Cousins Properties Q3 2009 Earnings Call Transcript

| About: Cousins Properties (CUZ)

Cousins Properties Inc. (NYSE:CUZ)

Q3 2009 Earnings Call

November 5, 2009 2:00 pm ET


Larry Gellerstedt - President & Chief Executive Officer

Jim Fleming - Chief Financial Officer

Craig Jones - Chief Investment Officer

Steven Yenser - Executive Vice President of Leasing and Asset Management


John Stewart - Green Street Advisors Incorporated

John Guinee - Stifel Nicolaus

Analyst for Jamie Feldman - Banc of America


Ladies and gentlemen, thank you for standing by and welcome to the Cousins Properties Incorporated third quarter 2009 conference call. (Operator Instructions)

As a remainder, this conference is being recorded Thursday, November 5, 2009.

Certain matters the company will be discussing today are forward-looking statements within the meaning of the federal securities laws. 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, 2008 and the current report on Form 8-K filed on September 14, 2009 for a discussion of the factors that may cause such material differences.

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 our website at

I would now like to turn the conference over to Mr. Larry Gellerstedt, President and Chief Executive Officer. Please go ahead.

Larry Gellerstedt

Good afternoon. I’m Larry Gellerstedt, President and Chief Executive Officer of Cousins Properties. On the phone with me today are Jim Fleming, our Chief Financial Officer; Craig Jones, our Chief Investment officer; and Steve Yenser, our Chief Leasing and Asset Management Officer. Welcome to our third quarter conference call.

As you all probably noticed, we had an exceptionally active third quarter, so before diving into the details, I would like to highlight the key takeaways and what it means to Cousins moving forward.

First, by raising $319 million in the secondary equity offering, we significantly delevered the company. Our strong balance sheet and access to capital will be a distinct advantage over our competition in the months and years ahead. Private developers, which make up the vast majority of the competition in our key markets simply do not have this kind of access to capital.

Secondly, we have significantly cut costs across the board.

Third, our operating portfolio continues to perform well in the face of very tough market conditions. Leasing our vacant space, both in the existing portfolio and in our development projects, remains our highest priority.

Fourth, sales have significantly picked up in our two remaining condominium projects.

Fifth, we have more land than we would like to have and plan to reduce this inventory moving forward. The good news is our land is located in the highest growth markets in the nation and our cost basis for the most part is low. Our carrying cost is also low, so we can afford to be somewhat selective as we work to decrease these holdings over the coming quarters.

Finally, it’s hard to predict when we will be able to deploy opportunistic capital but we are proactively tracking the market at a very detailed level and continue to seek investment opportunities. What I can say on this front is that we will focus on return rather than size and as always, we will have a sharpshooter approach.

We will also likely remain focused on our key markets where we have significant relationships and expertise.

I will provide more detail on all these points in a few minutes but at this time, I will call on Jim to review the financial results for the quarter. Jim.

Jim Fleming

Thank you, Larry and thanks to everyone on this call for your interest in Cousins. This quarter we reported FFO before special charges of $0.12 per share, compared with $0.45 last quarter. As you may recall, a good bit of our FFO in the second quarter came from our repurchase of the San Jose mortgage debt, which resulted in a gain of $12.5 million, or $0.24 per share.

In a few minutes, I’ll discuss the items that make up the remainder of the difference but first I want to highlight some of the more significant events from the quarter.

As most of you know, in September we issued 46 million shares of common stock in a secondary stock offering. The decision to issue this stock resulted from a thorough analysis of our company in which we looked at all of our assets and operations.

We came to the conclusion that an equity offering was important in order to improve our liquidity, to decrease our overall leverage, and to provide more cushion under our bank loan covenants. While we didn’t like our stock price and still don’t, we were very pleased with the results of the stock offering. Because the offering was two times over-subscribed we chose to increase the offering size a bit, which resulted in net proceeds of $318.6 million.

By the end of the third quarter, we had used $248 million to pay down bank debt and since the end of the quarter, we have paid an additional $105 million.

Paying down our bank debt won't result in much boost to our FFO but it has dramatically reduced our leverage and increased our liquidity.

As of today, our line of credit balance has been reduced from $398 million to $45 million, which along with our $100 million bank term loan, gives us a much more manageable level of bank debt and puts us in a much better shape with our 2012 loan maturities.

This pay-down has also reduced our overall company leverage calculated under our bank credit facility from what would have been about 55% to 38%. If you look at our key ratios on page eight of our supplemental package and take into account the addition of $105 million of bank debt we have prepaid since the end of the quarter, you will see that our adjusted debt to total market capitalization is now 43% versus 67% at the end of the second quarter.

With the sale of condos, land, and industrial properties, as well as a few selected assets, we should be able to reduce our leverage further over the next couple of years.

