Cousins Properties Inc (CUZ) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Cousins Properties Incorporated first-quarter 2012 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 today, Thursday, May 10, 2012.

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, acquisitions 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, 2011, 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'll now turn the call over to Larry Gellerstedt -- Larry?

Good morning, everyone.

This was another solid quarter, highlighted by strong operating results and continued progress towards our long-term strategic plan.

Cousins' strategy is threefold, and you should expect to hear us often on this -- simple platform, trophy assets, and opportunistic investments.

Our portfolio will be increasingly comprised of Class A office and retail assets that are well-placed within high-growth Sun Belt markets where our expertise and long-term relationships are competitive advantages.

Further playing to our strengths, we will use this platform to seek additional returns through opportunistic investments.

We are measuring our success across three categories -- leasing, asset sales and new investments.

To quickly sum up the first quarter, leasing was decent; asset sales exceeded expectations; and new investment opportunities were fairly scarce.

However, I would note that we have a significant development pipeline in place, and the volume of acquisition opportunities has increased a good bit in April and May.

I'll provide some additional color on each of these three areas before passing it to Greg for an overview of the financials.

I'll start with leasing.

On the office side, there was nothing earth-shattering about the quarter, but the portfolio held steady at 90% on a same-property basis.

Our three key assets with remaining vacancies are 191 Peachtree Tower, American Cancer Society Center, and Promenade; and we feel very good about our prospects at all three buildings.

In fact, current activity at both 191 and American Cancer Society, is the strongest it has been in several quarters, and we expect to have some announcements during the second quarter.

As a side note, at American Cancer Society Center, in an effort to drive new momentum and take advantage of existing infrastructure, we recently launched an extensive marketing campaign targeting data center tenants.

This is still in the very early stages, and has already generated some solid prospects.

Approximately 30% of the building is already occupied by data center tenants, so this isn't a new use -- it's simply an expanded marketing effort.

As for Promenade, activity remains quite brisk.

Just a few weeks ago, we announced six signed leases totaling 126,000 square feet.

This included a new lease with Norfolk Southern for 37,000 feet, and a long-term renewal with tvsdesign for 74,000 feet.

The building is now 72% leased, up from 58% at the time of purchase in November of last year.

We're in the early process with some large tenants right now, focused on the Midtown Market.

One quick note that may explain some of the momentum we're seeing in Atlanta -- the Bureau of Labor Statistics recently revised their employment numbers for Atlanta.

The new data shows that Metro's job base didn't actually lose 8000 jobs in 2011, as it had previously reported, but actually expanded by 64,000 jobs for the year.

Not only has growth been taking place in Atlanta, but Atlanta was ranked second in the nation for job growth among major metropolitan areas, from January 2011 to January 2012.

Atlanta still has a long way to go before it feels like a full recovery, but this was certainly a welcome bit of good news.

On the retail side, overall, the portfolio is in good shape.

We did see a slight downtick in the lease percentage from 89% at year-end, to 87%.

This was driven mainly by the expected loss of a few tenants at Avenue Webb Gin.

We're working to fill these vacancies and we feel confident about our ability to get this done in a reasonable time frame.

Overall, sales continued to improve across the portfolio, which bodes well for leasing trends over the long-term.

Moving on to asset sales, where we showed the most progress for the quarter -- as you remember, in February, we announced our intention to accelerate the sale of most of our remaining land and residential lots.

We believe this will provide significant boost towards executing our strategic plan.

The Forestar transaction, which we announced in February, where they agreed to purchase 18 of our 21 JV residential projects, officially closed in March.

This transaction immediately eliminated nearly 40% of our residential holdings, generated $23.5 million of cash to be redeployed into income-producing assets, reduced our annual land-carry costs by approximately $2 million, and eliminated approximately $80 million of required capital commitments associated with the build-out of these projects over the next 10 to 15 years.

The remainder of our land disposition initiative is proceeding well, as we have several additional holdings under contract.

