Apr 14, 2008
Executives
Tom Bell - Chairman & CEO Dan DuPree - President & COO Jim Fleming – CFO Craig Jones - CIO
Analysts
David Cohen – Morgan Stanley Shlomo/Jay Haveman – Goldman Sachs Ian Weissman – Merrill Lynch Chris Haley – Wachovia Capital Markets, LLC Cedrik Lachance – Green Street Advisors
Operator
Good day and welcome to the Cousins Properties Inc.’ s Fourth Quarter Conference Call.
Today’s call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to Tom Bell, Chairman and Chief Executive Officer.
Please go ahead, sir.
Tom Bell
Good morning, everyone, and thank you for joining us. I’m Tom Bell, Chairman and CEO of Cousins Properties, and with me today are Dan DuPree, our President and Chief Operating Officer, Jim Fleming, our CFO and Craig Jones, our Chief Investment Officer.
Welcome to our Fourth Quarter Conference Call and at this time, I’ll call on Jim Fleming to review the financial results for the quarter. Jim?
Jim Fleming
Thank you, Tom, and thanks everyone for your interest in Cousins. The matters we’ll be discussing today are forward-looking statements within the meanings of federal securities laws.
Actual results may differ materially from these statements. Please refer to our filings with the SEC including our annual report on Form 10K for the year ended December 31, 2006 for a discussion of factors that may cause such material differences.
Also, certain items we may refer to today are considered non-GAAP financial measures with the meaning that G is propagated by the SEC. These items, the comparable GAAP measures and their related reconciliations may be found in the quarterly disclosures and supplemental information links on the Investor Relations page of our website at www.cousinsproperties.com.
This quarter we reported FFO of $0.14 per share which is consistent with our first year FFO last quarter. Our results did not change because our lot sales continue to mirror the overall downturn of the residential market and we did not have significant track sales.
In addition, capitalized interest decreased as some of our recently developed properties became operational, and development activities were slower on some of our residential projects. You will recall last quarter that we reported an adjustment to reverse previously recognized revenue on our 50 Biscayne project.
We continue to close units through the fourth quarter and end of this year. We closed 280 units in 2007 and we have closed an additional 40 units in 2008 for a total of 320 to date.
As a result of these sales, we have completely paid off the construction on them. We also have another 53 units scheduled to close in the next few weeks which will bring our total to 373 of the 529 units.
This will allow us to return all invested capital with Cousins and the related groups and will leave 12 unsold units plus 144 units that will not have closed under the original context. Last quarter, we reversed a percentage of completion profits on 110 units.
This quarter, we have increased that number to the full 144 so that we will have no further units on percentage of completion accounting. As a result of this and some other adjustments, we recognized an after-tax loss from 50 Biscayne in the fourth quarter of approximately $600,000.
Therefore, in future quarters we will recognize profit from closing the sale of any remaining units without any offset or adjustments because of previous percentage of completion accounting. I also want to point out that because of the recent change in accounting rules, we are no longer recognizing percentage of completion profits and have not recognized percentage of completion profits at our other condominium project, 10 Terminus Place.
Despite the accounting changes, we don’t expect any reduction in our overall profit from 50 Biscayne since we’re entitled to retain 15% earnings money on any contracts we now close and can now achieve the same total profit by reselling these units with 85% of the original contract prices. And despite the problems in the Miami condominium market, our price point is well below the competition because we were able to lock in our construction pricing before subsequent cost increases.
Well, we don’t expect to sell these units in the near term. Eventually, the Miami market will recover and we believe we will successfully resell these units.
Turning to information contained in our supplemental package, Office same property results were generally consistent with last quarter as there were no significant changes at any property. Year to date same property results for Office is still negative because of the vacancy of 3100 Windy Hill Road.
Retail same property results decreased from quarter to quarter approximately 3% between the third and fourth quarters because of an annual true-up of expenses within the Prudential portfolio, as well as, an insurance reimbursement in the third quarter for one property that wasn’t matched. For the year, Retail same property results are up approximately 13% as a result of the lease up of the Avenue Viera and Viera Market Center.