In October, when we paid the additional amount on our line of credit, we terminated one $75 million interest rate swap and reduced the notional amount of another swap from $75 million to $40 million. We paid the counter-parties $2.8 million in connection with these transactions and we will report this amount as an expense in the fourth quarter.

This will of course result in lower FFO for the fourth quarter. But we expect to essentially earn back this amount through reduced interest expense over the next 12 months.

In September, we announced an impairment charge of $38.9 million related to our investment in [Termnus 200]. As we discussed at the time we took the charge as a result of our assessment of the Buckhead sub-market, the slow leasing velocity we have experienced, and the limited term on the construction loan. This impairment charge covers our full investment in the project plus what we expect to be obligated to pay under our construction loan guarantee.

Due to the complexities of various accounting rules that I won't get into on this call, we recorded the impairment in two places on our income statement. We recorded $21 million of the impairment in equity and net loss from unconsolidated joint ventures and $18 million in impairment loss on investment in unconsolidated joint ventures.

This quarter we also recorded a $4.9 million impairment charge related to our investment in Glenmore Gardens Villas LLC, a joint venture with a local developer to develop a town home community in Charlotte. In the second quarter, we took an impairment charge of $1.1 million on this investment, representing our equity investment in the venture.

Since that time, we have evaluated our alternatives and concluded that the best option will be to sell the project in its current state rather than to continue with development. As a result, we have recorded the amount we expect to owe under our guarantee of the construction loan.

Although our partner is jointly liable on the guarantee, we booked the full amount since our partner is a private developer with limited resources.

In addition, we consolidated this venture as required under accounting rules as of quarter end based on the fact that we are expecting to absorb the majority of the projected joint venture losses.

As you may be aware, Glenmore Gardens is one of Cousins’ three multi-family projects. The others are 10 Terminus in Atlanta and 60 North Market in Ashville. This decision to sell and take a further impairment on Glenmore Gardens completes our decision to exit all of these properties on an expedited basis.

In the third quarter, we made positive steps in reducing our expenses in response to the current state of the economy. In addition to continuing to minimize out of pocket expenses, we reduced our corporate staffing levels and made the decision to sell our corporate airplane.

Regarding the reduction in workforce, we terminated 18% of our non-property level employees. Since some of these individuals will be with us in the fourth quarter in a transition stage, we will not realize the full effect of this reduction until the first quarter of 2010. Our estimate of the annualized G&A savings from these efforts is $4.2 million.

These were difficult decisions since all of these individuals were contributors to the historical success of our company, in some cases for over 10 years. However, we feel the moves were necessary to make us a leaner organization better able to adapt and respond to the opportunities and challenges of this market.

As I have mentioned before, our capitalized G&A has declined significantly this year due to lower levels of development and in the third quarter we capitalized less than $600,000 versus $3.3 million in the third quarter of last year, and even higher levels before that.

Next year we are assuming only $1 million of capitalization for the full year.

The result of all of this is that our G&A expense savings are being offset in our FFO calculation by the loss of capitalization to development projects. However, the savings are very significant from a cash standpoint.

In addition, as we announced in September, we decided to sell our corporate airplane. The airplane is currently under contract for a price less than our carrying amount and we recorded the impairment charge of $4 million in the third quarter based on this difference.

Going forward, between the direct costs of operating the airplane and the fixed cost of housing and holding the airplane, we expect annualized savings of about $2.1 million.

I would like to make a couple of comments about our same property information on page 20 of our supplemental package. From this you will see a significant roll down in retail, about 12% for the year.

First, please remember that the properties in our retail portfolio are very small sample set, we’ve commented on this in past quarters, so small changes can wind up resulting in large percentage changes.

Second, if you look at the NOI schedule, which starts on page 9 of our supplemental package you will see the largest rolldown in our portfolio was at Avenue Carriage Crossing. You may recall that we lost the Linens N' Things lease at the end of last year at Avenue Carriage Crossing. After a six month period, we had some co-tenancy issues with a number of other tenants as a result of this vacancy that affected us starting in the third quarter. Due to the leasing efforts which we will talk about later in the call, we have now remedied this situation and Bed, Bath & Beyond opened yesterday in the former Linens N' Things space. As a result of that, all of the tenants who were in co-tenancy and paying reduced rent are now out of co-tenancy at Avenue Carriage Crossing. So in the fourth quarter, we will still suffer some from the co-tenancy but we do expect that the number will increase and then by first quarter, we expect to return to a healthier run-rate at that property.

Turning back to FFO before special charges, I would like to highlight the factors that contributed to the difference from last quarter. You can follow by looking at our supplemental package beginning on page 9.

Rental property revenues less rental property operating expenses from our properties decreased $706,000 between second and third quarters. Fluctuations in individual office properties are as follows -- FFO from 191 Peach Tree increased by 871,000 as a result of the commencement of the [coupe or carry] lease and increased occupancy by [Deloitte & Touche]. These increases are offset in part by an increase in reserve for bad debts.

