Cousins Properties Inc (CUZ) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Cousins Properties second-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 Wednesday, August 1, 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, 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, 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, please go ahead.

Good morning, everyone.

Our strategy for Cousins is three-fold -- simple platform, trophy assets, and opportunistic investments.

We've noted before that our portfolio will be increasingly comprised of Class A office assets that are well placed within high-growth Sunbelt markets where our expertise and long-term relationships are competitive advantages.

Further playing to our strengths, we are using this stable platform to seek additional returns through opportunistic investments.

The second-quarter results, with the successful disposition of three noncore assets and positive leasing headway in the operating portfolio, demonstrate continued progress towards this vision.

While we had no acquisitions in the second quarter, we are optimistic about our prospects for the balance of the year and remain encouraged by the development pipeline.

I'll briefly provide some additional color on our capital recycling efforts, the development pipeline, and the operating portfolio.

I'll also give a quick update on our markets before handing it to Gregg for an overview of the financials.

On the capital recycling front, we closed on the sale of three assets in the second quarter and were pleased with the valuations across the board.

As previously announced, Avenue Collierville, a 511,000 square foot lifestyle center located outside of Memphis, sold for $55 million.

Ten Peachtree Place, a fully-leased office building in midtown Atlanta, sold for a gross price of $61 million, and Galleria 75, 111,000 square foot flex office building in the Galleria submarket in northwest Atlanta, closed in June for $9.2 million.

We are now marketing two additional lifestyle centers for sale, Avenue Forsyth and Avenue Webb Gin, both of which are located in Atlanta.

The teasers just went out, so it's too early in the process to provide any guidance on pricing.

However, based on our experience with Collierville, we think the pool of vendors should be fairly deep.

On land disposition initiatives, despite a quiet quarter, things are proceeding very well.

We've sold $35 million in land and residential holdings year to date, and expect to reach our goal of $60 million by year end.

The bulk of the parcels under contract are scheduled to close in the fourth quarter.

As a reminder, Galleria 75 and Cosmopolitan Center, which we consider land holdings, are part of this initiative and are included in our target number.

The ongoing disposition of our noncore assets provides two key benefits.

First, it simplifies our portfolio, enabling us to operate more efficiently and to focus where we are strongest.

Second, it serves as the primary source of capital for our investment pipeline.

To that point, we're actively working to recycle this capital into investment opportunities with superior risk-adjusted returns.

The bulk of our investments will target high quality, urban office assets, well located in the best submarkets, at valuations below replacement cost.

Most of these will be value add in nature, but we're likely to have some select core acquisitions as well.

We're confident the assets we're targeting, if properly -- if managed appropriately, will significantly outperform their markets throughout the cycle.

The volume of acquisition opportunities has increased in recent months and we expect to execute some transactions over the next couple of quarters.

As a matter of fact, if all goes as planned, we'll have something to announce within the next few weeks in Texas.

The remainder of our investments will be more opportunistic in nature, where we have the opportunity to create value through our development expertise.

These are typically nonmarketed, relationship-driven projects.

On that note, we remain excited about our development pipeline.

Phase 1 at Emory Point is on track for a successful opening in the fourth quarter.

Apartment preleasing continues to exceed expectations in both volume and rate, and the retail portion should be 90% leased by year end.

Mahan Village, our Publix anchored project in Tallahassee is also slated to open later this year at similar leasing levels.

Looking further ahead, we're optimistic about the prospects for Phase 2 at Emory Point, which is expected to comprise 240 additional apartment units and 40,000 square of retail space.

If the predevelopment process remains on track, we'll commence construction for this $60 million phase in the first half of 2013.

Our $100 million mixed-use development at UNC also remains on track for a 2013 commencement.

At Third and Colorado, our proposed office tower in downtown Austin, it's all about hitting our preleasing requirements.

We are encouraged with our number of prospects, which would easily get us over our preleasing target, but we still have to get them in the boat.

Moving on to the operating portfolio, first I would like to make a few broad observations.

The weighted average lease term in our portfolio is over 7 years, generally with high-credit tenants.

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

In other words, the operating portfolio is in very solid shape, with limited downside and significant upside upon further execution of our leasing goals.

Gregg will provide more details on the financial upside in his remarks.

