May 13, 2008
Executives
Tom Bell – Chairman & CEO Dan DuPree – President & COO Jim Fleming - CFO Craig Jones - CIO
Analysts
Jay Habermann – Goldman Sachs [David Toddy] – Lehman Brothers Chris Haley - Wachovia Capital Markets Unidentified Analyst – Merrill Lynch
Operator
Good morning ladies and gentlemen and welcome to the Cousins Properties Incorporated first quarter 2008 conference call. (Operator Instructions) I would now like to turn the conference over to Tom Bell, Chairman and CEO; please go ahead sir.
Tom Bell
Good morning everyone. Thanks for joining us for the first quarter conference call of Cousins Properties.
I’m Tom Bell, Chairman and CEO of the company. With me today are Dan DuPree, our President and Chief Operating Officer, Jim Fleming, our Chief Financial Officer and Craig Jones, our Chief Investment Officer.
At this time I’ll call on Jim to review the financial results for the quarter.
Jim Fleming
Thank you Tom. Good morning everyone and thanks everyone for your interest in Cousins.
Certain matters we’ll be discussing today are forward-looking statements within the meaning 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 10-K for the year ended December 31, 2007 for a discussion of the factors that may cause such material differences. Also certain items we may refer to today are considered non-GAAP financial measures with the meaning of Regulation G as propagated by the SEC.
For these items, the comparable GAAP measures and the related reconciliations may be found through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website at www.cousinsproperties.com. This quarter we reported FFO of $0.27 per share compared with $0.14 last quarter.
I’d like to highlight the factors that contributed to this increase in FFO. You can follow by looking at our supplemental package beginning on page eight.
Revenues from our operating properties are increasing as development projects become operational and recently signed leases commence on our existing properties. Rental property revenues less rental property operating expenses for consolidate properties increased $1.5 million between the fourth quarter of 2007 and the first quarter of 2008.
The amount of $960,000 of this increase came from the continued lease-up of Terminus 100 and $103,000 came from the lease-up of One Ninety One Peachtree. The American Cancer Society Center also improved $164,000 as a result of an increase in parking revenue in the first quarter.
The Avenue Webb Gin and San Jose MarketCenter increased a combined $258,000 as a result of increased occupancy. In addition our joint venture FFO increased $671,000 partly as a result of improved operations at the Avenue Murfreesboro.
These positive results were offset slightly by a $103,000 decrease at the Avenue Carriage Crossing which occurred because we established a reserve on all pre-petition accounts receivable for Linens ‘N Things after it filed for bankruptcy protection. I want to cover some other details from the quarter.
FFO from out parcel sales was $755,000 which was from the sale of one out parcel at Tiffany Springs MarketCenter and FFO from track sales was $3.7 million which resulted from a sale of 22 acres at our North Point project. Profits from lot sales decreased due to a low volume of lot sales.
In the first quarter we sold 35 lots versus 83 lots in the fourth quarter of 2007. Income from other joint ventures was $1 million as a result of a fee received for an oil and gas lease at one of our Texas residential properties and earnest money forfeitures on canceled lot contracts in Florida.
Multifamily FFO improved to income of $650,000 as a result of the sale of additional units at 50 Biscayne. During the first quarter we closed 97 units and in April we closed an additional six units.
To date we have closed the sale of 381 of the 529 residential units plus four of the 13 commercial units leaving 157 units in inventory at this point. From the sales to-date we have repaid the construction loan and received back $8.3 million of our $9 million investment.
We are now reviewing the various alternatives to maximize the value of the remaining units which include leasing, holding the units until markets improve, and selling units to other investors. We no longer have any units under percentage of completion accounting so profits from the sale of the remaining units will be recognized at the time of sale.
Likewise at our other condominium project, Ten Terminus Place, we are not using percentage of completion accounting so we expect to recognize profits when units are closed. Interest income and other increased $727,000 for the quarter as a result of an increase in notes receivable and a gain on the sale of some miscellaneous assets.
Total general and administrative expenses increased $1.5 million as a result of year-end bonus true-ups taken in the fourth quarter of 2007 and an increase in expense associated with restricted stock units as the expense associated with these units varies with changes in our stock price and a reduction in salaries capitalized to development projects. However as some of you are aware we have taken steps recently to reduce our G&A expenses.