I've been around too many years in this business to let myself get ahead of the game on land contracts, but I will say we hope to sell over $60 million in land and residential lots by year end.

It's important to note that our sales efforts are not confined to land.

We also look to monetize mature operating assets from time to time.

This includes holdings that fall outside of our core competency, as well as core assets where we believe maximum value has been created and it's an appropriate time to harvest and recycle.

Just a few weeks ago, we closed on the sale of Avenue Collierville, our 511,000-square foot lifestyle center located outside of Memphis, for $55 million.

Given this wasn't one of our stronger retail assets, we were ultimately satisfied with the pricing.

Ten Peachtree Place, our fully-leased office building in Midtown Atlanta, is under contract to an institutional buyer, and should close within the next week.

Due to the JV structure with Coca-Cola, and existing debt on the property, net proceeds to Cousins will be fairly insignificant.

Nevertheless, pricing was strong and we'll be pleased to exit this mature, fully-leased asset at a profit.

Galleria 75, our 111,000-square foot Class B building in the Galleria Market, is also under contract and is expected to close in early June.

As a general note on pricing, we've been extremely pleased with the valuations across the board.

As I mentioned earlier, the key driver to these asset sales is the opportunity to recycle the proceeds into compelling acquisitions and developments.

While we haven't executed any acquisitions so far this year, we're working diligently on a targeted list of assets, both marketed and non-marketed, in our core markets.

On the development side, our existing pipeline is fairly robust and in solid shape.

Regarding the current pipeline, Emory Point, our $102 million multiphase mixed-use development adjacent to Emory University and the Centers for Disease Control in Atlanta, is progressing very well, and remains on track to open this fall.

Leasing interest for the residential portion continues to exceed all expectations.

The 80,000-square foot retail portion of the project is also ahead of schedule at nearly 80% committed.

We remain encouraged with the prospects for Phase II at Emory Point, which is expected to comprise 240 additional apartment units and 40,000 square feet of retail space.

If our pre-development efforts remain on track, we'll be able to commence construction for this $60 million phase in the first half of 2013.

Mahan Village, our $25 million Publix Supermarket-anchored development in Tallahassee, Florida, is on schedule for a successful fourth-quarter opening, with nearly 85% of the space already committed.

In 2013, we also expect to break ground on Phase I at University Square, our mixed-use development adjacent to the University of North Carolina at Chapel Hill, another outstanding infill opportunity in a high-demand, supply-constrained submarket.

The first phase is expected to have a total cost of approximately $70 million to $80 million.

Additionally, many of you likely saw some news published on a proposed office tower in Austin, Texas.

Our team is working on a 390,000-square foot office development opportunity at Third and Colorado in downtown Austin.

We are still very much in the pre-development phase, so it's difficult to gauge the likelihood of the project breaking ground at this point.

If we're able to meet our pre-leasing hurdles, we could potentially break ground later this year.

We are focusing a good bit on Texas for new opportunities, such as this tower, as well as potential acquisitions, so stay tuned on that front.

One additional opportunity to note -- Cousins was part of the team selected to be the master developer for the redevelopment of the 488-acre Fort McPherson, a former US Army base, located about midway between downtown Atlanta and Hartsfield-Jackson Airport.

The team includes Forest City Enterprises and Integral Group.

We'll collectively negotiate a contract with the development authority over the next couple of months.

The long-term prospects for this land are enormous.

If things go well, this project could provide a 10- to 15-year pipeline of development activity.

Couple this with our multimodal project in downtown Atlanta, and we've captured potential opportunities comprising nearly 600 acres of well-located, underutilized land inside the BeltLine in Atlanta.

In closing, we have a comprehensive strategy in place, based on simple platform, trophy assets, and opportunistic investments.

We are focusing on what we do best, and successfully exiting our non-core holdings to provide additional capital to do so.

We're off to a good start to the year, and expect to report continued progress next quarter.