In the second quarter our office and retail assets increased to 91% and 88% leased, respectively, on a same-store basis.

We've made significant progress getting to this point, but we still have some work to do.

On the office side our opportunity really boils down to getting the job done at three key assets -- One Ninety One Peachtree Tower, Promenade, and the American Cancer Society Center.

At One Ninety One Peachtree we had a strong uptick in leasing activity, bringing this asset to 85% leased, up from 82% at the end of the first quarter.

The building is now at 86% leased and moving in the right direction.

At Promenade, we remain ahead of pro forma on both leasing volume and rate, and momentum remains strong.

The building is now 69% leased, up from 58% at the time of purchase in November of last year, with a very solid pipeline of prospects.

We recently commenced an $8 million capital improvement project that should be complete by November.

The project includes a fitness center, a bistro, and a significant rework of the entrance lobby plaza area.

These enhancements should provide a further boost to our leasing efforts and serve as an example of our ability to add value through our development expertise.

At American Cancer Society Center we continue to focus on datacenter users and have a handful of prospects that we hope to convert into signed leases by year end.

On the retail side, we're happy to see the lease percentage increase to 88% and are working to fill the remaining vacancy.

The team feels confident about getting this done within a reasonable timeframe.

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

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.

It's no secret that the economic conditions are relatively strong in Texas, where employment growth continues to outpace the rest of the nation.

North Carolina is doing very well, too, particularly in the Raleigh/Durham market where we've been most focused.

Atlanta continues to lag Texas, but we believe, and the data confirms, that conditions are steadily improving.

The recently revised Bureau of Labor Statistics data shows that Atlanta's recovery is much further along than previously thought.

Not only has growth been taking place, but the pace of employment gains in Atlanta has been equal to, or better than, the national average over the past year.

The turnaround is starting to show in real estate data as well.

According to CoStar, Atlanta ranks second in net absorption amongst the 20 largest markets year to date, with 1.7 million square feet, trailing only Houston.

To be clear, Atlanta remains a tenants market and we have a long way to go before reaching full recovery.

But we do believe things are trending in a positive direction.

While we constantly monitor overall market conditions, we firmly believe that both the quality of the assets and the quality of the management and leasing teams are equally important drivers of success.

This combination has been crucial to Cousins' success over the years and is something we believe can't be overstated.

If you look at our assets across all of our markets and over any period of time, you'll see a significant level of outperformance.

Cousin maintains a very targeted, asset-specific approach to investing for this reason.

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

We're focusing on what we do best and successfully exiting our noncore holdings to provide the additional capital to do so.

It's been a solid first half of the year and we expect to report continued progress next quarter.

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

Thank you, Larry.

Good morning, everyone.

I'm pleased to report it was a clean, solid quarter, no unusual items either up or down.

FFO was $0.13 per share, which compares to $0.11 per share last year.

As with our performance in the first quarter, earnings were driven by solid internal growth -- same-property NOI was up 3.7% over last year -- and aggressive cost control.

G&A was down 8% from last year.

As Larry just discussed, we continued to make significant strides with our strategic plan.

It shows up in many places, including one I'd really like to highlight this morning, the quality of our revenue stream.

As recently as 2006, recurring rental revenues comprised only about 50% of our total revenues.

The rest was made up of less consistent sources of revenue -- fee income and proceeds from lots, land and condo sales.

Today, rental revenues comprise about 80% of our total revenues.

This is a material improvement in the predictability and durability of our cash flow and an important measure of the progress we're making.

We've accomplished this while significantly improving the quality of our balance sheet.

Debt to undepreciated assets is currently 36%.

Debt to EBITDA is 6.5 times.

We have no debt maturities until next summer and we only have $40 million outstanding on our $350 million credit facility.

Financially, this is not the Cousins you may have known just a few years ago.

The composition of both our income statement and our balance sheet has been reworked into what we believe is a more stable and resilient foundation to execute our strategic plan.

With that quick introduction, I'd like to review our financial performance.

As I said, FFO for the first quarter was -- I'm sorry; for the most recent quarter was $0.13 a share.

For the first six months it was $0.26 a share.

That's up 44% over the first six months last year.

As we transition to a more stable portfolio, same-property performance will become increasingly important to our earnings, and we're really doing well here.

