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Cogdell Spencer Inc. (NYSE:CSA)

Q1 2009 Earnings Call

May 12, 2009 10:00 am ET

Executives

Dana Crothers - IR

Jim Cogdell - Chairman

Frank Spencer - President and CEO

Chuck Handy - SVP and CFO

Scott Ransom - President and CEO of Erdman

Analysts

David Toti - Citi

Karin Ford - KeyBanc

Stephanie Krewson - Janney Montgomery Scott

Operator

Welcome to the Cogdell Spencer Inc. first quarter 2009 earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator instructions) Please note this conference is being recorded.

Now, I would like to turn the conference over. Dana Crothers. Ms. Crothers?

Dana Crothers

Welcome to Cogdell Spencer’s first quarter 2009 conference call. The press release and supplemental disclosure package were distributed yesterday afternoon as well as furnished on Form 8-K to provide access to the widest possible audience.

In the supplemental disclosure package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available on the Company’s website at www.cogdellspencer.com in the Investor Relations section. Additionally, we are hosting a live webcast of today’s call, which you can access in the same section.

At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1985. Although Cogdell Spencer believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in yesterday’s press release and from time to time, in the Company’s filings with the SEC. The Company does not undertake a duty to update any forward-looking statements.

With that, we would like to begin the call with Jim Cogdell, our Founder and Chairman of the Board. Jim?

Jim Cogdell

Thanks Dana. Good morning to all. Welcome to our first quarter’09 earnings call. Joining me this morning are Frank Spencer, Chuck Handy, and Scott Ransom. After our update, we will be available to answer your questions.

The global marketplace is slowly starting to see a few signs of the end of the economic spiral. However, as history has taught us, a full recovery time. The banks have recently undergone governmental imposed stress tests. Unemployment is still high but the number shows signs of stabilization and markets imply a hint of pending recovery.

Our business has experienced much the same. While the pipeline conversion delays remain, our portfolio and occupancy rates remained stable. Healthcare clients remain cautious and continue to prefer conservation of capital over capital deployment into [health] facility projects.

While the global economy is not out of the woods, we are confident in our business model and the company's ability to withstand the stress that many companies seem to be experiencing as a result.

Now to talk more of about the quarter and our business plan for the remaining main part of ‘'09, I'd like to turn over the call to our President and CEO Frank Spencer. Frank?

Frank Spencer

Thanks Jim. Good morning everyone. Thank you for joining us today. As Jim mentioned, we do continue to see our clients hold a conservative approach to capital investments. As we stated during our year-end review, we continued to look at investment opportunities only when risk adjusted returns warranted.

We are committing capital to projects when they drive our Design Build platform, when we have obtained construction-financing and the properties are substantially pre-leased. Before we get to the in-depth financials, I'd like to address our core portfolio, which represents the majority of our FFOM. While we saw a sequential decline in occupancy during the first quarter, we remain within our range of stability at 91.5% and are on budget, producing expected FFOM for the quarter and remained on track for the full year.

We have seen an increase in activity and interest in leasing across the global portfolio and expect to see the results of this activity during the second half of 2009.

Operating revenue in the core portfolio for the first quarter was $20.5 million and you may refer to our segment reporting for additional details on revenue breakdowns and portfolio information.

Our strategy of obtaining and maintaining franchise locations on dominant not-for-profit hospital campuses is being rewarded in the stability of our operating results, even in these challenging economic times. Being invested in the healthcare sector remains a desirable position, and we are confident in our long-term prospects.

Now I’d like us to switch gears to review some changes over the first quarter that are reflected in the financials posted yesterday afternoon. To discuss in detail, I’d like to turn now to Chuck Handy. Chuck.

Chuck Handy

Thanks, Frank, and good morning everyone. As noted in our earnings release, FFO Modified or FFOM for the first quarter was $8 million or $0.30 per share and unit after excluding a non-cash, after-tax impairment charge of approximately $102 million or $3.79 per share and unit. This impairment charge related to the Design Build and Development business segments goodwill and intangible assets and I will provide some additional information on this charge in a moment.