Now I'll pass it to Gregg for an overview of the financials.

Thanks, Larry.

Good morning, everyone.

In the spirit of our financial performance for the quarter, I'm going to keep my remarks simple, clean, and upbeat.

FFO for the first quarter was $0.13 per share, which was up from $0.08 last year.

Earnings were driven by solid internal growth, with same-property NOI up 5.4% over last year, and aggressive cost control.

G&A was down 11% from last year.

There are two other items on the income statement I'd like to point out.

The first is contained within Other Income, where we received a $1 million cash settlement during the quarter on a $2.2 million note we had with the previous partner that had been written down to zero in 2010.

The second is a $12 million impairment we took on the Avenue Collierville sale during the quarter.

I'll talk about the economics of this deal in just a few minutes.

I want to also point out the progress we continued to make on our balance sheet during the quarter.

Particularly the improvement we've made with our fixed charge coverage ratio, which has moved up to 1.93 times this quarter, from 1.76 times in the same period last year.

In part, this improvement is being driven by our sale of non-core landholdings.

The number of residential lots we have on the books is down over 80% from this time last year, while the number of acres of commercial and residential land is down 17%.

In total, land and lots now represent less than 5% of our gross book value.

With that quick introduction, I'd like to provide some details on several important transactions we completed during the quarter.

I'll start with our new unsecured credit facility.

It was a well-executed transaction that lowers our [alma] interest spread by 65 basis points, and extends the maturity out to 2016.

We also placed a non-recourse fixed-rate mortgage on 191 Peachtree, our headquarters office tower here in Atlanta.

This is a $100 million note with a 3.35% interest rate that matures in late 2018.

In addition, we're in the process of completing an early refinance of our mortgage at Emory University Midtown Hospital office tower that matures in 2013.

We anticipate completing the rate lock on this note in the near term, tying up another attractively priced piece of fixed rate debt on an asset we intend to hold long-term.

Finally, subsequent to quarter end, the mortgages for two of our four North Point office properties in North Atlanta matured, and we elected not to refinance.

This now leaves the entire four-building complex unencumbered and ready for potential capital recycling.

Earlier in the call, Larry laid out the property transactions we completed during the quarter, including our portfolio sale to Forestar, Ten Peachtree Place, Galleria 75, and The Avenue Collierville.

I thought it might be helpful to provide a few more details on two of these transactions -- Ten Peachtree and Collierville.

At Ten Peachtree, we recently signed a lease extension with AGL Resources, the lead tenant, to essentially lease the entire building through 2026.

This was a terrific outcome and prompted us to move forward with plans to harvest the value that had been created.

As you can imagine, the pool of potential buyers for this Class A, Midtown Atlanta, 100% leased to a credit tenant for 14 years, was deep.

The expected sales price generates a stabilized cap rate consistent with other recent comparable sales in the Buckhead and Midtown submarkets of Atlanta.

We expect our net proceeds to be approximately $5 million after debt repayment and accrued returns.

We'll provide more details on this transaction after the closing actually occurs.

I also wanted to provide some specifics on the sale of The Avenue Collierville, a lifestyle retail center in Memphis, that has already closed.

This property was originally developed by us in 2005, stabilized in 2006, and since it struggled a bit during the recent economic cycle and the cash flows reflect this.

Despite this performance, as with Ten Peachtree Place, the buyer pool was deep, and the bidding was very healthy, with several potential buyers all bidding right around the eventual sales price.

Using the 2011 GAAP NOI numbers we provide in the supplement, this sales price reflects an 8.02% cap rate.

However, as you know, these assets trade on a forward 12-month cash basis, and using our current budget for this period, the $55 million sales price equates to a 7.36% cap rate.

With that, I'd like to provide an update our guidance for 2012.

Before I start, I want 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.

The only change we have today to the guidance I provided on our previous conference call is a positive change.

If you remember, we said that Promenade would start the year generating about $1.5 million in quarterly NOI, increasing to $2 million by year-end as we leased it up.