Through attrition and reductions in force, we have now eliminated 28 of our 193 non-property positions. After taking into account severance payments and reduction in capitalization we anticipate our that G&A for calendar year 2008 will be $1 million to $2 million less than it was for 2007.
Interest expense increased from the fourth quarter to the first quarter by $1.3 million primarily as a result of projects coming on line including more of Terminus 100 and Lakeside Ranch Business Park. Capitalized interest also decreased because we had lower levels of development activity in CL Realty and [Tenco].
Finally for the quarter pre development and other expense increased as a result of the write-off of costs associated with one retail project we had been pursuing which we no longer consider probable. In reviewing the supplemental package you may have noticed the second generation tenant improvement leasing costs and building CapEx increase considerably in the first quarter.
This is attributable to the build-out and upgrade of One Georgia Center as we prepare it for occupancy by the Georgia DOT. I mentioned Linens ‘N Things earlier, this retailer filed for bankruptcy protection earlier this month.
We have four leases with Linens ‘N Things at the following locations: The Avenue Carriage Crossing, The Avenue West Cobb, The Avenue Murfreesboro and North Point MarketCenter. Our share of the combined annualized base rent for these locations is approximately $1 million.
None of these leases are on the initial list of 120 stores slated for closure. However there is not guarantee that one or more of these leases will not ultimately be rejected or modified later in the process.
We intend to closely follow the bankruptcy proceedings and will proactively act to protect our interests. Tom will speak in a few minutes about our recent decision to exit the industrial business but I want to make you aware of the land sales we have structured.
Forrest Robinson and Ray Weeks have formed a new venture and in the second quarter they have bought two tracks from our Jefferson Mill project and have a commitment to buy one additional track at Jefferson Mill and one at King Mill by December 31, 2009. In addition they have the option to buy five more parcels at King Mill and Jefferson Mill over the next three years.
We expect that the initial sales will generate about $2 million of gain. Earlier I mentioned a number of miscellaneous items that contributed to FFO this quarter including an oil and gas lease payment and a track sale at North Point.
We said many times that our FFO tends to be lumpy because of items such as these. While the timing of land sales is difficult to predict on a quarter-by-quarter basis we do see it as an important component of our business and create a significant value for our shareholders through land development over many years.
We have especially emphasized the lumpy but recurring nature of our land sales profits because the purchase and entitlement of strategic land tracks in our home markets is one of our core competencies. While it’s impossible to predict the future in today’s uncertain markets we are anticipating that some more land sales may occur later in the year.
We are keenly aware that some of the best long-term opportunities present themselves in down markets. As we mentioned last quarter we’ve worked hard to put ourselves in a position to take advantage of opportunities when we see them.
This included our $2.8 billion of assets sales and joint venture transactions in the strong markets of 2003 through 2006 through which we recycled about $1.5 billion of cash into our company to fund our developments and to pay down debt. It also included the recast of our bank credit facilities last summer which added $200 million of capacity and gave us more favorable loan covenants as well as loans on four properties that totaled over $537 million last year.
As a result of these actions we are well positioned to take advantage of opportunities in today’s debt-constrained markets. The maturities of our existing loans are also very favorable.
Our bank line of credit runs to 2011 with an extension right to 2012. The largest property level loan that matures in 2008 or 2009 is an $8.7 million loan on Lakeshore Park Plaza which we’re in the process of refinancing at a significantly higher loan amount.
We’ve also met recently with a number of lenders and potential joint venture partners to understand the markets and to look for opportunities. Its clear that not only have lenders tightened their standards, they’ve also chosen to pursue higher quality projects with strong sponsors.
As a result Cousins should benefit in the near-term by having access to capital that many developers and private real estate owners will not have. With that I’ll close my remarks and turn it back over to Tom.
Tom Bell
Thank you Jim. Today I’ll start with a few comments on the real estate markets and then review where we stand with our overall business and properties and what we’re doing as a company to take advantage of possible opportunities which might result from these difficult markets.
While the state of the real estate markets vary by product and geography it’s clear we’re in the midst of a significant and on-going real estate slowdown. Our residential lot sales business dropped off sharply last year and lot sales at most of our projects have continued to decline in Q1.