For the first six months of 2012, same-property NOI is up 4.6% on a GAAP basis and 9.8% on a cash basis.

Let me say that again -- 9.8% cash NOI growth in the first six months of 2012.

That's a really solid number for a property portfolio located in a part of the country that has essentially been written off as dead in the water by many investors.

This isn't to say value-add development opportunities won't also be an important part of our strategy going forward, because they will.

It's just that they will be appropriately sized relative to our total balance sheet, somewhere between 10% and 20% of gross assets.

Currently, our value-add development properties comprise 11% of total assets.

As Larry stated earlier, we anticipate several more properties being added to this group over the next year.

The balance sheet, while already solid and better than the office peer average, improved again this quarter.

Of particular note, based on leverage we actually transitioned to the lowest tier of pricing on our unsecured credit facility after the second quarter, reducing our spread by 10 basis points and our annual facility fee by 5 basis points.

I'd also like to point out a few changes we made in our financial reports and earnings supplement this quarter, as we try to continue to make these live documents that respond to your desire for transparency.

First, on the balance sheet with our earnings release, we've pulled deferred rents receivable, essentially straight-lining of rents, out of notes and accounts receivable and given it its own line item.

Second, we moved deposits out of the line item called deposits and deferred revenue and into accounts payable and other liabilities and grouped all of our deferred revenues into one line item.

Hopefully, both of these changes on the balance sheet will prove helpful as you try to generate an accurate net asset value for us.

Also, within the earnings supplement we've added a sheet that summarizes the key economic terms of all of our joint ventures.

Again, hopefully this eliminates any confusion as you try to value these investments.

A quick note -- this is a new schedule and we internally caught a small mistake on the Terminus 200 waterfall percentages this morning.

This has been corrected and reposted to our website.

Moving on, we've refined the earnings release and the supplement every single quarter since I've been with Cousins.

And if we're doing our jobs properly we will continue to make improvements.

We want to be responsive and we want to be transparent.

So, please, don't hesitate to continue calling with suggestions.

With that, I'd like to update our guidance for '12.

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.

As with the last quarter, the only change I have relates to Promenade and, again, it's a positive change.

If you recall, we said back in February 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, and over $2.3 million in the second quarter.

This beat has been driven by both favorable revenue and expense variances.

Timing has played a particularly important role on the expense side, as we have aggressively managed spending money at the property.

Bottom line, we originally anticipated a little over $7 million in NOI from Promenade in 2012 and we now anticipate a little over $8 million.

Other than that, I'm happy to report everything else continues to come in right on plan, and we have no other specific changes to 2012 guidance.

That being said, I do want to briefly discuss the earnings implications of the capital recycling program we are in the midst of executing.

Strategically, it's very compelling.

We're pleased with the results to date and I think many of you listening to this call are as well.

But we have more work to do and I just want to remind everyone that capital recycling is, by definition, typically dilutive to earnings in the short term, oftentimes driven by timing.

It's almost impossible to sell an asset on a Tuesday and buy the replacement asset on a Wednesday.

We're doing the best we can, but we're not losing sight of opportunistically trying to maximize value along the way.

And if we err on the timing, we'll most likely err on the side of conservatism, selling first and buying second, making sure we don't weaken our balance sheet.

So in addition to the performance of our existing property portfolio, please take into account our capital recycling activities as you generate your earnings forecasts.

Before closing, I'd like to discuss a forward-looking valuation concept that has been previously used here at Cousins.

It's the concept of monetizing the embedded NOI within our existing portfolio.

We brought it up during the 2009/2010 period to highlight the value of our vacant space.

We used a relatively simple calculation that stabilized our assets at a market occupancy rate, capped the incremental NOI, and then deducted the cost of achieving that stabilization.

It was well received and useful at first, but it lost its relevancy as we sold and we bought properties.

I'd like to reintroduce the concept again, but refine it a bit to insure a more lasting relevancy.

As Larry said earlier, the operating portfolio is in good shape, with same-property occupancy at 90% and minimal lease rollover risk.

That being said, there's still significant opportunity for cash flow growth in three large office properties -- One Ninety One Peachtree, the American Cancer Society Center, and Promenade.