It actually produced a little over $2 million in the first quarter alone.

Although the leasing at Promenade year-to-date has exceeded expectations, most of this $500,000 feat was the result of some unforeseen expense savings and parking income.

For modeling purposes, I would still recommend using our prior guidance for the balance of the year.

Other than that, I'm happy to report everything else continues to come in right on plan, and we've got no other changes to guidance.

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

Thank you.

(Operator Instructions) John Guinee, Stifel.

Hi, very thorough, thank you.

Just a couple house cleaning.

On Mahan Village in Tallahassee, what are you booking on a current basis?

It's one of these look-back deals, so you're probably able to book a fairly high return on invested capital.

John, it's Gregg.

Mahan Village is a development property, so we're not booking any income at this time.

Okay, so your preferred returns are not being realized at all right now?

No, the only thing that's running through there is running through the balance sheet in terms of CIP.

Okay, and then on page 21 of the sup, you basically have all the lots at Callaway Gardens and Blalock Lakes were sold to a home building venture which the Company is a joint venture partner, et cetera, et cetera.

Is this a new structure, or the same structure?

And can you expand on what's going on in these two particular second home big developments?

There's no new structures, John.

On Blalock Lakes, in terms of what's going on, we have the property listed with a broker.

So it's out to the market, and we intend to hopefully get an attractive level of interest and dispose of that property.

On Callaway Gardens, that one will take a little bit longer.

That's inside the development of Callaway Gardens, and there's actually some positive things going on in the local market down there, with a lot of growth.

That will probably take two to three years before we work our way through that, but we do intend to also exit that as the market improves down there.

And then the last question, I had mistakenly thought that the impairments were all behind us, and then the Colliers deal came on.

When you look at your disposition plan for the rest of this year and next year, should we be aware that there may be still more impairment charges?

Well, John, I think if you certainly look at Collierville, as I said, it was not one of our strongest centers.

But the lifestyle portion of our portfolio was developed towards the end of the cycle, and the performance of those centers on a square foot basis is fairly uneven, so Collierville was a little bit at the lower side.

If you go back into the PRU assets that are in the mixing bowl, those were developed going back to 2000.

And so you might, just like anything, as we dispose of those, there might be some gains in some and there may be some losses in others.

But we really view the way, hopefully the way that most people will look at this, is if we look at that forward 12 year NOI -- I mean, 12 month NOI, we saw this as a very, very strong outcome for this sale.

Excellent, thank you.

Anthony Paolone, JPMorgan.

Thanks, good morning.

You mentioned the investment opportunity side when you talked about the three items you are judging yourself on as just being scarce.

Is that, that you're not seeing deal flow?

Or is it that you're just not getting to pricing?

What we've normally seen is the first quarter and the disposition market just across the country is usually a slow quarter, just in terms of the number of assets that are out there, and this first quarter of this year was no exception.

So, it really wasn't, in our case, the assets that we have targeted in the markets we're looking at, it wasn't a case of going after them and not being successful from a pricing standpoint, it really was a lack of deal flow.

And just as we saw last year, as we look both on the marketed and non-marketed side, the deal flow is ramping up in the second quarter, and we see that staying strong through the third quarter.

We're projecting -- our look is that the market is going to end up being about the same as last year, in terms of total dispositions in the key markets that we're looking at.

It's really been deal flow versus pricing, but we may be sitting on the next call saying it's pricing versus deal flow, but we are encouraged with some of the prospects we have in the next couple of quarters.

Is the stuff that you look out and see over these next few quarters, is it more on the lines of development opportunities, or is it existing assets?

Our strategy is certainly looking at both.

Our focus continues to be over time, to work down the percentage of our assets to a lower level that we have in Atlanta.

We're focused on, primarily on Texas and secondarily on North Carolina, in terms of outside of those markets.

In Texas, Austin, where we've been for 20 years, and Dallas where we've been for 20 years and Houston, are our primary focuses.