Net loss for the first quarter excluding the impairment charge was approximately $400,000 or $0.02 per share.

Now let me provide the information about the charge for impairment. During the first quarter cash flow in multiples for comparable public engineering and construction companies decreased by approximately 19% and we saw our stock price decline by approximately 46%.

In March, we experienced an acceleration of project delays and cancellations, as our Design-Build clients have addressed uncertainty with respect to the availability and pricing of their project financing. As a result of these factors, we performed an interim impairment review of goodwill and intangible assets. The review of consisted of a process that compared the carrying value of the Design-Build and Development business segment to its fair value.

A third party valuation specialist was used to estimate fair value using both income and market approaches. Based on our review the company recorded a pretax, non-cash impairment charge of a $120.9 million or $4.50 per share and unit and an after-tax impairment charge of $101.7 million or $3.79 per share and unit.

Detailed disclosures regarding the impairment charges including expected future amortization expense, related to intangible assets, is contained in our first quarter Form-10-Q that was filed last evening.

Our total revenue for the first quarter totaled $69.7 million. Rental revenue for the quarter totaled $19.7 million, while revenue related to Design-Build contracts totaled approximately $46.4 million. Fee revenue including property management, leasing and development fees, as well as expense reimbursement totaled $3.6 million of the quarter.

Selling, general and administrative expenses for the first quarter totaled $4.5 million, which included $2.2 million of corporate G&A.

At March 31, approximately 74% of our debt was at fixed rates and our average interest rate on real estate mortgages was approximately 5.9%. Our total debt had a weighted average remaining term of approximately 3.1 years and we had $112 million outstanding on our $115 million revolving line of credit at quarter end.

For the first quarter our interest coverage was 2.7 times and our fixed charge coverage was 2.3 times. On March 18, we paid a dividend for the first quarter of $22.05 per share to shareholders of record on March 31.

At December 31, we had approximately 662 leases at our consolidated properties with an overall occupancy of 91.5%. No single tenant accounted for more than 7.6% of annualized rental revenue.

Recurring capital expenditures for the first quarter totaled $56,000 or approximately $0.02 per square foot across our consolidated portfolio. Tenant improvements related to second generation leases totaled approximately $671,000 or approximately $0.20 per square foot across our consolidated portfolio for the quarter.

In January, we announced the groundbreaking of a $21 million medical office building and ambulatory surgery center in Jackson, Tennessee. This 75% pre-leased, 106,772 square foot project marks our first project with West Tennessee Healthcare Inc. and is located on the campus of Jackson-Madison County General Hospital. Ultimately, this project is expected to be owned 50% by Cogdell Spencer and 50% by a combination of local physicians and West Tennessee Healthcare Inc.

In March, we closed on $14.8 million of financing for this project, providing for a total term of 10 years, which includes a construction period of 18 months. The loan requires interest-only payments of LIBOR plus 2.5% during the construction period, and converts to a permanent loan requiring monthly principal and interest payments based on a 25-year amortization schedule. We entered into a forward starting interest rate swap that fixes the current interest rate at 6.19% from the end of the construction period to maturity.

The structure of this project demonstrates our discipline of starting only development projects that produce the desired return, possess a significant level of pre-leasing, and when acceptable construction financing is in place.

Of the $49 million in mortgage debt we have maturing in 2009, $30 million has an extension option of two years. We’re also under a loan commitment to refinance the $9.1 million mortgage for Roper MOB LLC that matures in July. The new loan provides for a principal balance of $9.5 million with principal and interest payments of 7.1% on a 25-year amortization schedule. The new mortgage will mature June 1, 2019. The remaining 2009 maturities are related to well-leased properties that have manageable loan to value ratios.

Now let me discuss guidance for 2009. We are revising our 2009 guidance for FFO Modified, or FFOM excluding impairment charges to be in the range of $0.90 to $0.98 per fully diluted share and unit for 2009. As a reminder, we believe FFOM to be an important supplemental measure of operating performance because it adds back to traditionally defined FFO, the non-cash amortization of non-real estate related intangible assets associated with purchase accounting for the Erdman merger.