Combined, these three properties represent one third of our total NOI, and they have a current weighted average occupancy of 76%.

For purposes of our embedded NOI analysis this time around, we're going to ring-fence these three assets.

By isolating these assets you can easily track our performance and hold us accountable, regardless of what happens elsewhere in the portfolio.

So, assuming we can move the occupancy of these assets up from 76%, where they currently are, to a stabilized occupancy of 90%, at current market rents, that generates about $10 million in incremental annual NOI.

You can cap this NOI at any number you think is appropriate, but for today's discussion let's just assume a nice round 7%.

That generates $140 million in incremental value.

Let's assume the cost about $65 per square foot, or $25 million in leasing commissions and [TIs] to realize this incremental value.

That's a net gain of NAV of $115 million, or about $1.10 a share.

Off a base of our current share price of around $7.75, that represents a 15% increase.

It's material and we're pursuing it aggressively.

We'll keep you apprised of our progress.

With that, let me turn the call back over to the Operator for your questions.

Thank you.

(Operator Instructions) Jamie Feldman; Bank of America Merrill Lynch.

So I guess, Gregg, just following up on your last comments, since you kind of laid it out there, what do you think is realistic in terms of timing as people are underwriting that upside to the portfolio?

Jamie, we're going to go as fast as we can.

I can tell you all eyes internally are on that.

But I don't want to put a timeframe out there right now.

Okay.

So I guess digging deeper on the assets, so One Ninety One Peachtree, what is the leasing pipeline look like?

The leasing pipeline, we obviously made a lot of progress in this last quarter.

And I would say the leasing pipeline continues to look solid here.

The leasing pipeline at Promenade is very deep and we feel very, very confident about where Promenade is as well.

And I would say the biggest question will be American Cancer Society.

And the response we've gotten from our datacenter initiative in terms of remarketing the unique qualities of that building to that particular targeted audience has been very, very strong.

And so the question gets to be, as that audience looks at this building, how quickly we can convert that interest into signed leases.

And so I would say that American Cancer Society has been a struggle since Turner vacated the 90,000 square feet.

From an office perspective, it continues to -- it's a great building but it's a very unique office tenant that wants to be there.

And so the pipeline's been slow on that.

The datacenter users, that's been a strong pipeline.

But we don't have as much experience with that particular pipeline and what conversion rate we may be successful in securing.

Okay.

I mean, it's a similar story to some other markets where there's kind of one-off datacenter owners.

Do you guys think at all of just selling either the asset or maybe some sort of JV through one of the datacenter guys that that's their core competency?

We've got CMBS data on it and we have not looked at a sale of the property.

It is a property where some of the datacenter users -- and you hit it on the point -- that have come to us are interested in some type of structure, of a JV condominium type of structure, some type of structure to take the spot and have some kind of ROFO when we decided to sell it.

And that's really the reason why I'm having a -- we're less certain as to what our conversion likelihood might be with some of those users, as we just work through those various issues.

Okay.

And then, I guess just to take a step back, focusing on Atlanta, the leasing stats were good for the quarter from the broker reports.

It seemed like perimeter and some of the northern submarkets seemed better than downtown.

Can you just give us a sense of -- and then, we're just also hearing on a macro environment and you've got a lot of kind of new manufacturing happening around the market, helping the warehouse business.

Can you kind of give us more of a sense of what's really happening there?

And then, what's the risk of new supply that would really push back on job growth and real net absorption?

Sure.

At the macro level I would say that Atlanta is certainly showing -- and Georgia -- are certainly showing a lot of positive signs.

Hartsfield, which obviously drives a lot of the attractiveness to Atlanta from a business standpoint, just opened a $1.5 billion new international terminal.

The Port of Savannah is on fast-track funding for its deepening and expansion, which will make it one of the largest ports on the eastern seaboard.

And that drives a lot of transportation and logistics business up through Atlanta as well.

Actually, our project on the multi-modal deal that we're working on just got upgraded in terms of where it stands in the potential funding cycle down the road in the future.

So I think Atlanta from a quality of life, cost of living, travel perspective is driving these businesses that you're seeing.

And there have been a fair number of announcements this year of new businesses relocating to Atlanta and job growth is reflecting that.

As you know well, that growth is slower to show up in the office sector.