And the Carolinas, it's more in the Raleigh-Durham market at that point.

We like Charlotte, but we're a little less aggressive about looking at Charlotte just due to some uncertainty with the two big banks up there.

So on the acquisition side, I think -- I'm optimistic we'll have some good success there in the balance of the year.

On Emory Point, you mentioned the resi coming in stronger than expected and having good traction on retail.

Any updated yield you expect on that project?

And also just thoughts on where the second phase may pencil?

Well, I think you -- I would say that we've been able to have a fair amount of early indicators that the apartments are going to be very successful.

Both in terms of -- I think at this point we've had just under 500 people sign up for reservations, and there is no model to look at yet.

And we've had about 30 of those, and we just started leasing in the past couple of weeks, we've had about 30 already convert.

And that's a very high conversion ratio because there's only so many people we can talk to.

So the part -- and they're leasing above pro forma, and the retail is leasing above pro forma.

We could have the retail leased, we're just being very selective in terms of tenant mix for the health of the overall development.

Not going to comment on spreads and those things versus what we've said before, but I would certainly say that we're very encouraged.

And our main reason that we have spaced out starting Phase Two, if we just looked at leasing on both the retail and the multifamily side, you would certainly have said it was strong enough to start Phase Two sooner.

But, we have certainly learned from the long-term value of mixed use projects, it is really good to let a first phase get opened and work through any of the operational issues, whether it's parking or signage or traffic flow or those things, before you come in with a second phase too quickly.

We're quite optimistic that the second quarter of next year, we'll have a start at Emory.

And the last question, you took down some very low cost debt with 191 Peachtree, and you redid your line.

You have some preferred stock out there.

Any thoughts on, could that be something that you'd use proceeds from potential stabilized sales to call in, or how are you thinking about the preferreds that are out there?

Tony, it's Gregg.

We treat the preferreds as an investment alternative, and we compare it to the other alternatives that we have.

And, if and when it becomes the best alternative we have, we'll take a look at that.

As we sit here right now, it's not our best alternative.

Okay, thank you.

Brendan Maiorana, Wells Fargo.

Thanks, good morning.

Larry, you talked about leasing activity that seems like it's better, for you guys at least, in midtown and downtown with Promenade Two and 191 and American Cancer.

Can you give us a little sense of the tenants, where it's more active and are those tenants actually expanding?

Or is this just a little bit of musical chairs with some downsizing on the new lease agreements?

Brendan, I would say that the majority of the tenants that we're doing business with right now are in the downtown market.

Our downtown tenants that are moving from other buildings to 191 Peachtree because of the value proposition that 191 Peachtree provides them.

And 191 Peachtree, the downtown market is still slower than the midtown market.

Midtown and Buckhead would certainly be the most preferred submarkets right now.

But in downtown, if we really look at our competitive subset, with just the quality of the building and the commerce club on top of 191 Peachtree, and the cost basis in which we have 191 Peachtree, it's in a pretty strong position.

And although our lease percentage number didn't move this quarter, I'm quite optimistic that you'll see the lease percentage number in the next quarter or two move up in a positive way on 191 Peachtree.

American Cancer Society is sort of an interesting story, the American Cancer Society, the developer, which was not Cousins that developed that building, developed it for one purpose and that was to be a data center building.

It sits on one of the largest intersections of fiber-optic cable in the southeast.

It's got all sorts of electrical capacity that you see being built into today's data centers, that that building has always had.

So the focus on data centers is really just a re-marketing effort into that space.

Because a lot of national users had maybe not been up to speed with some of the positive attributes of that building, and a couple of other data center buildings in the downtown market are 100% full right now, so we're optimistic about that.

Promenade is just -- we're executing what we said we would execute, it's a great asset.

We're selectively putting some capital in it to improve it.

Our sponsorship is driving good results, and there, you are seeing relocation of tenants within the midtown market, you're seeing other tenants relocating to midtown from other markets, and so we're very encouraged on that front.