Our revised 2009 guidance reflects the delay in cancellation of projects experienced by our Design Build and Development business segment that I mentioned earlier. This revised guidance also reflects the measures that we announced in December, including the implementation of our cost saving plan, which when combined with our previously announced reduction in force will generate approximately $17 million in annual savings. Also included in the plan is the elimination of all executive incentive compensation for the 2009 fiscal year.

At this time I’d like to turn the call back to Frank for look at the Erdman business integration. Frank.

Frank Spencer

Thanks Chuck. As we mentioned on the year end call, we now fully rolled out our regional business strategy staffing our major hubs with Regional Presidents, Vice Presidents of Operations and a full complement of business development staff.

This strategy along with the new single branding of Cogdell Spencer-Erdman has been well received and is already beginning to yield new business opportunities throughout our national reach.

Our regional teams have begun interfacing with the marketplace, presenting the four key areas of our unique fully service, value proposition, which focus on strategy, capital, delivery and management.

First, our experienced strategy team, partners with our clients, early in the decision process, as we are assisting our clients on defining their growth strategies and in addressing key issues such as operational efficiencies, market expansion and hospital position integration.

Our team of thought leaders helps our clients define their healthcare deliver goals and then develop the innovative facilities solutions that support those goals. This team works with our clients as they focus on sustainability. As we’ve seen, the healthcare organizations are realizing the importance of going green. This involves the rethinking of everything, from energy consumption to cleaning, from capital to construction.

Second, our capital team engages with our clients to assist with debt structuring and equity capital to fund their healthcare facility programs. Through customized ownership programs, position partnerships and joint-venture investments, we are there to help our clients find the best capitals structure for their project and investment needs.

Next, our delivery model includes the development and Design Build aspects of our business. Here, we focus on delivering projects from concept to completion an arena in which we have more than six decades of proven experience. For the second consecutive year, Modern Healthcare ranked our Design Build group number one in total revenue.

As our client’s needs evolved in this challenging market environment, we are stressing our ability to serve them regardless of project size with a highly flexible and efficient delivery model. Our focus is on cost efficiency, speed-to-market and appropriate facility solutions that will lower operating costs.

The development opportunities that we continue to pursue for our own balance sheet contain a very favorable return profile. Because of our ability to self perform the Design and Construction and the way that we booked those profits on a GAAP basis, our development opportunities provide outsized returns.

For example, on a development project that might yield a standard 9.5% return on total cost, we would generate the same NO. But our booked costs if you will, is lowered by the amount of development fees, design fees and construction fees that we earned. Therefore, that project might yield something closer to 11.5% return on our internal as opposed to the 9.5% return that others would generate on that same deal.

This also dramatically impacts other development statistics, such as levered and unlevered IRRs. Our IRRs on self-performed development end up in the early teens on an unlevered basis and in the mid-twenties on a levered basis. This compares to low double-digits on unlevered, and high teens on a levered basis that the same traditional project might yield.

A direct example is an exciting new development that will break ground in late May. As we have always done, we will disclose specific details when we break ground. However, I’d like to share some overview statistics to help describe the value proposition we are executing. This project is a 100% pre-leased, $14 million and 50,000 sq. feet. We have already closed on a construction to permanent loan, with 75% loan- to-cost providing $10.5 million of proceeds at LIBOR plus 2.25% during construction and fixed for ten years after that at 5.95% with a 25-year amortization schedule.

This has an initial return on total cost of 9.75%, since we are doing all of the design and development work. The net equity investment for this project is approximately $2.4 million after taking all fees into account. As you can see, the platform we have built allows us not only to deliver the best product at the right price for our clients, but it also allows us to build shareholder value in a dramatic fashion.

Finally, upon project completion, our team of property management professionals solely dedicated to the management of healthcare facilities is available 24/7/365. We offer professional management for our clients to ensure long-term performance, lowest cost of occupancy, environmental sustainability, and of course, steady financial returns for our shareholders and other financial group partners.