Likewise the condominium business has also slowed and with one exception we don’t expect to begin any new condo projects in the near term. Our retail customers are generally honoring their existing commitments but they are very reluctant to make new commitments which will almost certainly slow down most of the projects in our shadow pipeline.
And although our office leasing to-date has been quite good, we expect leasing decisions to begin to slow as well. As Jim pointed out we sold very few lots in the first quarter and based on the current momentum and supply of undeveloped lots in our markets, we’re not forecasting that we’ll sell somewhere between 200 and 250 lots this year.
And as a result, we’re not anticipating any significant profits from lot sales in 2008. We are also not planning to develop any additional lots this year except in a couple of selective projects.
Fortunately our investment in this business is only about 7% of our overall capital base. On the bright side even though its tough to sell lots in this market we are continuing to sell dirt by the yard in Florida and as Jim pointed out we’re making money off of oil and gas leases in Texas.
So while we might not have great residential markets I have to give our guys great credit for creativity. As you know we tried to build up our industrial business from scratch over the last few years with our partner Ray Weeks.
We knew the spreads were generally thinner for this property type than for our other products but we had hoped we could use our relationships and our reputation for quality to differentiate ourselves from the competition. Well four years of effort have proved this strategy, my strategy I might add, to be flawed.
We have learned this is a business driven almost entirely by price and led by companies with large portfolios. In April we decided to exit this business and focus our resources on other products where we are more competitive and which generally provide us with better returns.
As we announced last month our industrial division President, Forrest Robinson, has now left Cousins to form a new business venture with our partner Ray Weeks. We have high quality properties and land in good markets and we plan to have Ray and Forrest finish the leasing at the existing King Mill and Jefferson Mill buildings and we expect to sell these buildings once we are in a position to do so.
We will continue our relationship in our Dallas properties with our partner [Seefried] and when the market is favorable we’ll either sell our remaining land or develop it through these partnerships. We are focusing a lot of attention today on leasing up our retail development projects.
Tenants at The Avenue Forsyth began opening at the end of April and grand opening activities are scheduled for later this week. Phase one retail space is now 68% committed and our leasing momentum remains pretty good considering the markets.
We remain encouraged about the progress we are making and the market demographics in this growing market and the regional roadmaps where it supports the market at Avenue Forsyth are excellent. Tiffany Springs MarketCenter grand opening is now scheduled for July with several tenants on track to open early.
This traditional power center is our first development in the Kansas City area and it’s currently 88% committed. At The Avenue Murfreesboro key leases were executed during the quarter with Old Navy and Haverty’s, bringing the built and under construction portions of the shopping center to 80% committed.
Recent openings include Cost Plus World Market, American Eagle and Hollister. Tenants continue to report strong sales and many tenants report continuously meeting or beating their plan.
We’re continuing to pursue several potential new retail developments but as of now it appears we will only have one new retail start this year at our Emory mixed-use project. For The Avenue Ridgewalk our proposed project at Cherokee County north of Atlanta, our closing date continues to be dependent on the timing of the Georgia DOT’s work on a newly approved interstate exit that will serve our site.
Land closing is now expected for early 2009. On other properties where we have sites under control but do not need to purchase the land immediately our current strategy is to take our time, to let retailers’ appetites for new stores return rather than to try to force developments in today’s difficult environment.
Our operating office property portfolio finished the quarter at 92% leased overall. We expect to add to this leasing percentage during the year but the biggest gain in our leasing will come when we’re able to find a user or buyer for the 188,000 square foot former IBM training center at 3100 Wildwood.
As we’ve said before this is a specialized building that in all likelihood will be leased or acquired by one user and it’s hard to predict exactly when that will happen. However the rest of the operating portfolio is very close to fully leased and we will see increased FFO from these properties as the tenants take occupancy and begin paying rent under our recent leases.
At One Georgia Center the Georgia Department of Transportation began phased occupancy this April and will occupy its full 285,000 square feet by August bringing the building to 100% occupied. At One Ninety One Peachtree we have leased 716,000 square feet since we purchased the building in September of ’06 bringing the building to 88% leased today although you should keep in mind that the 375,000 square foot Wachovia lease will expire at year-end.
At this point we have back-filled 143,000 square feet of the Wachovia space so their departure should leave the building at about 70% leased. We’re working hard this year to back-fill the remaining Wachovia space and to lease the other vacant space in this building.