But you are beginning to see that growth demonstrated in the leasing statistics that we've seen to date.

I think if you look at it from a standpoint of new supply, there's still a significant difference in every submarket in Atlanta from where market rents are to where replacement cost rents would have to be.

And that's not to say that there won't be some new supply that's driven by a corporate user or a large percentage of a building being driven by a corporate user.

But it's going to take a user that's willing to pay a significantly -- depending on which submarket it is, but in every submarket, significant higher rents to be in that new building.

So we don't see any prospects for any new buildings, new office buildings, in any of the submarkets that we're tracking, other than a building that would be a corporate user driving that demand.

Okay.

And then, my last question, just to frame the opportunistic investments you're talking about, are those most Texas-based?

And can you just characterize what the market looks like?

Obviously, we stay focused on Atlanta and will where it is.

But we like our portfolio in Atlanta a lot, in terms of where we're positioned with the assets, with Terminus and Buckhead and Promenade and Midtown and One Ninety One and American Cancer [City] downtown and North Point.

Those are great buildings.

So in terms of our investment appetite, we have been primarily focused on Texas, primarily, North Carolina secondarily.

And those markets we've been tracking and spending a lot of time in the Houston market.

Houston continues to be a very strong performer and I'm sure everybody on the call has been watching Houston's numbers.

So we're active with looking at Houston.

Dallas, we particularly are focused on the Uptown/Arch district submarket, which is the strongest submarket in that particular city and has some real amenities coming to it, with a new park that spans over the interstate between the Arch districts and the Uptown market.

And then in Austin, where we've been a long time, we continue to be focused there primarily right now on our Third and Colorado initiative.

But we still own a site out at Research Park, which we've done four buildings there and we've got a pad for a fifth.

We get some interest periodically from corporate users on that.

So the Texas market's remained very, very healthy really across the board.

Okay.

All right.

Thank you.

Anthony Paolone; JPMorgan.

Just a follow-up on the Atlanta macro commentary, Larry.

Larry, I think at NAREIT you talked about specifically there being I think something like three leases in downtown running around that maybe could land at One Ninety One, and also a [notable] potential corporate relocation to Atlanta.

I was just wondering if you could update us on those, either where the leases landed and what kind of impact on the real estate markets.

Well, you are beginning to -- on the lease side on One Ninety One, we have landed or are in the process of landing those three leases that I talked about.

So we've been successful in securing those.

This building just remains a fantastic value for tenants that are open to looking at downtown or already in downtown.

And we've got some good prospects behind those.

In terms of the corporate relocations, I think the one and specifically we were talking about did pan out and you saw State Farm announce that they were going to move over 1,000 jobs to Atlanta.

That will go in a couple of buildings in the central Perimeter market.

And that's one of four or five similar size corporate relocations that have been announced in Atlanta in the last 12 months.

So things are definitely picking up, and I think the statistics bear that out.

Okay.

Those leases at One Ninety One that you landed, are those in the leasing stats yet or they're just not quite there?

A couple of them are and one of them is yet to hit.

Okay.

And then, in terms of acquisitions, dispositions for the second half of the year, if you hit your land goal and you've got these other couple retail assets out there, it seems like a couple hundred million on the sales side at least.

And then, do you think you could be a net acquirer, given your comments about just activity picking up here?

Or do you think you're a net seller in the second half?

Well, I hope we certainly find acquisition opportunities that make great use of those sales proceeds.

But as Gregg said in his comments -- and I do anticipate we're going to have something in the next couple of weeks in Texas that will be very compelling to announce.

We're just -- I can't give any more details on it right now, but we'll have some more in a couple of weeks.

But we're not going to try to get too cute on market timing.

We think that, based on our experience at Collierville that this is a good time to move the Forsyth and Webb Gin transaction, based on the pricing that we saw at Collierville, but also the buyer interest.

And so, when the market's right we're going to move on the sell side and keep the balance sheet strong.

And we're not going to try to, obviously, get too anxious on the acquisition side.

But we do have some things in our gun sights, very specific opportunities for the balance of the year that I hope will be successful and I'll be able to talk to you about shortly.

Okay.

Is there anything, do you think, that's prompting a little bit more deal flow on the potential acquisitions side?