We believe that this integrated service model puts us in a strong position to act as trusted advisers to our clients as they face the challenges of the current real estate market environment.

That said, I’d turn now to Scott Ransom to provide an update of the pipeline business and strategy within our Design-Build and Development business. Scott?

Scott Ransom

Thanks Frank and good morning. As Frank mentioned, under the guidance of the regional Presidents, we’ve seen numerous client engagements as a result of the new integrated deliver model we offer. Our strategic planning team has seen a dramatic uptick in proposal requests and client engagements within the past 30 days, reflecting significant business throughout our national footprint with a highly sought-after group of clients.

While this is positive news, this type of engagement typically has a fairly long lead time and the bottom line benefit will likely not be recognized in the near-term. So while we have seen a decline in our current pipeline and acknowledge that we have continued to see clients delay or cancel projects, while they wait out the economic storm, we are encouraged by the increased activity and proposal of requests we seen in the past month.

We believe that we are laying meaningful groundwork for increasing market share, while short-term revenue remains a bit unpredictable. We have been working with the regional Presidents on a number of unique opportunities through out national network.

One of those is large for-profit multi-specialty group that is looking to engage us in a master facility strategy for replacement facilities in their market. Where they need our expertise is in the strategic, geographic analysis of these new facilities with service offerings to replace in the facilities and where do we place it to be stronger in the future. This is a potential new client founded through our strong network of relationships.

Another opportunity that came to us is an existing client relationship which positions us to work with the client through our capital and delivery teams. This client is looking for finance structure and to improve physician recruitment for an on-campus facility that would house specialty services. Our engagement will include market demand analysis, facility scope, design build services and financing options, ranging from physician joint venture to third party investment or full direct ownership.

Another example for mid-size not-for profit healthcare systems seeking a majority equity partner that can also facilitate design build services for a medical office building located on campus largely occupied by healthcare system tenants.

I'd like to go back to Frank now to talk about some recent steps we have taken in regards to some of the financing data as related to our business. Frank?

Frank Spencer

Thanks Scott. I'd like to take a moment to address the Design Build business from an overall financing perspective as it relates to our debt structuring. While we are not currently in default on our financial covenants in the Erdman term loan, in this uncertain time, that does become a possibility at some point in the future.

We decided to take the initiative to address this possibility by engaging our banking partners to negotiate amendments that mitigate that risk by entering into an agreement that gives us the option to pay down our principal. Through trusted relationships with our banking partner, we have entered into an agreement that will amend the loan terms in exchange for a prepayment of $50 million of principal.

While we currently have plenty of cash flow and coverage, we took this initiative in advance of any issue. We received a favorable set of terms, which are covered in-depth in the liquidity section of our 10-Q. To make this $50 million principal pre-payment, which represents a de-levering of our total debt position, we are exploring public and private equity, the sale of assets and a full range of other strategic options. We are confident in our ability to complete this transaction, should it become a necessity.

As Jim and Chuck mentioned, we paid a first quarter dividend of $0.225 cents per share and unit with an FFOM of $0.30 per share. Our Board plans to continue to pay quarterly dividends out of cash flow, and we will not borrow to pay dividends. As such the Board will evaluate the dividend on a quarter-by-quarter basis, but we expect to maintain a ratio similar to that of the first quarter.

Before we wrap up I’d like to reiterate that our core portfolio remains stable and strong, and its revenue represents the majority of our FFOM. While we saw a minor decline in occupancy from year end, we expect to see a stabler uptick through the remainder of the year and remain on budget.

Everyone is experiencing continued turbulence from the economic slowdown, but we believe our stable portfolio and position in the sector of healthcare leave us in a positive position overall, despite the current challenges we are facing in the Design Build business.

The integrated platform sets us apart in the marketplace and drove our one number national ranking in 2008. We are confident in our business strategy and platform and look forward to announcing new projects as they break ground through the reminder of the year.

Thank you again for joining us this morning. And with that, Operator, I like to open up the call to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Toti with Citi.