We continue to see strong interest in One Ninety One Peachtree. Its quality simply could not be replicated in today’s market and our low purchase price for the building and tax abasements give us the ability to sign leases at very attractive rates.
We are now working on an additional 67,000 square feet of expansions and deals under letters of intent which we expect will result in signed leases very soon and we are also working with over 320,000 square feet of additional qualified prospects. We are also excited about the restaurants and amenities that will open later at One Ninety One.
New York based El Molino began construction of a high end Italian restaurant in April and we also have agreements for a café, coffee bar and sundry shop at One Ninety One and we’re working on a new health club to open by year-end. Terminus 100 is now 91% occupied and 96% committed and we have active prospects for the remaining 18,000 square feet of office space.
Construction is on track for Terminus 200 and we’re continuing to focus our efforts on leasing this building. Our most attractive and active prospects total over 400,000 square feet and we’re tracking more than 380,000 square feet of additional prospects.
The Buckhead office market is headed for over supply with three new buildings started after Terminus 200, one each from Tishman Speyer Crescent Resources and Duke Realty. This will make the leasing environment more difficult but Terminus clearly has the lion’s share of the momentum in Buckhead and Cousins Properties enjoys many long-term relationships in the Atlanta community.
Terminus is now one of the most popular meeting places in Buckhead with five quality restaurants already open in a pedestrian-friendly environment. We are in the final stages of lease negotiations for two additional restaurants on the lobby level of Terminus 200 which will further cement Terminus as a dining destination.
And I would of course be remiss if I failed to point out that we’ve recently signed a lease with what may be Atlanta’s most popular restaurant, Chick-fil-A. Despite the softening market our condominium project at Ten Terminus Place is nearing completion and sales traffic is fortunately increasing.
We currently have 34 of 137 units under contract. Construction is on schedule for completion in September and we’ve just completed two model units that are in the process of being fully furnished and we are also building-out our large amenity deck.
This should give our potential buyers a better sense of the project. Terminus Ten is a high quality building and very well priced versus the competition in Buckhead which is sure to present a very good value in this market.
Palisades West our Austin project is on schedule for completion in October. Our first building is fully leased and we’re in the final stages of negotiating a lease for approximately 30,000 square feet that we expect to sign by the end of May in our second building.
This will bring the overall project to 68% leased and we have identified 400,000 square feet of prospects for the remaining 125,000 square feet we have available. Austin is continuing to experience strong job growth and population growth and we believe it is a very good long-term growth market.
In previous calls we’ve discussed our proposed mixed-use project at Emory University. We expect to start the first phase of this project later in the year which will include 166 condominium units and 93,000 square feet of restaurant and retail shops.
The first phase will also include approximately 275 apartments that will be developed and owned by another party. These units are in a unique market and will serve an unmet need.
Emory University and its related medical facilities plus the center for disease control and children’s healthcare are all within walking distance of the project and there are very limited retail and housing choices in the area. We believe there will be strong demand for these units most of which will be priced under $400,000 by the faculty and staff of these facilities who are anxious to live closer to where they work.
Our third party business has made significant progress recently. Since our last call we’ve secured contracts to manage and lease 623,000 square foot 999 Peachtree building in mid-town Atlanta as well as five buildings containing 850,000 square feet at Piedmont Center in Buckhead.
We are also working on other prospects in both Atlanta and Dallas. And at the end of the first quarter we signed a contract with [Cox] for a fee development of a 700,000 square foot office building in suburban Atlanta.
I mentioned last quarter that we are starting to see opportunities on distressed land and development transactions and that I expected these opportunities to become more attractive in the second half of this year. We are now seeing an increasing volume of potential opportunities both for land purchases and for developments and we have evaluated a number of these in the first quarter.
We think these opportunities will increase and become more attractive as we move a bit further through the cycle. So while we’re being proactive we are also being patient at this point.
Rayonier, the timber and forest products company based in Jacksonville, Florida announced recently that we have entered into a strategic alliance to help them with the entitlement and planning of 6,300 acres of land they own in Palm Coast, Northeastern Florida. We’re excited about this new relationship and we hope to be in a position to enter into a long-term joint venture with them for development of this and other projects in the not-to-distant future.