We're also encouraged with the leasing activity at Terminus as well as North Point.

That's very helpful.

Can you -- I don't know if you're going to want to get into specifics, but can you give us a sense of where you'd expect to be on a leased rate for 191, American Cancer and Prom Two either at the end of this year, or maybe within 12 or 18 months?

You mean in terms of lease percentage?

Yes.

If you're low 80%'s at the two downtown buildings and you're low 70%'s at Prom?

Where do you think those go in the next 12 months or so?

I hope they go up.

Brendan, I'm not going to give specifics on the numbers, but I would say that certainly, Promenade, we are executing the plan.

We thought we had a fairly aggressive plan when we bought the building, and we are ahead of where we had expected to be, and I continue to expect us to outperform.

191 Peachtree, which is -- for a few quarters has been a little stagnant in the low 80%'s, I'm very optimistic that you'll see it pop up above 85% in the next few quarters.

American Cancer Society is a little bit harder to predict, because American Cancer Society is a very unique building, and so the deal flow there is more sporadic.

But when it does happen, I mean, the reason the vacancy is there, is you had a very large tenant move out.

And it tends to move in big blocks, and so that one is a little bit harder for me to forecast where we may be.

But you'll continue to see Promenade and 191 Peachtree move up.

Okay, that's helpful.

And then this might be more for Gregg, but notwithstanding the straight-line -- the leasing activity that you guys expect to get done over the next 12 months or so, maybe a little less than that, the straight-line rent number has remained higher after you guys did some very nice leasing in 2010 and 2011.

On a same space basis, when would we expect that number to start moving down more significantly?

Yes, Brendan, it's a great question.

But I think I've got to stick with Larry's comments.

We give you really good by property data guidance, and I think that's really the only guidance I can provide at this time.

Okay, all right.

The last question I had was with respect to Concourse Corporate Center, which is on the market, and is an asset that you guys third-party manage and lease.

I think it makes up a sizable portion of that line item within your business.

I know you probably feel confident that you guys could retain that management agreement, but to the extent that you didn't, can you provide some insight into how significant of an impact that would be on that particular line item?

Well, you're right.

The Williams Square, which was a significant asset that traded last quarter, that TIAA sold in Dallas, with the new owner, Brookdale Group, we did retain the leasing and the property management.

And we've had it at both those assets for over 10 years and have fabulous teams in place.

And so if a buyer of those -- unless the buyer of Concourse happens to self lease and self manage, then we feel optimistic about our chances there, just based upon track record, history and results.

In terms of its impact on the overall fee business, if we were not to retain it, probably the easiest way to look at it is, it's about 2 million square feet, and you can figure out, just on a percentage basis, what that would be of the portfolio we had.

A lot of the cost of that asset is property level type expenses.

Hopefully that gives you enough guidance to get (multiple speakers).

Meaning that it's scalable?

Right.

Great, thank you.

You bet.

Dave AuBuchon, Robert W. Baird & Co.

Good morning, can you give an update on where you stand relative to your original $10 million to $12 million of cash NOI growth from lease up of your in-place portfolio, inclusive of some of the trades that you've made recently?

Dave, it's Gregg, good morning.

We provided that guidance a couple years ago, and so much has happened in the portfolio since then, it's really not a relevant data point.

If we had to put a number on it, we put between 80% to 90% of that metric has been completed to date, but it's really hard, I mean we've sat down and tried to solve for it.

So much has happened in the portfolio since then and it was meant to be a static metric, that it really isn't relevant anymore.

Right and Galleria 75 was under-leased at that point in time, correct?

That's right.

That's fine, thanks.

Can you -- Larry, you mentioned the potential development in Austin, and that you could start it if you've got some pre-leasing done.

Can you just help us understand what the potential ownership structure would look like in your potential capital commitment to that project, if the leasing did work out?