David Toti - Citi

Good morning everyone. Michael Bilerman is here with me as well. I have two questions. The first relates to the impairments and the write-downs. Can you just walk us through specifically, how you arrived at the income and market approaches and what was the delta between the two values and just some additional detail on them, on how you came up with the exact scale of impairment, would be helpful?

Chuck Handy

As I said, we engaged, this Chuck by the way. We engaged a independent third party evaluation specialist as part of our analysis of course and we look at forward multiples for comparables companies, I think as a mentioned earlier. We also looked at really our forecast -- projected cash flow forecast for Erdman portfolio as we had seen an acceleration of project delays and cancellations even late in the first quarter. We saw that acceleration, so between those two items we -- generally the valuation weighted both the market approach as well as the income approach equally and the result of that led to the impairment charge that we took.

David Toti - Citi

Okay. If we see any kind of material change in valuation in the market, does that that mean there could be any kind of reversal in the impairment. Do you there is more downside in the impairment based on that methodology?

Chuck Handy

Well, I think first of all under GAAP, if we saw a reversal, GAAP does not allow you to write-back up the assets. So, its only downward movement and in tangible assets, you're not allowed to write them back up. But, I think where we see it now -- as multiples change for comparable companies, that is sort of an indicator that we would look at to revisit any potential issues that might come up in the future.

I think, given where we are now, we've taken what we feel is a conservative view and a conservative approach to this and taking into account not only what we've seen as far as cancellation and delays, the acceleration of that we've seen late in the first quarter. We've also applied our view of perhaps a slower recovery, economic recovery than we perhaps once thought it might be as early as just a few months ago. So, I think we've taken a prudent and conservative approach.

David Toti - Citi

And just moving over to the balance sheet, can you disclose how far long you are relative to some of the options that you mentioned, asset sales, discussions with potential private equity private equity, and also how far long are you relative to the amendment process?

Frank Spencer

In terms of our options on the balance sheet, it would not be appropriate to discuss specific negotiations right now, but I’m happy to talk about where we are on the amendment itself. We already have that agreement in hand, the banking group has approved it, and so we have the optionality at this point to pay down the $50 million and amend the terms as are disclosed in our Q. So, that’s not an unknown at all, it is simply a question of, if and when we feel it’s necessary to pull that trigger.

David Toti - Citi

Well, how much capacity do you have today? I mean, you felt like you have $50 million lying around, and so you wouldn’t be able to fund to get that amendment. And so, I guess how much liquidity do you have immediate, and then how much more do you need to do, and how far long are you in that process to be able to get that, so that when the trigger comes in the third quarter and you haven’t found the 50 doesn’t turn into a 100?

Frank Spencer

I understand the question; we are not prepared this morning to talk about where we are in the specific funding discussions because that would have the potential of perhaps derailing a conversation. But we are confident in our ability to meet those requirements should we decide it’s necessary.

David Toti - Citi

Is there any immediate liquidity that you have today without having to do other transactions in terms of any draws on the line, cash on hand, anything that could be today, if you had to come up with, without doing any other transactions?

Frank Spencer

Sure. I mean obviously you can take a look at the Q and the supplemental and there is some significant liquidity, and so you can take a look at that and I think it is pretty self evident that there is not that large a gap.

David Toti - Citi

Have you thought about just paying the rest of the dividend in stock for the entire year and generating -- that would probably save about half of it?

Frank Spencer

That is always an option that is available to the Board. It has not been one that we have chosen to implement. But all options are available should we chose to do that.

David Toti - Citi

Then how are you going to be updating the market in terms of -- I guess, you have until June 30th to take this amendment?

Frank Spencer

Correct.

David Toti - Citi

And is there any risk of violating the covenants between now and then?

Frank Spencer

No. No risk whatsoever.

Operator

Our next question comes from Karin Ford of KeyBanc.

Karin Ford - KeyBanc

Hi, good morning. Just following up on that line of questioning. If you guys didn’t pay down and make this amendment, when do you guys think you would breach the covenant on the term loan?