They also own other tracks of land in Florida and Southeastern Georgia which we may be able to help them with over time. It would be premature to make any assumptions about how this relationship may develop but given our past experience in other similar JVs we are excited to have a business relationship with such a fine company where we see so many synergies.
Finally we recently decided to change our company’s organizational structure. While we doubt that this will be of much interest to anyone outside our organization we are excited about the changes and thought briefly outlining them on the call will help all of you understand how Cousins is preparing to react to the opportunities that generally arise during the down cycle.
We are shifting from being organized around our product types to being organized around the critical functions. Instead of divisions that focus on one product like retail, we now have groups that handle functions, like development, leasing and asset management, investment and administration.
These functional responsibilities now include all of our product types; office, retail, residential and mixed-use. We have named Larry Gellerstedt, Executive Vice President and Chief Development Officer, and Joel Murphy, Executive Vice President and Chief Leasing and Asset Management Officer.
And we have reorganized the development and property functions to report to these two leaders. As a result Larry now has the responsibility for all of our development projects until they become stabilized including our land and residential development business.
Joel has responsibility for all asset management, property management, client service and leasing. We have also selected multi disciplinary teams made up of members from these functional groups to pursue each development project headed by a team leader.
In this new organization structure, we will continue to have Dan and I in charge of our overall business, which Jim Fleming continues as our Executive Vice President and Chief Financial Officer and runs our administrative functions and Craig Jones, our Executive Vice President and Chief Investment Officer oversees our investment process as well as acquisitions and disposition. This functional approach will help us better share information and talent across all product types making the company more flexible and quicker to react to emerging opportunities.
It also makes it easier for us to handle mixed-use opportunities which we’re seeing more and more often. It will also provide new opportunities for our people and thus help Cousins retain our best talent.
We do not expect this reorganization will affect our relationships with tenants, partners or vendors. As I said it’s an exciting time to be here at Cousins Properties.
We appreciate your time today and your interest in our company. We’ll continue to monitor our markets and watch the overall economy both for risks and for opportunities.
Even though the economy is in a difficult period, we will continue to do what we’ve always done, be optimistic and flexible and look for ways to make money for our shareholders over the long-term. And we’re excited about our prospects as we move forward.
With that I’ll close my remarks and turn the call over for any questions you may have.
Operator
(Operator Instructions) Your first question comes from the line of Jay Habermann – Goldman Sachs
Jay Habermann – Goldman Sachs
Tom just in light of your comments and obviously the decision to sort of scale back the development sort of shadow pipeline if you will, you’re exiting industrial, scaling back retail to some degree given the current environment, and obviously you mentioned office continues to be soft, just curious where you continue to see the best investment opportunities? You mentioned perhaps something in the latter half of this year.
I think that’s consistent with your sort of views on the prior call, but I’m just wondering in fact where are you seeing land prices, how much of a change thus far, are you seeing Cap rates move at all in your markets? But I guess sort of where are you seeing best returns today?
Tom Bell
We do believe that Cap rates have been reduced significantly in most of the markets we operate in but there’s so little activity in terms of sales that you can’t be certain. We’ve seen a lot of properties go on the market and end up not being sold because the owners have not yet come to the conclusion that they either paid too much or they can’t get what they might have been able to get in 2006, early 2007.
So with regard to opportunities we’re seeing a lot of residential opportunities. So far most of these opportunities are being presented by developers and home builders as opposed to financial institutions.
We believe that when they begin to be presented by financial institutions the opportunities will improve. We are seeing many development opportunities both in the retail and office side.
These are opportunities that are fully entitled but the developer is unable to get financing in these credit markets. We have not seen one yet that we want to pursue but we’ve looked at several and come pretty close a couple of times.
Once again we think that those opportunities will probably become more prevalent as the year goes on and the pricing will become better. Like I said, we’re seeing fewer Greenfield development opportunities in our classic product types that would be two or three years in the future.
The ones that we have in our shadow pipeline we are by and large delaying but we do expect to see these distressed opportunities become available by the end of the year.
Jay Habermann – Goldman Sachs
Obviously you did make a change there to much more of a functional structure and I’m just wondering you mentioned the change in G&A, the run rate for the year, should we expect to see some charges as well, severance payments?
Jim Fleming
I commented on our G&A, said it would be – we expect it’ll be $1 million to $2 million lower this year than last year. That factors in all of that severance and all the other things.