Sure, I hope you can see we are trying to mute our excitement about the opportunity there.

We've had -- we've developed Frost Bank Tower in downtown Austin, and it sold for a record price, and still is one of the leading assets in downtown Austin, so we have a lot of credibility with the tenant base there, based on our history.

We have a fabulous site at Third and Colorado that is owned by a group out of San Antonio.

We have partnered with them, where they put the land in the venture, and we're doing all the pre-development activities.

Rents in downtown Austin, for those of you that follow that market, are very healthy.

It's one of the healthiest downtown markets, certainly that we're aware of.

And so rents are generally in that downtown market, are at or above replacement costs.

And so we think that somebody, there is demand for somebody to do an office tower down there.

We think our site is fantastic, our credibility is strong, we like the design and tenant response has been great.

With that said, we've got to convert that to something that's bankable, and we're hard about doing that.

We took it to the design review commission in Austin, which is no easy task.

I think only maybe Chapel Hill is more difficult there, university towns tend to have tough design commissions.

We got a 9-0 vote this week, so we've got a good design, now we just have to get the tenants so that we can start.

The venture structure will be determined just by the pre-leasing -- where we are, pre-leasing the land would typically be expected to be put in and whatever by the owners of the land into the venture, and would reflect whatever percentage that ends up being.

They've got the opportunity to invest more, but it would be some type of venture structure, but our main focus right now is getting that pre-leasing done.

And so, hard cost to build, is that somewhere around $350 a foot?

That's probably as good a number as any.

Okay.

You mentioned you are doing some pre-development work.

Just with that project and then the University Square project, how much have you spent to date on those two initiatives?

In terms of pre-development costs?

Yes, sir.

Very little.

The structure that we have with the University has been, and continues to be, a joint funding of all pre-development costs until zoning is obtained, which we hope to obtain in the next few months.

So, I don't have the exact number, but it's well short of $1 million on our side of the venture.

If that venture does not take place, for whatever reason the University decided to proceed on a different path, then we get reimbursed for any out-of-pocket costs that we have, we certainly don't anticipate that happening.

And our real expense so far on Third and Colorado, has just been getting schematic design so that we can get construction costs accurate and then it's just time costs, with our team out there, getting it zoned and doing prospective tenants.

Both of those are very manageable at this point.

Okay.

And then relative to ACSC, the data center strategy, what sort of CapEx have you thought about or underwritten, just in terms of leasing space on the data center side there?

Really, I think it's one of the things that the prospects that have reached out to us are really very intrigued with, is that the CapEx that you normally associate with trying to convert anything to a data center space, largely has already been spent on this building.

It was spent when the building was developed, so even though 30% of the building currently is with data center users, we're still -- have tremendous power, availability and generator capacity and all those types of things.

So we really don't see it being much outside the norm of what we've been doing with existing leasing.

And what would be the potential lease up of data center space in that building to the way you see it?

We could take all the rest of the vacancy and absolutely do data center space in it.

That's what we hope to do, we've got plenty of capacity to do that.

Okay.

And how would we think about the rents off of that, similar to what you're getting in the space already?

I think that's the safest way to think about it, Dave.

And you see data center rents, and I know in the spaces, it's a lot higher, and those things on specialty built facilities, but I think the safest way to look it would best be to assume that the rent structure would be comparable to what we've been getting in there.

Okay.

Last question would be relative to the Fort McPherson and the Gulch project, how should we think about any fees that are generated off of those projects?

And what's the near term impact that would have?

I would just look at the fees for the next year or two as a wash.

That any costs we're spending are being offset by the fees, and hopefully a little bit better.

But these projects are both projects that are, just given their size and complexity, have a couple of years of environmental permitting.

In terms of Fort Mac, you've got to go through the Brack Group of getting the Department of Defense to turn it over to this development, master development group.

So I would look at it as a wash for the next 12 to 18 months.

And, Gregg, that would be netted out in the fee income line?

Yes.

Exactly.