Frank Spencer

We've looked at a range of risk, Karin. That really depends on how long the current delays last. It’s a trailing 12 months EBITDA measure. And so if the markets open up more quickly than we have conservatively estimated it might never get there. But we wanted to be prepared and take a proactive step, so that we've got a solution to the problem if we need one.

Karin Ford - KeyBanc

Okay. And how do you rank the alternatives that you talked about to raise the additional funds between sort of asset sales, private equity, public equity and have you guys looked at some type of M&A activity as well?

Frank Spencer

We're looking at a whole range of options. I wouldn’t handicap them, because different options have different pricing and come with different constraints or opportunities and so I just wouldn’t rank those opportunities but we are certainly looking at a full range of opportunities that are available to us.

Karin Ford - KeyBanc

And where are Cap rates today?

Frank Spencer

Where are Cap rate today? We haven't done a transaction in a while, so as I usually tell you, I'm the wrong guy to do Cap rate estimations. Although, I will say I saw one piece of paper on two assets go by my desk. Can't say it’s a closed deal but I saw somebody making offers still with the seven handle. So, I'm not sure that's what we invest at, but I think there may still be some people buying MOBs in the seven’s.

Karin Ford - KeyBanc

Would you guys be seller at an 8?

Frank Spencer

I am not exactly sure what you're asking there but do we want to sell all our assets for an 8? We don't have an offer to that effect and that would not be one of the strategies we're contemplating.

Karin Ford - KeyBanc

Okay. Just one last line of questioning, just on the guidance. It sounded like you’re your comments that the reason for the guidance coming down was solely due to reduced expectations on Marshall Erdman. Is that correct?

Frank Spencer

That’s correct.

Karin Ford - KeyBanc

Okay. And can you just tell us what your assumptions are for Erdman now under the new guidance?

Frank Spencer

Well, I think from a model perspective, it’s pretty easy to back into, and that the guidance reduction is really coming off the third party Design Build business. But our assumptions going forward are that we’re going to complete what we’ve got in process for the year, and obviously we are working to convert both existing pipeline and sign new projects. And I think that’s a point I really think is important to stress.

We still have, under the planning stages and design in a number of cases, a substantial pipeline that remains multiples of projected gross revenues. It is really the conversion and the taking those off of delay that’s critical for us, as opposed to just signing up new work. Which is not to say we don’t want to sign up new work, and we’re working on that everyday as well to build that pipeline, but what we’ve assumed Karin is that we get very little additional conversion for the balance of the year in our guidance, although we are hopeful that we can do better than that, but our assumption is that it is basically what we’re currently working on.

Karin Ford - KeyBanc

Okay. And it sounds like the tax exempt market has started to free up a little bit. Is that helping with Erdman’s potential prospects as well?

Frank Spencer

You know we’ve seen a little bit of ebbs and flows on that. In our last call we talked about some positive bond issuances in the last week of January, the first week of February. We actually have seen things slow back down a little bit, particularly in pricing, what we thought at that time was a faster narrowing of spreads really stalled in terms of pricing. And so there is some availability but it has not come back as quickly as we would have hoped. And that’s quite frankly part of what the delays are right now.

Operator

Our next question comes from Stephanie Krewson of Janney Montgomery Scott.

Stephanie Krewson - Janney Montgomery Scott

Hi, guys, lot of my questions have been answered. So I'll try and be brief. Related to Erdman who was the third-party evaluation specialist you hired?

Chuck Handy

We’ve used Duff & Phelps.

Stephanie Krewson - Janney Montgomery Scott

Okay. And what multiple on EBITIA should we use for Marshall Erdman? You bought it at 9.3, should we use 4.5, I mean, you’ve written off have the value basically?

Frank Spencer

I am not sure we should tell you what multiple to use. I think what I would do is direct you to the AEC, public multiples, and you can take a took there. There is a range, I think that will help you triangulate on something.

Stephanie Krewson - Janney Montgomery Scott

Okay. Could you tell us what those - sorry I just had to step out, did I missed what that range was?