Jay Habermann – Goldman Sachs
Okay also in terms of major financial instructions, B of A for example, are you seeing any sort of indication there that they might look to scale back obviously given that they’re a pretty significant percentage of overall revenues?
Tom Bell
Well B of A is our partner in the building in Charlotte, the big building which makes it look like it’s a big contributor but actually if you understand the structure of that agreement; it’s not a big contributor. So we really don’t have any B of A risk in our portfolio.
Jay Habermann – Goldman Sachs
It was more broadly toward the financial institutions in general.
Tom Bell
Haven’t seen anything yet. Most of our financial tenants are in the wealth management and brokerage side of the businesses as opposed to the lending side of the businesses.
We haven’t seen any reduction there to-date.
Jay Habermann – Goldman Sachs
Could you give us a sense of what your leasing spreads in your office and retail portfolios were in the quarter?
Jim Fleming
What are you looking at, spreads over --
Jay Habermann – Goldman Sachs
The leases over expiring? Just trying to get a sense as to your same-store growth, how much of it was new leases that are being commenced versus what’s being signed over, what was expiring.
Jim Fleming
For the most part what we saw when the sequential quarters was continued to lease-up at we had some at Inform which is now American Cancer Society Center as that continued to come on line. We had some at three or four retail projects which I mentioned.
I’ll let Dan comment on the roll-up roll-down question but really the sequential improvements you’re seeing are from leasing up what had been vacant.
Dan DuPree
In the first quarter we leased 406,000 square feet of office space, 304,000 feet of that was in development projects and for that we count 191 as a development deal, 102,000 square feet were in operating centers or renewals. So a pretty robust first quarter.
We kicked around the question about roll-up or roll-down while there has been some deterioration in overall or some increase in vacancy in the overall market, in the trophy projects which is largely where we operate we’re not seeing it. Over the entire portfolio I don’t think we have any roll-down.
We have in a couple of isolated cases some pretty good roll-up. Part of that is because we sold all of our assets that were fully leased at very high lease rates that would have been vulnerable to roll-down.
And we retained those assets where we had the greatest opportunity for roll-up and that’s what we’re seeing. In our retail we leased net of 103,000 feet in the first quarter.
We had 18,000 square feet of reduction in operating centers, 122,000 square feet of new leases and development deals. So I think we’re on track for a solid if not spectacular year in leasing on the retail side as well.
Tom Bell
And remember our leases, our office leases are generally ten years and generally include on average 3% per year bumps.
Operator
Your next question comes from the line of [David Toddy] – Lehman Brothers
[David Toddy] – Lehman Brothers
Your leverage has been creeping up obviously as your developments are placed into service, how comfortable are you at current levels and what’s the sort of maximum target you would be comfortable with and also what types of activities might you engage in to reduce that at some point?
Jim Fleming
Our leverage would have been the same this quarter as last quarter except we had a little more cash on hand at the end of the quarter, in other words if we’d used that cash to pay down the credit facility so it – you’re right, based on the market cap analysis we do, its in the high 30s. That was with a stock price of between $24.00 and $25.00 and the stock is a little higher than that at this point.
Really what we do in analyzing this question is to look at our financial model as we project things out into the future and make sure we’re comfortable that we’re going to be safely within our bank covenants and that we’re going to be at a level we think we’re comfortable with and the market will be comfortable with and I can tell you we’ve modeled it with a lot of different assumptions about development levels, about acquisitions and we are comfortable. We’ve run it out five years.
We could do a high level of development if we saw the opportunities and still not run into problems with our financial covenants. So we really don’t see an issue as we project things forward.
It will depend on what number you see in that supplemental, it will depend on what the stock price does and how, what happens when things come online but we feel very comfortable as we move ahead.
[David Toddy] – Lehman Brothers
You mentioned that you expect some softness in office leasing demand going forward, is that due a little bit more to the supply or do you actually think its more related to pull-back in some of your local industries?
Tom Bell
Office leasing to date, in our office leasing to date, it’s been very good. But we saw in the overall market and Atlanta declined a little bit for instance in the first quarter of the year.
We don’t have much space to lease, additional space to lease. We’ve got some space in One Ninety One obviously.