FFO from the American Cancer Society Center increased 298,000 as a result of a second quarter settlement with a tenant relating to operating expense reimbursements from prior years and a third quarter catch-up in electricity reimbursement billings.

Next quarter, we expect FFO from this property to decline as a $139,000 square foot lease with AT&T expired on September 30th.

FFO from Terminus 100 decreased by $1.3 million as a result of an increase in bad debt reserves. If you look at page nine of our supplemental package, you will see that the NOI for this property went from $3.3 million in the first quarter to $4.8 million in the second quarter and then back down to $3.5 million this quarter. We’ve been evaluating a bad debt reserve each quarter for collectability and we removed the reserve in the second quarter and then reimposed part of it this quarter. If you ignore this fluctuation, you will see that the run-rate for this property is now about $4 million.

FFO from retail properties decreased $632,000 between quarters, primarily as a result of the following -- first FFO from Avenue Carriage Crossing decreased by $300,000 primarily as a result of an increase in bad debt expense and a co-tenancy adjustments that I mentioned before. And then FFO from Avenue [Web Gen] decreased by $196,000 as a result of an increase in bad debt expense.

FFO from out parcel sales decreased $954,000 between quarters and FFO from track sales decreased by $393,000 between quarters, both of these reflecting the lumpy nature of these parts of the business.

In the third quarter, we sold 30 lots compared to 48 lots in the second quarter, which caused a slight decrease in lot sales FFO of $179,000.

We recorded FFO from multi-family sales in the third quarter of $1.9 million. Last quarter, we called your attention to the brownstones at Habbersham in Atlanta’s Buck Head sub-market as a small example of the opportunities that we expect to see and take advantage of going forward. You may recall that this was a town home development with 14 partially completely units and five pads. We expected a nine-month sales period and we are happy to report that the sales period was much quicker than we expected and now all of the town home -- excuse me, as of the end of the third quarter, all of the town home units are closed. The pads are also under contract and we expect them to close during the fourth quarter.

The debt we took on with this acquisition has been fully repaid. This is a small deal but it did give us $1.5 million gain in the third quarter.

We also sold five units at 10 Terminus, resulting in profits of $231,000 and sold one unit at 60 North Market for a profit of $97,000.

Leasing fees increased $1.6 million between quarters mainly due to a $1.2 million fee on a lease at Lincoln Center in Dallas and a $700,000 fee on a lease at 999 Peach Tree in Atlanta, two of our third party managed properties.

Termination fees decreased $836,000 between quarters. The third quarter fees relate to small termination fees from several properties. The second quarter fees were mostly from larger tenants at the Avenue Carriage Crossing at Terminus 100.

General and administrative expenses before separation expenses, commission on development fee and reimbursed expenses decreased $768,000 between quarters as a result of the reduction in force that I mentioned earlier and the departure in prior quarters of other individuals, including Tom Bell.

The same property analysis in the supplemental package shows a decline for all periods presented in office and retail properties -- the decline in office and retail from the second quarter to the third quarter is primarily a result of the changes I noted earlier in my discussion of office and retail FFO. The change in year-to-date comparison for office is primarily the result of the decrease in occupancy at 8995 West Side Parkway which is formerly our [Athrogenics] Building, gallery of 75, the American Cancer Society Center, and Meridian Mark, partially offset by an increase in occupancy at One Georgia Center and I mentioned earlier the change for retail year-to-date and for year-to-date a significant part of that is due to big box bankruptcies we experienced at the end of 2008.

I would like to comment on a change we made to our supplemental package that we hope will be helpful. In the past we have included the percentage leased for each of our properties. This number represents the percentage of a property for which we have executed leases at the end of the quarter, whether or not the tenant had taken occupancy. So for example, if a tenant has a signed lease as of the end of the quarter, the square footage is included in the percentage lease calculation even if the tenant doesn’t take occupancy until after the end of the quarter.

We have added what we call economic occupancy to our portfolio listing for each property. This number excludes tenants who have executed leases but are not in occupancy.

Economic occupancy is still a snapshot as of the end of the quarter and not an average for the quarter but it should provide a more direct link between our leasing statistics and the amount of FFO we report from [these properties].

And finally, a quick note about our dividend -- as you know, this is a board decision and our board is going to keep looking at it every quarter. We have continued our approach at paying out our expected taxable income using a combination of two-thirds stock and one-third cash. At some point, we will likely get back to an all-cash dividend but for now, the stock dividend is a helpful way to continue to delever our balance sheet a bit.

With that, I’ll close my remarks and turn it back over to Larry.

Larry Gellerstedt

Thanks, Jim. Well, we are starting to see reports every day that the economy may have bottomed out and at least technically, the recession has ended. And it is certainly good after this long period of time to have some upbeat economic news but the real estate sector as we all know has always lagged the overall economy and we certainly don’t expect this cycle will be any different.