It seems like you're seeing more compared to some of your commentary last couple quarters.

I think it varies.

Some of it's just seasonal.

It seems as though the second and third quarter is always stronger in terms of deal flow than the fourth quarter.

Anecdotally, on a couple of deals we're seeing, I do think that some private long-term owners of real estate are contemplating sale in some of the markets due to the health of the market and the pricing, but also just uncertainty about what tax policy may be in the next couple of years and how that might affect real estate.

So we do hear that sort of as a secondary discussion in terms of the motivation of some of these private buyers to come to market right now.

Okay.

Thank you.

Brendan Maiorana; Wells Fargo.

Just a follow-up on the capital recycling -- Gregg, you highlighted the balance sheet in your prepared remarks and you've done a very good job getting the leverage levels down to levels that I think you view as reasonable.

But from a higher level perspective, notwithstanding timing that may happen in the back half of the year, as we think about where leverage is today, is it fair to assume that dispositions will offset net investments?

Or, do you think you can, outside of selling equity, do you think that you can expand your -- do you think you can be a net acquirer, net investor over the next couple of years?

Brendan, the plan is generally a leverage-neutral plan.

So on a gross basis we're going to sell the same number that we buy.

Timing obviously can play a role as those trades happen.

But over the course of our strategic plan implementation, call it two to three years, we generally are contemplating a leverage neutral to slightly leveraged decline improvement favorable over that period of time.

Any big jumps you see inter-period will primarily be timing.

And we have -- nowhere in the plan at this time do we have any new equity issuance, common equity issuance.

Sure.

So we've got Forsyth and Webb Gin that come out.

There's $25 million of land this year.

How much more do you think -- when you look beyond that and we get into next year, you still have some land left.

And then, how much more do you think you have in terms of noncore assets that you'd like to prune over time and then redeploy into more core stuff in Texas and North Carolina?

Brendan, quite a bit.

If you look at our strategy, we're talking about Class A trophy office assets in the Sunbelt in our specific submarkets.

So the answer is, quite a bit.

And I want you also, as you guys model the balance of the year out, take a look at Palisades.

We are under an obligation to sell our interest in that property, 50% ownership interest in that property, at the option of our tenant there.

And they've given us every indication they're going to execute that option to purchase it from us.

So we'll have an additional sale at the end of this year, and it's reasonably significant.

Yes.

And that one I think we talked privately about that, but is it fair to assume that the pricing that your partner there got from your previous partner I think was around $345 or $350 a foot.

That's probably a pretty good proxy for what you guys are -- the purchase option that's likely to occur at the end of the year?

Yes.

The way that it works is it's fair market value.

So I would think that would be as good a proxy as any on Palisades.

Okay, that's helpful.

And then, Gregg, on your $10 million NOI upside of the three remaining office assets that you have, is that upside from the guidance that you provided in terms of NOI for 2012 or is that from the current Q2 run rate?

How should we think about that $10 million of upside?

That's based upon the upside from the first half of 2012.

Okay, upside, great.

Think the six-month number.

Okay.

And then, I know you kept the guidance for One Ninety One the same.

It seems like leasing is maybe a little bit better than what you guys had expected.

And I think you're looking for maybe $3.9 million of NOI by the end of the year.

It would seem like if some of those tenants that you signed were to take occupancy the number would be higher than that.

Is that a fair characterization?

And does that indicate that maybe those tenants aren't taking occupancy in the back half of the year, but that's a '13 event?

Most of those tenants will be first part of next year, by the time they get their space built out and occupied.

Okay.

So that's next year?

Yes.

Okay.

And then, last one for me, I know as we talked about in January, you guys have still, I think, somewhere around $5 million of G&A that could come out of the run rate.

Has there been any of that that's been achieved in the first half of the year?

Or is that still something that's more likely to happen over the next couple of years and we haven't gotten much of that thus far?

The G&A is something that I wouldn't want to give any specific numbers on G&A, but as we continue to simplify the platform, we're looking for ways to make the G&A more efficient as we go.

And so it will be something that you will see achieved concurrently with the simplification of the platform and will play out over the next 12 to 24 months.

Okay, great.

All right.

Thank you.

Michael Knott; Green Street Advisors.

Good morning; it's Jed Reagan here with Michael.

