center and 10 Peachtree Place are -- we've now sold One Georgia Center, 97% leased, 10 Peachtree Place with the AGL leases is 100% leased.

So we've been warning a trophy tower with vacancy in Midtown because we're confident that our brand and our team can create some value there.

And then in terms of, kind of, the asset strategy going forward, you've expressed interest in pruning some of the mature assets.

Have you named any of those or do you have particular assets in mind, I'm sure you do today?

And then what would be the weightings of the overall pruning in terms of office or retail?

Well, I think, we've probably given enough color on that.

I mean, as I've said, we're net sellers in Atlanta.

We are definitely sellers of land.

And we would like our portfolio over the next three to five years to be more evenly distributed in Texas and North Carolina.

And our focus is on office, primarily on the acquisition side, office and retail on the development side.

Although, we'd look at a retail acquisition, but more office focused.

Don't want to comment on which particular assets we might be sellers of.

Okay.

No problem.

And then just in terms of the lots that you sold.

Who is the buyer on those?

It's multiple buyers.

Its homebuilders, most of those lots were out in Texas.

Okay.

Thank you very much.

You bet.

(Operator Instructions) Michael Knott, Green Street Advisors.

Hi, good morning guys.

It's Jed Reagan here with Michael.

Gregg, it looks like the retail expenses were higher again year-over-year.

Was that a case again of expense reversals last year affecting comps and is that likely to affect the fourth quarter as well do you think?

Yes, the year-over-year retail operating expenses increased by about $700,000 from $3.2 million to $3.9 million.

It was primarily driven by real estate taxes at two retail properties, the Avenue Collierville and the Avenue Webb Gin.

We had a little slight uptick in bad debt expense at Forsyth and Webb Gin as well.

But quarter-to-quarter sequentially, operating expenses actually went down 3.9%.

Operating expenses are, particularly taxes can be lumpy and if you look at the first nine months of the year, you get a better picture.

And I believe operating expenses of the real estate portfolio for the first nine months were up 1.8%, 1.9%.

That's really just the timing of real estate property taxes.

Okay.

Thanks.

And can you guys provide a split out for the $65 million in industrial proceeds?

No, we need to let those deals close and then we'll give you all of the split out on that.

Okay.

Fair enough.

The yield expectations on the Tallahassee project, are you able to discuss those?

Well, as I said, we usually when we underwrite, we try to have a cash on cost yield of over [9] and this project would be consistent with that underwriting and we try to under fairly conservative assumptions try to have a couple hundred basis points spread over where we think exit cap rates are.

That project is 77% leased going in.

So we're -- it's a solid project.

We're very pleased to be able to work with the Watkins Group and get that deal done.

Okay.

That's helpful.

And lastly, Larry, you touched on this briefly in your opening remarks.

But just maybe a little bit more color.

With your shares recently trading at big asset discounts, just wondering how you guys think about the decision to expand the portfolio versus repurchasing shares.

As we've said several times, whatever we do, whether it's buying a property, developing a property or buying back stock, we're going to do it on a leverage neutral basis.

We like where our balance sheet is right now.

And so the logical source of funds to buy back stock would be asset sales.

Well, to do it on a leverage-neutral basis, I'd have to buy back, let's just call it for simplicity's sake 50-50, I'd have to buy back 50% stock, and I'd have to do something with the other 50% i.e., buy back debt.

The only debt available to me to buy down right now is my line of credit, which as you know is sub 2% or thereabouts.

So the math of a stock buyback on a leverage neutral basis breaks down a little bit when you look at it that way.

That being said, we look at it all the time.

We track where our share price is and we look at all the different uses of capital that are available to us.

And so it's something we look at all the time.

Okay.

I appreciate that.

Thank you.

Dave Aubuchon, Baird.

Thanks.

I just had a follow-up question.

If you don't want to comment on Promenade, that's fine.

But just speaking ahead about your CapEx budget, is the vacancy of Promenade over lower quality space or is it space that could be more plug and play in this sort of environment?

There's some above.

It was -- most of the -- when the building was built, it was 100% AT&T and they have slowly moved out of the building.

But I would say 80% of it would be -- look like new generation new -- first generation space.

Some of it we can plug and play.

Okay.

Thanks.

Mr.

Gellerstedt, there are no further questions at this time.

Please continue with your presentation or closing remarks.

Well, we appreciate everybody's interest and all the questions.

I'm sure that we will see the vast majority of you in a couple of weeks out at NAREIT in Dallas.

And we look forward to being able to talk some more.

I appreciate your interest in Cousins.

Thanks.

Ladies and gentlemen, that does conclude the conference call for today.

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

Have a great day everybody.