We do see things that appear to be stabilizing in our key markets but we anticipate the 2010 will be another challenging year. However, long-term we continue to believe in the long-term prospects of our key markets throughout the sun belt.

Now, continuing with the key points I touched on at the beginning of my call, I want to stress three themes that are very important to our company right now. Our balance sheet, our cost structure, and our operations.

Regarding our balance sheet, Jim mentioned how much our equity raise has helped our leverage level and we are going to push to sell some assets over the next couple of years in order to drop our leverage even further. The most obvious place to start is our condos and we are now working through a much more aggressive approach to selling that appears to be working. More on that in a couple of minutes.

Over the next year, you should also expect us to focus on our land positions and our industrial assets and possibly a few selected operating properties. Our approach will be to sell non-strategic assets if we can get decent pricing.

While I am talking about sales, I want to discuss our San Jose retail project, which we have been marketing for possible sale or refinancing. The project was 96% leased at the end of last quarter in a high barrier to entry market in California but we weren’t sure what such a stabilized asset like this would bring in today’s markets. Initially we were a little disappointed in the offers and about a month ago, we told the potential buyers no, that we were not going to sell the asset, mainly because our equity offering had put us in a position where we didn’t need to sell and in fact didn’t have any compelling use for the proceeds at that moment.

Meanwhile, we signed two new leases and the shopping center is now 99.5% committed. After saying no, we’ve continued to receive increasing offers and we now have a couple of offers in the price range that we have originally been looking for. If we go forward with the sale, it now appears that we will have a modest book gain and we will definitely be selling at a substantially higher amount than the loan pay-off we made in the second quarter.

We will keep you posted but we just received these latest offers but I am pleased that the market seems to be firming up.

Liquidity is also an important part of our balance sheet analysis and we have been fortunate not to have much in the way of near-term debt maturities to deal with. We will continue to watch this as we move forward but the equity offering has reduced our 2012 maturities significantly.

The second point I want to discuss is our cost structure. It’s not easy to decide to let people go, especially productive people like we have at Cousins, many of whom have been our colleagues for years. And at Cousins, we have had good reasons over the years to have more G&A than most rates our size because this has given us the resources to pursue new developments and other opportunities.

I am an entrepreneur -- in fact, our entire culture at Cousins is entrepreneurial, and I can assure you that we will continue to be opportunistic and keep the talent that we need in order to do that. But in these times, it’s important to cut back wherever we can and we have worked hard to do that.

Jim mentioned our personnel reductions this quarter, and with those we’ve now reduced our non-property personnel level by 35% since the end of 2007 and we have cut over $17 million in cost in our annual G&A.

As we announced, we also made a decision to sell the company airplane and as we work on next year’s budget, we are looking for more ways to trim expenses. You can expect us to keep our focus on cost.

The final point we are stressing at Cousins today is operations. We had a company meeting a couple of weeks ago where I showed a slide of a football players blocking and tackling and it had three words -- sales, leasing, and [inaudible]. At times like this, I believe it is important to focus on things we can control and I want to give some perspectives on a few specifics.

Our efforts to sell condos are encouraging. At 10 Terminus, we closed four units during the third quarter. We closed an additional seven units in October and we have another 14 under contract and five pending contracts. At 60 North Market in Ashville, where we closed on a deed and [lou] foreclosure in July, the project had 28 for sale residential projects remaining and four retail units. We sold one unit in the third quarter but since then we have closed on 11 residential units and have 10 more under contract. We now just have seven residential units and three retail units available. Our goal is to be sold out by the end of the year at 60 North Market.

As you know, we took impairments on both these projects last quarter when we decided to reduce our prices and it now appears we found a pricing level that will clear the market.

10 Terminus should get a further boost after we have sold a few more units and the occupancy gets to the point where lenders are willing to make 90% loans instead of the 80% loans they are now making. Our goal at 10 Terminus is to be 51% closed or under contract by the end of 2009. This is a significant achievement, given that we were only about 15 units closed at the end of the second quarter when we took the impairment charge.

Last quarter, I described our most important business is keeping our existing properties full, as well as filling our development properties. Our leasing team has done a good job with our retail portfolio this quarter, increasing our leasing levels in a very difficult market.

The retail portfolio increased to 83% leased at the end of the third quarter from 82% last quarter and this includes Tiffany Market Center, which became operational during the third quarter. Excluding Tiffany Springs, the portfolio increased to 84% leased.

At the beginning of 2009, we were facing a significant amount of vacancy related to big box bankruptcies. I am pleased to report that our retail leasing team has secured commitments for 83% of the vacant space, which includes the opening of Bed Bath and Beyond in a former Linens N Things box at Avenue Carriage Crossing this week, as Jim had mentioned, as well as a new tenant, IO Metro, replacing cost plus world market later this year.