Wondering if you can talk about tech demand.

Are you seeing any uptick in tech demand in your markets and for your specific buildings?

And if so, where would you say that's most pronounced these days?

Are you talking about tech demand being the tenants coming from the tech sector?

Yes.

Okay.

You certainly see it in Austin; very, very strongly.

And that's not 100% of the demand, but as you all know, Austin is a very strong market in terms of both the folks that are there and the folks that continue to find it attractive.

And therefore our Third and Colorado building, a fair amount of the prospects for that building do come from that sector.

As we travel around other parts of the portfolio in terms of other markets, I think that tech, just like industry in general, is continuing to be a larger and larger part of new tenant demand, that a lot of the new businesses, I would say, are coming from that sector.

And that's encouraging.

It does provide an opportunity for us from an underwriting standpoint to get our heads around those businesses and what make those tick.

But you are seeing, particularly on the new business side and some of the rapidly expanding businesses, a fair amount of that coming from the various aspects of the tech sector.

Would you say that's a meaningful component of the demand in Atlanta these days?

Atlanta, I wouldn't say it's unmeaningful or meaningful.

It's a growing part, but Atlanta is still -- most of the tenant demand you see in Atlanta is service based, because that's just what drives the Atlanta economy and particularly in our building types.

So law firms and other professional services type organizations still represent the majority of our tenant mix in Atlanta.

Okay.

Can you remind me just in terms of yield expectations for the three major development projects that you're in various stages on, with Emory Point, UNC and Austin.

Anything you've provided on that before, just a refresh?

Well, we don't give specific yield expectations, but -- and they vary, depending on product type.

So obviously the apartments will have a lower yield than a retail development will, just by the nature of that product type.

But we continue to be disciplined in our underwriting.

And a back of the envelope thing is we usually try to conservatively underwrite at a 200-basis-point spread in terms of where we think we're going to get our development margin on.

So if you think the yield of a product type's at a 7, then you're trying to develop to a minimum of a 9 yield.

And that remains a pretty accurate way to look at the way we look at our development activity.

Okay, that's helpful.

And I apologize if you touched on this, but just as far as -- looked like Q2 leasing activity, at least the kind of the headline volume numbers, have slowed just a little bit in the second quarter.

Are you seeing a noticeable slowdown in the market?

And how would you characterize tenant decision-making these days?

Well, when you -- obviously, as we fill up a lot of the portfolio, the gross amount of leasing will decrease.

And that's a good thing.

But in terms of the tenant demand, we saw tenant demand be pretty strong in the first and second quarter.

Usually things do slow down a little in the summer.

Anecdotally, though, I would tell you that we think that some tenants are tapping the brakes in markets, just due to really global economic and national economic uncertainty.

It's not as though folks were hitting the brakes like they were a few years ago.

But it's just folks seem to be in a position to where -- if I don't have to make a decision this quarter, I might just put it off until next quarter on space.

And I think that could be something that we would see and I would think others might see between now and the end of the year, just with the amount of uncertainty and the headlines coming across every day.

Great, that's helpful.

And just last one, for Gregg, what would you say are the biggest drivers of the 10% cash same-store NOI increase?

And would you characterize the results from the first half of the year as sort of representative of your expectation for the second half of the year in that regard?

The 10% growth in cash NOIs you can see is reasonably evenly split between retail and office.

And a lot of it's driven -- it's driven by both revenues and expenses, but it is driven by expense control.

I mean, we're working really hard to run these properties smarter.

Not all expense control, by any stretch of the imagination, but some of that is in there.

In terms of a look forward, as much as I'd like to provide that guidance, really the guidance we provide is on asset-specific guidance.

And I've given you all I can on that front.

Understand.

Okay, thanks a lot, guys.

(Operator Instructions) John Guinee; Stifel Financial.

Well, Gregg, you did a great job sort of walking through potential FFO dilution from the dispositions and then monetizing embedded NOI.

The next logical step would just to start giving FFO guidance and also an NAV page.

Is that coming down the pike?

We're not uncomfortable giving FFO guidance.

We don't have an inherent need to run from it.

We just need to clean up our cash flow just a little bit more before I feel like we're going to be confident in providing that guidance, because if I provide it I want it to be good.