I’d now like to discuss the components of that over detail by describing the changes between the third and fourth quarter of 2007. You can follow my discussion beginning on Page 9 of our supplemental package.
I’ll begin with the office division. Our rental property revenues less rental operating expenses increased $844,000 between quarters.
This increase is primarily the result of continued lease up in Terminus 100. The retail and industrial divisions, FOO generated from rental operations from the fourth quarter remained consistent with the third quarter.
FFO from outparcel sales for third quarter and fourth quarter represented the sale of one outparcel each quarter at The Avenue Forsyth project. FFO from track sales in the fourth quarter represented the sale of outparcel in our Jefferson Mill industrial project for a gain of $622,000 and the sale of a track in Temco joint venture.
Other joint venture expenses increased as a result of an increase in real estate taxes on certain unconsolidated residential projects on which development activities have been temporarily suspended. Multi-family FFO changed from a loss of $3.3 million in the third quarter to a loss of $1.1 million as a result of the items I discussed with 50 Biscayne.
Leasing and other fees decreased $2.2 million as a result of the third quarter leasing commission earned on a lease at Williams Square third-party managed property. Termination fees in the fourth quarter represented $493,000 from the termination of a tenant at The Avenue Carriage Crossing, and $496,000 from the termination of a tenant at The Avenue Webb Gin.
Total general and administrative expenses decreased $1.9 million as a result of year-end true-ups for bonuses and adjustments to expense associated with restricted stock and restricted stock units. Interest expense increased $1.8 million as a result of a decrease in capitalized interest associated with the operating portion of Terminus 100 and the completion of The Avenue Webb Gin along with lower levels of development activity in CL Realty and Temco.
Income tax benefit decreased $1.3 million primarily as a result of a lower pretax loss at taxable subsidiary caused by the third quarter adjustment taken for 50 Biscayne. In the fourth quarter, we completed the steps we began last summer to strengthen our balance sheet.
In the third quarter, we recast our bank credit facility and increased the available amount by $100 million. We added $100 million five-year bank term loan.
We renewed our loan on 100 and 200 North Point and we closed a ten-year mortgage loan on The American Cancer Society Center, which was formally called Inforum. In the fourth quarter, we closed at 6.13%, $180 million five-year mortgage loan on Terminus 100 and at 5.6%, $83.3 million three-year mortgage loan on San Jose Market Center.
As a result of this activity, we ended the year with a $500 million revolving credit facility, on which we had only an outstanding balance of $53 million. In the fourth quarter, we also entered into a joint venture with Prudential to develop Terminus 200, who contributed the land and site improvements.
Prudential contributed cash and the venture closed the construction loan to provide additional funding for the remainder of the project. As a result, we do not expect to be required to contribute any more cash to complete this project.
This venture is essentially a 50/50 venture with respect to funding. However, we are entitled to receive more than 50% of the economics if the profit return meets or exceeds certain performance metrics.
The result of these financing activities is an expanded capacity to act on new opportunities, as well as, the ability to complete our existing projects without the need for additional financing. The unused capacity on our existing credit facility is now about twice the total anticipated funding needed to complete our current developments.
The ability to fund our cash needs without being dependent on the credit markets is particularly valuable in times of tight credit when opportunities are available for well capitalized companies. Before I close, I want to make you aware that we also repurchased 628,500 shares of our common stock in the fourth quarter at an average price of $22.57 per share.
We will continue to evaluate the market for our stock and purchase additional shares when we feel it is advantageous to do so. With that, I’ll close my remarks and turn it back over to Tom.
Tom Bell
Thank you, Jim. Well as we’ve been expecting for a while now, the economy has cooled off considerably in recent months.
Residential housing markets continue to show extreme weakness and the debt problems that started in the residential area are now beginning to affect commercial real estate markets, consumer spending and the broader economy. These factors will almost certainly make it more challenging for us and others to start new developments in the near future.
Partially, because of the actions we have taken over the last few years, CUZ is in a good position to deal with the current economic situation. Let me first review where we are currently and then I’ll discuss our plans for the year.