In our office portfolio, we lost a little ground due to the expiration of the 139,000 square foot AT&T lease at the American Cancer Society Center, which reduced our overall leasing -- percentage leased from 90% to 87%.

The team is focused on filling this space as quickly as possible. This asset is a core downtown asset that we have at a very attractive cost basis and we are confident in our ability to release that space.

At One Georgia Center, we were able to extend the lease term for the Georgia Department of Transportation by one year. This transaction is not apparent in our leasing percentages but it is reflective of the work we do behind the scenes to strengthen the portfolio.

Over the last six months, there has been a lot of publicity about the Buck Head office market. As Jim mentioned, we took an impairment this quarter for our full investment in the Terminus 200 office building, as well as our principal guarantee on the construction loan.

All the publicity surrounding Buck Head has actually had one positive effect, which is increased traffic from potential tenants. But the negative effect is tenants are continuing to look for a bargain and they are very reluctant to make a decision. Despite all the negatives about market conditions in Buck Head, we believe in Terminus 200 and have confidence that it will compete well in the market because of its location, its amenity base, and its connection to the rest of Terminus, and we are committed to making it successful.

191 Peach Tree continues to capture more than its share of available tenants because it is correctly perceived as a high profile premium quality building at a lower price than most quality alternatives. In October, we signed a letter of intent with a local law firm, Hall Booth, for 54,000 square feet of space. We are now negotiating this lease which is scheduled to commence in March of 2010.

We’ve also signed a 15-year lease with the commerce club, a prestigious Atlanta business club that is in the process of merging with the 191 Club in our building. The plan is for the combined club to relocate to the 49th floor of 191 Peach Tree, which will not add much to the building’s leasing percentage but will provide a unique amenity that will be important to the building’s future.

With the exception of these two buildings and our second Pallisades building in Austin, we have very little space available in the portfolio and very little rollover in the near-term. In fact, our rollover is only 4% in 2010 and we have no large expirations until mid-2011.

Our fee business continues to be productive. We’ve added new business during the quarter, picking up a 184,000 square foot office leasing assignment in Dallas and winning two additional leasing assignments in Atlanta and Dallas that are in the process of being signed.

We also successfully closed two significant lease deals during the third quarter that generated $1.8 million in fees.

In addition, we worked on an advisory assignment for an investment bank during the summer that yielded a $250,000 fee we recognized this quarter. This was an interesting assignment for us because it involved valuation of a large portfolio of assets across the country. It also gave us some valuable perspective on how banks are approaching their troubled assets.

Meanwhile, in Atlanta, we are continuing to work on the center for civil and human rights where we are the fee developer.

In times like this, cash is king and non-income producing assets are given much value in these public markets. I talked about our condos and what we are doing to sell those on an accelerated basis. I also want to comment on our land.

First I want to reiterate that we have more land than we would like. We plan to focus on reducing our land exposure over time. This will include selling select land tracks even in today’s markets.

However, because we have almost no debt on our land, we have low carrying costs and we also have a low basis and a lot of that land. Therefore, the land is not a big drain on our company. Because of this, we could use the typical Cousins approach of being opportunistic as we work to decrease our land holdings.

I would like to close with some comments about a few things we are seeing in our markets. First, although this downturn has been painful, it is going to give us a competitive advantage in our markets. We’ve gotten our balance sheet in order with our recent equity offering and are going to be in a good position to capitalize on opportunities when they arise over the next two or three years, both for our own account and through joint ventures.

A related point is what tenants think about landlords in this market. We are hearing over and over that tenants and brokers are increasingly differentiating between landlords they believe can perform and those that can't perform. Obviously it is important to a tenant who makes a large multi-year space commitment that the landlord is in a position to fund the improvements and other concessions that are part of their deal. And in securing the deal is probably even more important that the brokers know their commissions are going to be paid.

Because of our long track record and good capital position, we are getting a leg up in discussions with potential tenants today and expect our advantage in this area will increase over time.

One question we are getting these days is what we are doing to track acquisition opportunities and when they are going to start happening. Interestingly, there is an important aspect of this question that is related to the question about landlord funding. So far, there hasn’t been much pressure on either the banks, commercial real estate loans, or the CMBS loans because interest rates have stayed low and most loans are performing since current NOI is still healthy.

Lots of folks have focused on upcoming loan maturities and these are significant but the easy way out for lenders will be for the lenders to extend the maturities and push the problem out. The big problems, though, arise when tenants start to deal with their future space needs and want to sign a new lease, blend and extend an existing one, add or subtract space, or make other plans. Most of these changes require substantial capital from the landlord of its lenders and many of them result in a decrease in current NOI. Buildings with under capital landlords and dead end loans don’t have a way to deal with either of these so their only realistic approach is to leave the leases alone, declining to make modifications to accommodate tenants and over time, this will result in a loss of tenants and bigger problems in the future.