And so I think that that's going to come eventually and we're making good headway to getting there, John.

On the NAV page, we are absolutely taking a look at providing a template as many of our peers do to help you all generate your NAV.

So as we continue to look at that, we've polled our peers.

We actually looked at it this quarter as a potential inclusion in our supplement.

But we just have a little bit more work to do before we can put something out that I'm comfortable with.

But on both of those fronts, yes, we're moving in that direction.

Okay, good.

Larry, One Ravinia just sold for about $136 a foot, which at one time was a very good asset up in the Perimeter market.

I don't know if it's really held that same position.

Do you have exposure up in the Perimeter market?

And what's your thought on that market in general?

John, I don't track that market as closely as we do the markets that we're more focused on.

But I have, certainly with our exposure in that market in terms of Concourse and some other assets, we track it and follow it.

And you also -- it looks like we'll see Concourse probably trade.

It's been in the paper that that's under contract in the next quarter or so.

So I was not -- that pricing was about what I would have expected for that asset.

And from what I understand, although I don't know the details of the Concourse pricing, I would have expected that about the same as well.

Okay.

And then, you had a lot of discussions on just asset by asset.

So a quick obvious question -- depending on how you count the square footage at American Cancer Society, your CMBS data is about $140 to $150 a square foot, and I think it matures in a few years.

What's the thought process on putting any more money into that building and really trying to make something happen when it would be a real stretch to think that the American Cancer Society building might be worth more than the debt some day.

That's a very good question and one that we have absolutely been focused on.

And as we look at folks that might particularly be tenants in that building, we're very, very mindful of what the debt on that building is and making sure that we're being smart from any cash investment that we will get an appropriate return on any new cash deployed in that building, John.

Okay.

And then , comparing Promenade and your Austin development, what do you think your -- on a per foot -- development costs would be in Austin?

And what do you think your stabilized basis would be on Promenade, just to give people a sense on the relative costs these days?

Sure.

I would think that the Third and Colorado new building in Austin you'd be at $350-ish kind of dollars a square foot.

And the all-in basis on a Promenade would be in the $220, $230.

So $120, $130 difference.

Okay.

And then the last question; I think this is probably for Gregg.

Mahan Village down in Tallahassee, on the one hand it's a development deal, which earns a 9% [prep] and a 16% look-back.

On the other hand, this wonderful chart you put together here shows that you're recognizing revenues and expenses as if fully owned.

Can you sort of reconcile what you're doing now in the development process in terms of earning any income on that asset?

Well, John, there's no income yet being recognized at Mahan Village.

And when we do, we'll recognize it per GAAP.

And GAAP will have us take a look at it, just like we're looking at the original Cousins/Watkins joint venture.

We'll run out a forecasted cash flow.

And if the look-back IRR that's in the docs against 16% in the second one, just like 16% in the first one, is highly probable then GAAP would have us recognize 16%.

But we're not there yet.

And so, there's really no -- there's nothing running through my income statement on Mahan Village to date.

Got you.

Okay, I see.

So Watkins you're earning a 16% look-back, but Mahan Village is just a typical development deal.

Yes, until it starts to cash flow.

Okay, great.

Well, thanks a lot.

Follow-up, Jamie Feldman; Bank of America Merrill Lynch.

Just a quick follow.

So in terms of the Austin development, can you guys talk a little bit about the competitive landscape there?

What are the other buildings that may go up around the same time?

Jamie, we've got the best site and we're further along in the sense that we are almost all the way through all of our entitlement process and review process.

There are a couple other buildings that had been mentioned that are in what I would call the pre-marketing stage.

One of them is at the Green Water Treatment facility, which the City of Austin took out of commission and are redeveloping that site.

That's an initiative that Trammell Crow is working with the City on.

And there are a couple of other buildings.

And then there are a couple of smaller buildings, largely owner occupied that are being currently delivered in that market.

But we are further along and we do have a preleasing threshold that we are wanting to get to and will get to before we go ahead with that.

Okay.

Thank you.

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

I'll turn the call back to you.

Please proceed with your closing remarks.

Well, we hope everyone is having a great summer.

We appreciate you listening in and appreciate your continued interest in Cousins.

We look forward to a great back half of the year.

Thanks very much.

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.