I’ll start with residential. The residential markets continued to weaken in 2007 as it became clear there was an over supply of developed lots and unsold homes even in the high growth, low appreciation markets like Georgia and Texas.
At this point, we don’t see any significant improvement in the residential picture in the near term and we will continue to live in our development of new lots as we wait for supply and demand to come back into balance. Out lot sales were down significantly in 2007 and we don’t expect them to improve in 2008.
So far, we don’t see a long-term reduction in the value of our residential business, but obviously the slowdown is having an impact on our current earnings. Now onto retail.
During the fourth quarter, the deteriorating economic conditions began to affect the willingness and ability of consumers to spend through the holidays and a number of our retailers, especially those in women's fashion had disappointing results in December. We anticipate this will negatively affect retailer demand for new stores.
Accordingly, we are redoubling our efforts to lease space currently in our inventory and proceeding cautiously with new projects. That being said, thus far, retailers are still fulfilling their commitments to 2008 store openings.
As we reported in our last conference call, we opened The Avenue Murfreesboro in suburban Nashville in mid-October. The retail space and the existing phases is now 80% committed and a number of important tenants have signed leases and are in the process of building out their stores.
Among these are Cost Plus World Market, American Eagle, Hollister, Old Navy, Haverty's, and Linens 'N Things. We expect to continue to execute leases with a number of additional tenants throughout the year.
We’ve been encouraged by the early tenant sales of this center's Barnes & Noble, Dick's Sporting Goods, Longhorn Steakhouse and Ultra, among others, all exceeded their holiday sales plan. The Avenue Forsyth in our home market of Atlanta is on schedule to open in the spring.
The retail space is now 58% committed and we have signed leases with AMC, Circuit City, Barnes & Noble, Chico's, DSW, Victoria's Secret, White House/Black Market, J Jill, Joseph Bank's, Ted's Montana Grill, Origins, and Coldwater Creek. The market demographics at regional road networks supporting The Avenue Forsyth remained excellent.
We will open Tiffany Springs Market Center in Kansas City in the late summer. This project is 87% committed and anchors include Target, Home Depot, and JC Penney.
We have also signed leases with Best Buy, Famous Footwear, Justice, PetsMart, Sports Authority, Lifeway Christian and Ultra. This is a classic power center with strong anchors and should drive great customer traffic throughout the center.
Site development work continues to progress well on The Avenue Ridgewalk, our project in Cherokee County north of Atlanta. Our closing date is depending on the timing of the Georgia Department of Transportation's work on a newly approved interstate exit that will serve our site.
At this time, we expect to close on the land either in late 2008 or the early months of 2009. 2007 proved to be a strong year overall for leasing activity.
For the full year, our retail division signed 161 leases of first generation space for over 1.2 million square feet. Additionally there are 64 more first generation leases out for signature for an additional 312,000 square feet.
Our operating retail properties are now 91% leased. As I mentioned earlier, considerable effort in leasing resources will be focused on our existing operating properties and projects under construction in 2008 as we push to increase the overall occupancy in our retail portfolio.
I’m disappointed we haven’t been able to execute more leases today than our industrial properties. We continue to pursue several prospects for both our Atlanta and Dallas buildings and these prospects remain active but decisions by tenants are continuing to be pushed out in this declining economy.
Partially, industrial development activity has slowed as well so vacancy rates are being held in check. We’re working hard on our raising efforts and we do not intend to build any speculative new space in our parks until we lease the space we have available today.
During the fourth quarter, our industrial division sold a 15-acre site for a regional company to build its 150,000 square-foot headquarters at our Jefferson Mill Business Park. Additionally Cousins and our partner, LNR, and the Benham Companies were selected to be the master developers for the redevelopment of Fort Gillem.
Fort Gillem is a 1,500-acre army base that is being closed under the most recent background of base closing. The site is located just four and a half miles from Atlanta's airport and our approved conceptual plan calls for more than 8 million square feet of industrial buildings and 1,000 residential units, as well as, additional retail, office and institutional uses.