We believe this CapEx inflection point will force lenders to take action and deal with problem assets and it should serve as a catalyst for a significant number of property transfers over the coming years.

We are being very focused and vigilant on this point tracking assets in our markets where we think this is happening and we think it is a matter of time before we get the opportunity to buy some of these assets.

With that, I will conclude my remarks and turn the call over for any questions. Thank you.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of John Stewart from Green Street Advisors.

John Stewart - Green Street Advisors Incorporated

Larry, I wanted to first of all ask obviously we’ve seen a series of impairment charges and wanted to get your take in terms of where we stand as we work our through that process. Should we expect to see anything else in the fourth quarter or do you think you pretty well cleared the stage at this point?

Larry Gellerstedt

That’s a fair question and we certainly at the end of every quarter take a very hard look at all our assets and looking for any impairments. And we certainly have attempted to be very, very diligent as always but particularly diligent these last couple of quarters as we have seen some impairments and have recognized those. And I am always positive and I hope we’ve been diligent and thorough but the other thing, as you know, that we can't predict is market conditions continue to change and that has an impact on the impairments. But we certainly think we’ve been diligent on that and I certainly look forward to a call that we don’t have any impairments to talk about, at least as much as you all on the phone do.

John Stewart - Green Street Advisors Incorporated

I wanted to touch quickly on the industrial assets -- you referenced those obviously in terms of potential dispositions and I know that at least under your predecessor, the strategy was to lease those up before you sold them but they have been just kind of languishing without much leasing. What is the thought process in terms of whether to move those along the same lines of what you are doing with the condos or are you going to hold out for more leasing there?

Larry Gellerstedt

Well you know, I think the -- let me tell you what we are seeing on the industrial side. We actually have -- although we can't point to specific executed leases, we are seeing the number of prospects pick up, looking at our industrial properties. And although it’s a business, we want to get out of in the long-term, we have partners that are doing the day-to-day leasing of these assets that are very committed and they are long-term players in this space, so we think that we are seeing the deals out there. We think we are seeing an up-tick in the deals and quite frankly, we don’t think there is a market for these assets until they get significantly or predominantly leased. An empty industrial building in today’s market isn’t a whole lot different than a empty sub-division. You’ve got to get some NOI coming off those assets to generate anything.

But we are always open to people that want to come and talk to us about a different approach to the portfolio if they think that makes sense.

John Stewart - Green Street Advisors Incorporated

Okay. A couple of housekeeping points -- on the AT&T lease at American Cancer Society, what was the annualized rent from that lease and what should we expect to see the drop off in the fourth quarter?

Jim Fleming

Give me a minute on that. I’ve got a schedule here, John, and I’ll look it up.

John Stewart - Green Street Advisors Incorporated

While you are looking that up, I had a couple points on the economic occupancy, which has certainly helpful, we appreciate seeing that but a couple that seem to beg a couple of questions, particularly at 191 Peach Tree and Avenue [Mar Frisboro] where there was a pick-up in economic occupancy but not so much in the percentage leased, and yet you didn’t really see that running through the P&L. Could you kind of walk us through --

Jim Fleming

I’m sorry, I wasn’t listening as closely as I should have because I am trying to flip through this lease, this schedule but the economic occupancy shows the status as of the end of the quarter. It’s a snapshot. It’s not an average on a daily basis for the quarter, so it’s not perfect, I suppose, if you are trying to match up NOI to come up with a run-rate but I think it will give you a better sense of where we are in the process and I think probably the right way to look at it is to look at the end of the quarter, look at it at the beginning of the quarter, and hopefully over time you will have a track record that you can look at from this to see how things kind of [slimmed] out.

John Stewart - Green Street Advisors Incorporated

I guess specifically on Avenue [Mar Frisboro], the bigger picture question is that the percentage leased was basically stagnant but economic occupancy picked up 600 basis points -- what should we expect to see in terms of the stabilized NOI run-rate from that asset and how do you [inaudible] on that property?

Jim Fleming

Give me another minute and let me see if I can look that up too and I will try to give you a better number but the --

Larry Gellerstedt

John, I tell you what -- let us get those numbers together and come back to you on those two, if you don’t mind.

John Stewart - Green Street Advisors Incorporated

You bet. Let me just ask one more and I’ll jump off the queue -- the footnote on the Blue Valley land, could you kind of walk us through the story there?

Jim Fleming

Blue Valley is one where we wrote off our investment. We have no liability on the loan. We are in a partnership with a local residential developer. The loan is in default. The bank has actually been taken over and it is sort of in limbo. We had sort of expected that loan to get foreclosed and that hasn’t happened yet, so we are still showing on our debt schedule but essentially we don’t think we will have any further involvement at all and there won't be any financial impact on that, from that.