Frank Spencer

No, we didn’t talk of about that range. I’m just saying there’s publicly available data on the public AEC firms. And I think that will give you a good target to use as a multiple. I don't think its our place necessarily to tell you what that multiple ought to be.

Stephanie Krewson - Janney Montgomery Scott

Okay. Could you cite the range, its sort of a busy day there, other companies reporting. Could you just throw us a bone here? Come on Frank. No [Hardboard answers]?

Frank Spencer

Now here is the problem.

Stephanie Krewson - Janney Montgomery Scott

Give me the range Frank.

Frank Spencer

The Duff & Phelps report is not a public document and so what we’ve used internally probably is not something that we'd be comfortable releasing to the public.

Stephanie Krewson - Janney Montgomery Scott

All right. Next question so, a lot of the unit holders that converted to common in the first quarter were Erdman unit holders. I'm assuming that was a taxable event for them?

Chuck Handy

Yes.

Stephanie Krewson - Janney Montgomery Scott

And therefore what should we read into that?

Chuck Handy

Yeah. I think that a lot of -- the majority of the conversions that occurred in the first quarter were op unit holders, private equity op unit holders that came over in the Erdman transaction. There was only a one year lock-up only op units that were issued and so I think in March as a result of that there were op units that were converted, primarily by private equity.

Stephanie Krewson - Janney Montgomery Scott

Then you were just taking advantage of the list stock price to convert? Okay. I got it.

Jim Cogdell

That's a good guess, but I just…

Frank Spencer

Well, I think their plan -- the vast majority of that was one of the Erdman owners and their plan had always been to covert to shares upon the end of their lockup and they send us the paper work and we send them the shares and it’s that straightforward.

Stephanie Krewson - Janney Montgomery Scott

Okay. Few more quick questions; first the easy one; your occupancy decline seemed to come from Augusta, Georgia, South Carolina and Virginia as such -- and once again, forgive me because I did have to step out for a minute on an another call.

Frank Spencer

No problem.

Stephanie Krewson - Janney Montgomery Scott

Is there any reason for concern? I mean, I thought the 35th Parallels and south of that was sort of a magic demarcation line?

Frank Spencer

What I would tell you is that the -- we are focused on all of those markets and we are actually exactly where we budgeted it to be, and are still budgeting as we discussed at year end, a 1% to 2% increase in portfolio NOI year-over-year. So these are all situations we’re working on, not surprised by, and we’re actually right on top of internal budgets.

Stephanie Krewson - Janney Montgomery Scott

Okay. Last question. Why shouldn’t we expect another dividend cut? I heard your statements about the dividend and your intent to pay it in cash, but now your taxable income for the year is going to be significantly lower, so you have the flexibility to cut it and retain that cash perhaps put it towards paying down your term loan.

Frank Spencer

Well, I think to the extent that your cash flow declines on a quarter-by-quarter basis from the $0.30, which it would necessarily do if we hit our revised guidance range, then I think you should expect the Board to make proportional decisions around the dividend, because the Board has reiterated its position that we will not borrow to pay the dividend and we will only pay the dividend out of available cash.

Stephanie Krewson - Janney Montgomery Scott

Okay, so dividend cut. Got it. Thanks.

Frank Spencer

Well, the Board has not actually made that decision for the second quarter, so those were your words, not mine.

Stephanie Krewson - Janney Montgomery Scott

I understand.

Operator

(Operator Instructions) At this time I show no further questions. I would like to turn the call back over to our moderators for any closing remarks.

Frank Spencer

Thank you, Operator. I would like to thank everybody again for joining us this morning. While we certainly have had a turbulent time relative to our Design-Build business, I think the proactive steps we have taken to put us in a positive position going forward and laying the ground work for and expanding market share in an economic recovery will serve us well.

We look forward to speaking with you again in the second half of ’09. And in the meantime if you have any specific questions, as always we are happy to take your calls and answer your questions. Have a good day.

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Source: Cogdell Spencer Inc. Q1 2009 Earnings Call Transcript
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