Our office markets in 2007 were as healthy as we’ve seen in the last several years. Fortunately, a relatively small amount of supply has been added in our markets since the technology and telecom bust in 2001.
Our office team had a very successful year leasing up One Ninety One Peachtree, Terminus 100, One Georgia Center, The American Cancer Society Center, North Point and our two buildings in Birmingham. We will see continued improvements in income from these buildings in 2008 and beyond as tenants take possession of their space.
Our operating office property portfolio increased to 92% leased at the end of 2007, up from 91% leased at the end of the third quarter, and 84% leased at the end of 2006. We will continue to monitor the office markets in light of the negative economic news we’re now seeing but we’ve not experienced any significant problems so far.
Most of office leasing efforts this year will focus on Terminus 200, the remaining space at One Ninety One, as well as, finding a user for the former IBM training center at 3100 Wildwood. In Downtown Atlanta, One Ninety One closed the year at 75% leased.
If we include the lease with Deloitte & Touche that we reported in January, we have leased well over 700,000 square feet since we bought the building in late 2006, and the building now stands at 87% leased. We continue to see strong interest in One Ninety One Peachtree and we’re actively working with over 400,000 square feet of prospects.
Included in the 87% leased figure at our One Ninety One building is about 265,000 square feet of the existing 375,000 square feet Wachovia lease that is set to expire at the end of 2008. One Ninety One is a great value in the Atlanta office market and we feel confident we will successfully release the Wachovia space and continue to exceed our pro forma leasing goals for One Ninety One.
Terminus 100 was 93% leased and 88% occupied at the end of the year. Including letters of intent, Terminus 100 is now about 95% committed and we have more than enough prospects to fill the remaining 18,000 square feet of office space.
Activity levels continue to escalate as Flying Biscuit joins AquaKnox, Bricktops, Lola and MF Buckhead, further cementing Terminus as a major dining destination. Construction is on track for Terminus 200 with all excavation completed and footings for the tower underway and the first two slabs of the parking deck in place.
We have over 770,000 square feet of lease prospects at this point and the Buckhead sub market continues to draw significant attention as one of the most desirable locations for financial and professional firms. While some competitors appear to be moving ahead with potential alternative space, we remain confident that momentum at Terminus will continue reinforced by the overall Terminus experience.
Ten Terminus Place is averaging 12 new qualified buyers visiting the sales center each week although this activity has not translated into a significant number of new sales contracts in Q4. While Atlanta condo sales slowed throughout the year, we do believe sales at 10 Terminus will accelerate once the project nears completion.
We now have 34 units under contract and construction is on schedule with completion of two model units planned for the second quarter. During our last call, we reported pursuing a joint venture with Emory University to develop a mixed use project adjacent to the Emory campus and the Center for Disease Control headquarters on Cliffton Road.
During the process of finalizing the venture documents, Emory decided to be a ground lessor instead of a venture partner. Cousins will develop the project, which will include residential and retail components.
Interest in this project is excellent because of the limited housing and retail options in the area and its urban infill nature. We expect to begin construction this summer.
Palisades, our Austin project is on schedule for completion in the third quarter of this year. Both buildings topped out during the fourth quarter of 2007 and we expect to top out the parking garage in mid-May.
As you know, the first building is fully leased and we continue to actively market the second building and have proposals out to over 400,000 square feet of prospects. Closing is on Miami condominium project, 50 Biscayne, has gone relatively well given the deplorable state of the Miami condominium market.
As Jim pointed out, we have closed the sale of 320 of 529 units. We now have reversed percentage of completion revenues on all remaining units except the ones that are scheduled to close in the next few weeks.
Once these closings occur, we will be able to make decisions about what to do with any remaining unsold units. We should be in a strong position at that time because we will have already paid off the construction loan and by the end of Q1, we should have received all of our investment back and have no further units on percentage of completion accounting.
On the overall economy, it's hard to predict how long the current downturn will continue but I’m not optimistic. I believe the problems in the housing market will go on for some time, mainly because of the very negative market psychology which exists today.
Until we see a change in buyer attitudes, the market will not be able to build the momentum required to absorb the current oversupply. Retail and office demand will be driven by job growth and consumer spending and we’ll continue to monitor these factors very closely.