All right, thanks guys.

(Operator Instructions) Michael Knott, Green Street Advisors.

This is Jed Reagan here with Michael.

Can you remind us when you expect Promenade to be stabilized, and does the success there, to date, accelerate at all the timelines for that?

I don't think we've given a timeline for it.

Just needless to say, we said that we're sitting at -- somebody, I think maybe you all asked on a call, would we be happy if it was sitting in the low 80%'s three years from now, and I said no.

So that's my answer, it's moving ahead of expectations, and we continue to be very, very bullish.

It's actually, even with our leasing, it's got one of the largest -- or the largest contiguous block of space, in Midtown, of a building of similar size and quality.

By the time we get done with Midtown, we might ship you those beer goggles back.

We actually think it's doing pretty well.

That was just a joke.

Okay.

And a related question, are you seeing any potential larger Atlanta leasing requirements out there from tenants you're looking to move in from the suburbs, or even out of state?

Yes.

I think I mentioned in my remarks we do have some large tenant prospects, particularly for the space we have in Promenade.

And that's what we anticipated, not only is it an attractive submarket, but it's got the contiguous space there, and there could be some signage opportunities.

Those prospects vary, in terms of relocations, within Atlanta as well as some locations of businesses or national businesses looking to increase their regional presence in Atlanta.

Okay, thanks.

And just a quick one for Gregg, how much of the reduction that you guys are seeing in same-store expenses year-over-year do you attribute to the mild winter?

And were there other factors at play there, in those numbers, that we should think about?

No.

When you take a look at that reduction in same-store expenses year-over-year, it really is spread out among different line items.

I can't point to utilities specifically, or taxes specifically.

Some of it is focused in some of our larger properties, we're really making terrific headway on 191 Peachtree for example and on Forsyth, two very large properties in our portfolio.

But beyond that focus on the larger properties, the expense savings are just a function of, I think, of our management team just executing better and tighter.

Okay.

So relatively little due to the warmer weather, you think?

That's correct.

Okay, great.

Thank you, guys.

John Guinee, Stifel.

Just a couple of curiosities.

First, on 555 North Point Tower, we saw the FFO bounce around a little bit, leasing bounce around while occupancy stayed pretty steady.

Can you walk us through that?

And then, I'm assuming you're going to put the whole package on the market later this year, just correct us if we're wrong on that.

And then the second question was, did you take a look at the Hearst Tower transaction in Charlotte and what did you think of that?

On the Hearst transaction in Charlotte, we certainly, because it's in the geography we're interested in, we certainly took a look at it.

We did not put a bid in on it.

We think it's a great asset.

But we were not comfortable right now, even though downtown Charlotte's got a low vacancy, 10%, 12%, that's relatively high, actually, for downtown Charlotte, and we really at this point want to see how the banking, in terms of how much of the space that the bank committed to, they're actually going to occupy.

We just would let things settle down a little bit more in Charlotte before we're going to be real interested in Charlotte.

So we did not price the transaction.

On 555, John, as you know, we had Kids II, a very large tenant there, move out of that space recently which was the cause of the bumpiness in NOI that you saw, but we've successfully backfilled that space with two tenants.

One took occupancy March 1, and the other moves in next month.

So you will start to see that cash flow even back out as we move forward.

And we have not -- when Gregg said we've got it so that we've got the flexibility for sale, we don't have a time frame on when we're going to look at recycling that.

What's really going to drive our recycling, we want to have and we now do have, the flexibility to move on a number of assets when we're ready to move, but we are trying to balance that with where we see the investment opportunities.

So not going to put a timeframe on those assets or any of the other ones, other than land.

All right.

Thank you.

Thanks, John.

Thank you, there are no further questions at this time.

Mr. Gellerstedt, I will turn the conference back over to you to continue with your presentation or closing remarks.

Thanks, everybody, for listening today, and we look forward to seeing you soon.

Hope everybody has a great day.

Thank you.

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

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