John Stewart - Green Street Advisors Incorporated

Why do you not have -- if you don’t have any liability, why are you showing $2.9 million as your share of the debt?

Jim Fleming

Well, we do that even for non-recourse debt, John. I mean, that’s just the way that we have done that schedule for years, so you will see that’s the case really for any project debt that is out there, whether it is recourse or non-recourse, where we have an ownership interest and technically we still have an ownership interest even though we don’t really expect to going forward.

John Stewart - Green Street Advisors Incorporated


Jim Fleming

But that’s the reason for the footnote.

John Stewart - Green Street Advisors Incorporated

Thank you.


(Operator Instructions) Your next question comes from the line of John Guinee from Stifel Nicolaus.

John Guinee - Stifel Nicolaus

Larry, Jim, excellent job. A couple of things -- what is your expected run-rate on G&A going forward in 2010?

Jim Fleming

John, that’s a great question. It’s a little hard to pin down because we are in the process of working on a budget right now for next year. To give you some perspective, our G&A in ’06 and ’07 was in the $57 million range to $58 million range before capitalization, but we had high levels of capitalization.

We’ve cut that number, the top line number to what I think will be in the mid 30s, John. It could be in the high 30s. It depends on a number of non-cash things and whether those will affect us going into next year but worst case it would be high 30s. So Larry talked in his speech about a $17 million reduction -- I think that is conservative. We are expecting a very low level of capitalization of about $1 million next year, so that ought to bring us we think down into the mid 30s range, maybe even a little bit lower than that.

John Guinee - Stifel Nicolaus

Okay. Second question is you guys have great supplementals but one sort of black box is the taxable resubsidiary, which I think you refer to sometimes as CREC. And that generated a sizable tax losses which used to be run through as tax loss carry forwards, essentially. That stopped in the second quarter. Is there any disclosure in your SEC documents about the taxable resub and how you expect that to -- when you expect that to turn profitable? Because a lot of your non-income producing land is sort of hard to value if the taxable resub continues to operate at a loss.

Jim Fleming

John, what we have said about that is that we can't predict when Crack or Cousins Real estate corporation, which is a tactical subsidiary, we can't predict when that business will become profitable. Really there are two factors that affected that decision -- one is we have -- although we’ve had a number of years in the past where it has generated profits in ’07, ’08, and ’09 -- and likely in ’09, we will have tax losses and under the accounting rules, if you have three years of tax losses in a row, it’s difficult to maintain a position that you are going to be able to use those tax losses going forward.

The -- we do think -- I mean, I think that there is a good chance that we will be able to use those tax losses. It’s a significant sized asset for us and the NOLs have a 20-year life and some of the other disallowed interest items have an infinite life, so it is likely we will able to use them. It’s hard to say when.

I think in valuing that business though, I wouldn’t look so much at that. You really need to look at the G&A for the company, which includes CREC, in terms of what our expenses are. But really what we have done with this is to say we are not going to get any tax advantages in the current period -- they will just add up and we will potentially get to use those in the future but in terms of the value of the land, the good news is that for once this business becomes profitable which could happen because of land sales at some point in the future, once this business becomes profitable we will have at least three years where we will be able to continue operating and have no effect on FFO from any tax burden.

John Guinee - Stifel Nicolaus

Tying those two together, if you look at companies that have core portfolios about the size of yours, sort of 7, 10 million square feet, the ones we cover are Franklin Street Properties and Parkway, both of whom run G&As of sub $10 million a year. And then if you look at the same metrics no the basis of basis points to annual NOI, you sort of get that same $8 million to $10 million a year in G&A. Is it appropriate to bifurcate your G&A between your core operations and then your taxable resub and your merchant building business?

Jim Fleming

John, I don’t know that that would be that helpful. What I would say is we do have an amount in our G&A for our -- that’s part of the taxable subsidiary which is our third party management business, which is really a separate business. It’s very capital, very labor intensive, not capital intensive like most real estate and so it’s got -- we are making, generating profits from that business but it’s got a much lower profit margin than you would expect from a capital investment business like real estate. So that kind of business I think it’s more comparable to CBRE or [Jones Lang Lasalle], somebody like that that would have a much higher percentage of their revenues and their expenses.

That’s a piece of it. I think another piece of it, and I don’t really know how to quantify this but I think that a number of other reats take an approach where they take their corporate office staff and allocate a lot of the cost to their properties, it’s a property level expenses. We do not do that -- unless somebody is working on a specific property, we report the G&A as G&A and I think we may show a higher number as a result of that than a lot of really the portfolio companies that really take a lot of that cost and allocate it out to the properties.

And then third, we are more complicated. We do have a number of talent in different areas, multiple product types and so for a company our size, we do expect to run a somewhat higher G&A.