A bright spot is the abundance of equity capital still in the market despite the debt crunch. This should make the recovery happen faster when buyers return to the market.
Past real estate downturns have generally provided good investment opportunities and at Cousins, we are well positioned to take advantage of these opportunities. Our asset sales over the past five years generated $2.1 billion in capital, $1.5 billion of which we’ve used to pay off debt and reinvest in our developments, which significantly reduced the overall leverage of our company.
Last year, we took several steps to lock in debt and to free up availability under our credit facility. As a result, we can finish our current developments and take advantage of other opportunities without being at the mercy of the credit markets.
It is important to know this is very unusual for a development company. Although we tend to benchmark ourselves against other public companies, many of which are also well capitalized, these are generally not our competitors in the development business.
Our competition tends to be private developers most of whom have financed their projects with other people's money. This often gave them an advantage during times when easy money was available but now the advantage should be ours with our strong capital structure.
We’re already seeing a number of deals from other developers who aren't able to find the capital they need to continue their projects. I am sure we will see more opportunities later in the year.
Some analysts have commented recently about their concerns regarding development risks and a slowing economic environment. I thought it might be helpful to spend a few minutes on this subject.
We’ve always recognized that there is risk associated with development. It is the reason that development yields, for us, have exceeded straight-line investment yields by 200 basis points or more and often much more.
That 200 plus basis points gives us quite a cushion. On top of that is a disciplined underwriting process which employs 50 years and many cycles of experience.
This process causes us to fully understand the dynamics of our market from both the cost and marketing standpoint before we start a project. This underwriting allowed us to perform against market dynamics as recently as 2001 when we began Frost Bank Towers or 2001-2003 downturn when we began Frost Bank Tower's Class A trophy office building in Austin, Texas, amidst some investor angst.
The net result of that asset performance is that we did lease it and we leased it at rates well in excess of competitive space and then sold the building for a record price in the state of Texas, generating value creation of $44 million for our shareholders. This is important to note because deteriorating economic times often provide the greatest long-term investment opportunities for companies like Cousins.
We believe development capability conservatively employed can be an asset in lesser economic times just as it is in robust periods. I want to finish by outlining four things we will focus on in 2008.
First, we’ll focus on leasing. We’ve had good success in our office portfolio over the last year and we will work on extending this momentum at One Ninety One Peachtree, Terminus 200, and 3100 Wildwood.
In retail, we will also build on this year's past success as we continue to fill up our development properties in 2008. In industrial, will continue to concentrate on the available prospects both in Atlanta and in Dallas.
Second, we’ll continue to be opportunistic, looking for smart ways to take advantage of the downturn and create long-term value for our shareholders. As I mentioned earlier, it will be harder for all developers to begin new projects in the near term because many potential tenants are hesitant to commit to new space in today's environment.
However, for those locations they do want, we have the advantage of access to capital and the ability to deliver a quality project on time and on budget. We will continue to look for opportunities where other developers are unable to move forward.
We’ll also look for other investment opportunities where we think the market is not appropriately pricing assets. Third, we will maintain our disciplined underwriting process.
This has been the hallmark of Cousins for many years. As we’ve said before, we did not underwrite our development projects based on the aggressive market conditions of the last couple of years and we will not do so in the future.
If we need to scale back our development starts for a period of time, it will make the necessary adjustments. We set our plan as to start $300 to $400 million of new developments per year through the cycle.
We’ve been able to start more than that over the last several years and as a result we had many good projects that are now coming online. We will keep up the pace of development where it makes sense but we will not force developments that don’t.
Fourth, we will continue to focus attention on our cost structure. This includes making sure our G&A and other expenses are in line with the development opportunities we are seeing.
Rest assured, we will not allow the current downturn to distract us from our long-term goals because overall, our most important measure continues to be the value we create for our shareholders. Terminus 100, The American Cancer Society Center, the San Jose Market Center, are all good indications that even in today's market, the value creation for good developments and smart acquisitions are substantial.