John Guinee - Stifel Nicolaus

Thank you very much.


Your next question comes from the line of Jamie Feldman from Banc of America.

Analyst for Jamie Feldman - Banc of America

Hi, this is [inaudible] for Jamie. Can you please give some color around leasing velocity in fourth quarter thus far and maybe give some outlook on expectations for the office portfolio and the retail portfolio in 2010?

Larry Gellerstedt

Well, the --

Analyst for Jamie Feldman - Banc of America

Just very generally.

Larry Gellerstedt

Very generally -- let’s see, on the office side, it’s very, very hard to see that there is much momentum picking up in the office market in general in the markets that we are in. As I said in my talk, there is a lot of tenants looking that are looking primarily because it’s a great economic time to look. But that’s a balance of really two things -- one they are looking for good prices but two, they have to be confident where their businesses are, so that they can size their space right and their locations right.

And so I can't say that we are seeing an increased momentum or velocity in office leasing yet, although we are seeing an increased number of prospects.

Having said that, the positive impact on the improving economy that we talked about should be on -- we should see that with the confidence coming back and businesses start to make sure, make those decisions. But I do anticipate that 2010 from the office side will continue to be pretty sluggish and that’s why I think we are in a fairly good position because of the low amount of rollover we have.

Steve, I’ll let you comment on the retail side.

Steven Yenser

I think on the retail side, I think it -- a lot of it is yet to be determined I think by how the holiday sales period will go for retailers. I think we would love to see a similar activity in ’10 that we have seen in 09 in the retail portfolio. We’ve had a very impressive ’09 given the market conditions that we have seen.

So I think we are seeing an improving sales climate, albeit small. We are seeing that in our portfolio also and a lot of that, if that continues into the fourth quarter, I think will be a boost to the momentum of retailers looking at store openings for 2010.

Analyst for Jamie Feldman - Banc of America

Great. Thank you very much.


(Operator Instructions)

Larry Gellerstedt

While we are waiting on a question, we had had two that we asked to have a moment on and I will let Jim provide those answers.

Jim Fleming

Let me start with Murphy’s Burrough -- on Murphy’s Burrough, if you look in our supplemental, and I don’t have my page numbers here but if you look at the joint venture information, you will see Cousins’ share of Avenue Murphy’s Burrough. We show the FFO Cousins going 708 in the first quarter, 727 in the second, and 786 in the third. In the third quarter, we did have four tenants totaling 28,000 square feet that took occupancy but there is a pretty significant FFO lag because most of those took occupancy late in the quarter. We do have one other University of Phoenix lease for 9,000 feet that is signed but not yet open, so that would give us a total of 37,000 square feet. Largely that -- those -- the rental numbers for those are not in the numbers you see historically. If you look, and I don’t want to pin us down too much in terms of a run-rate but we do expect significant increases in going forward -- somebody just passed me a note. I want to say we expect to see I would say in the range of $300,000 to $400,000 a quarter in increases over time as we get into next year.

The AT&T lease, I’ve got a number here but let me make sure I’ve got this right. Why don’t we keep -- if there is anything else, let’s go to it. I just don’t want to quote an incorrect number.


Your next question comes from the line of John Stewart from Green Street Advisors.

John Stewart - Green Street Advisors Incorporated

To follow-up again on Murphy’s Burrough, when you look at the construction loans that you’ve got, obviously two of those three assets now, you’ve essentially written off entirely and here’s the third one and you know, Jim, I take your points about what you expect the pick-up from OI to be next year but with respect to that construction loan and the value of this asset or the expected pick-up in the income stream, how do you think about that maturity?

Jim Fleming

I feel pretty decent about that one, John. We’ve been in discussions with the lenders for a while. We are having some pretty productive discussions as we -- you know, we are in a partnership with [Faseon] on that, so we’ve got to work together with them. But we’ve made some progress lately and I think we are headed toward a loan extension on that. It’s not done yet but I feel decent about that.

John Stewart - Green Street Advisors Incorporated

Okay. And one more quick one, just on the pads at the brownstones at Haversham that you said are under contract -- what should we expect to see in the fourth quarter and will that be entirely gain or was there any basis allocated to the pads?

Jim Fleming

There will be a little bit of gain. We said we had $1.5 million in gains so far this quarter. There will probably be another couple of hundred thousand dollars of gain, we expect. It’s not a big number.

John Stewart - Green Street Advisors Incorporated

Okay. Thank you.


Mr. Gellerstedt, there are no further questions at this time. Please continue with your presentation or final remarks.

Larry Gellerstedt

Well, we appreciate everyone’s interest in Cousins. I know that Jim and I and Cameron will be seeing most of you next week in Phoenix. We look forward to being able to talk about where we are and where we are going and spending time with you out in Phoenix next week. Thanks for your interest today and we are always available if you have questions to follow-up with. Thanks.


Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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