The value creation implied by the recent loan underwriting for these three properties is a cumulative 56% or $204 million. This value creation is what increases our NAV over time and in the long term, it should have significant impact on our total return to shareholders.
With that, I’ll close my remarks and turn the call over for any questions.
Operator
Ladies and gentlemen, we will now begin the Question-and-Answer session. As a reminder, if you have a question please press * followed by the 1 on your touch tone phone.
If you’d like to withdraw your question, press the * followed by the 2. If you are using a speaker phone, you will have to lift your handset before making your selection.
David Cohen – Morgan Stanley
Tom Bell
David Cohen – Morgan Stanley
Tom Bell
David Cohen – Morgan Stanley
Tom Bell
David Cohen – Morgan Stanley
Tom Bell
David Cohen – Morgan Stanley
Tom Bell
Operator
Shlomo/Jay Haveman – Goldman Sachs
Tom Bell
Shlomo/Jay Haveman – Goldman Sachs
Tom Bell
Shlomo/Jay Haveman – Goldman Sachs
Tom Bell
Shlomo/Jay Haveman – Goldman Sachs
Tom Bell
Shlomo/Jay Haveman – Goldman Sachs
Tom Bell
Operator
Ian Weissman – Merrill Lynch
Tom Bell
Ian Weissman – Merrill Lynch
Tom Bell
Ian Weissman – Merrill Lynch
Tom Bell
Ian Weissman – Merrill Lynch
Tom Bell
Ian Weissman – Merrill Lynch
Tom Bell
Ian Weissman – Merrill Lynch
Tom Bell
Ian Weissman – Merrill Lynch
Dan DuPree
Jim Fleming
Ian Weissman – Merrill Lynch
Operator
Chris Haley – Wachovia Capital Markets, LLC
Jim Fleming
Chris Haley – Wachovia Capital Markets, LLC
Jim Fleming
Tom Bell
Chris Haley – Wachovia Capital Markets, LLC
Tom Bell
Chris Haley – Wachovia Capital Markets, LLC
Dan DuPree
Chris Haley – Wachovia Capital Markets, LLC
Tom Bell
Chris Haley – Wachovia Capital Markets, LLC
Jim Fleming
Chris Haley – Wachovia Capital Markets, LLC
Operator
Ladies and gentlemen, I’d like to remind the audience that if they have a question, please press * followed by the 1. If you are using a speaker phone, please lift your handset before pressing the numbers.
Cedrik Lachance – Green Street Advisors
Tom Bell
Cedrik, the time frame is—I think the project pro forma goes out for 10 or 12 years. It's a very long-term project.
The next two years, as I understand it, are basically focused on completing the development plans and negotiating with the Army as to exactly how they're going to make the land available to the joint venture because they have various alternatives.
Cedrik Lachance – Green Street Advisors
Dan DuPree
Cedrik Lachance – Green Street Advisors
Dan DuPree
Cedrik Lachance – Green Street Advisors
Dan DuPree
Jim Fleming
Cedrik Lachance – Green Street Advisors
Tom Bell
Cedrik Lachance – Green Street Advisors
Tom Bell
Operator
Jay Haveman – Goldman Sachs
Hey, good morning. It's actually Jay.
I joined from another call, but just a question on the downtown leasing market, downtown Atlanta, and just sort of comparing that with Buckhead, it sounds like you have pretty good interest in both but getting a sense of what you’re seeing in terms of changes, maybe in demand and net effective rents or any other changes, concession packages or free rent, etc?
Tom Bell
Jay Haveman – Goldman Sachs
Tom Bell
Jay Haveman – Goldman Sachs s
Operator
Chris Haley – Wachovia Capital Markets, LLC
Tom Bell
Chris Haley – Wachovia Capital Markets, LLC
Tom Bell
Chris Haley – Wachovia Capital Markets, LLC
Jim Fleming
Chris Haley – Wachovia Capital Markets, LLC
Operator
Tom Bell
Operator
Ladies and gentlemen, this does conclude the Cousins Properties Inc., Fourth Quarter Conference Call. You may now disconnect and we thank you for using AT&T conferencing.