We’ve got a new building at Terminus but the rest of our properties are pretty much leased up. We’re seeing plenty of activity at One Ninety One, surprising level of activity.
And at Terminus 200 we’ve got a real good start on some anchor leasing there but we think that’s going to be a tough market. We have three out of town developers who come behind us and they’re building speculative Class A buildings and I would guess they’ll regret that.
[David Toddy] – Lehman Brothers
Did you provide any guidance in terms of the scope of the land sales gain that will be booked in the second quarter?
Tom Bell
If we knew exactly when land would sell we would definitely give you guidance. But we just don’t know.
We’re constantly buying and titling land. As you know we have significant land positions.
We’re constantly looking for opportunities to sell the land when we see a good return for our shareholders. And it’s very opportunistic.
The west side of 400 where we made the sale in the first quarter of the year, we’ve been selling that land off now for almost four years and now we’re about done. We have two or three parcels left there and another significant one across the street.
So it’s very frustrating for us just as it is for you. We really can’t predict this land business.
All we can say is for 40 years we’ve been buying and titling and selling land and we’ve made a very nice return for our shareholders doing it and it’s a core part of our business. But it’s not very predictable.
Operator
Your next question comes from the line of Chris Haley - Wachovia Capital Markets
Chris Haley - Wachovia Capital Markets
Could you give us a sense Jim on second generation capital expenditures, what would be driving that number up in the first quarter and then what we should be looking at for the rest of the year or give us your best guess?
Jim Fleming
The first quarter was primarily from the build-out of One Georgia Center for the Georgia DOT about $5.1 million of that number was for the DOT. We do expect the level is going to be higher for the rest, at a higher level for the rest of this year.
I can’t really tell you because it’s going to be lumpy. I can’t tell you exactly how it’s going to fall but we think it will be at a more elevated level this year than last year because we have leased-up a number of properties and while we’ve got the American Cancer Society situated now we’ve got to finish the build-out for the DOT and their lease at that building.
And then we’ve got a number of tenants that we’re building out space for at One Ninety One. It’s going to be a net positive in terms of FFO.
We think that this will, we’ve analyzed this and we’ve taken into account the tenant improvement dollars that we have to expend and what we think the debt service on those tenant improvement dollars will be and then looking at what we would expect to get in FFO or NOI from the properties, we’re going to have a net gain this year we think of about $0.09 to $0.10 and then that will continue for the next two years based on the leases we signed in 2007. So that for the leases we signed in 2007 we would expect a $0.09 to $0.10 FFO improvement for calendar year 2008, about double that for 2009 and about triple that for 2010 so it’s a process that’s working as we work through spending the money.
But it is going to involve significant dollars going out to do this tenant improvement work.
Chris Haley - Wachovia Capital Markets
These spaces, some companies take the liberty of saying if the space was vacant for six to 12 months even though they owned it for years, that they characterize it as a first generation capital expenditure and do not disclose it. Is that to say, that’s just their treatment, your treatment here is though in certain assets that you are saying that all space, all re-tenanting space, re-tenanting dollars are second generation?
Jim Fleming
You will see all of our tenant improvement and leasing commission dollars either in the second generation number or in the development pipeline number. One Ninety One for instance we have in the development pipeline but we’ve estimated the build-out and leasing commission number in our total dollar number you see in the pipeline.
So you’ll see all of our numbers in one of those two places.
Chris Haley - Wachovia Capital Markets
So the difference between an asset that is the capital expenditure that’s in this line item versus the development page, the delineation is just scale of amount of redevelopment?
Jim Fleming
It’s really, we decided with One Ninety One we would show that as a development project in our pipeline because it was really bought in a way where we were going to treat it comparably to a development. We underwrote it like a development.
It was going to involve a long period of time. That one is unique.
That’s the only one we’ve done that with. We thought it would be better disclosure to do it that way.
Every other building we have, if its not a new development project its going to be in the existing pipeline and any TI dollars you’ll see will be in this second generation.
Chris Haley - Wachovia Capital Markets
Okay so beyond the DOT deal and the other ACS are there any other assets that you look at over the next 12 to 24 months where you’re going to be doing significant interior work or tenant [inaudible] work?
Jim Fleming
Well One Ninety One which will show up in the development pipeline because there will be, because really the rest of the projects as far as I’m aware are going to be in the development.
Dan DuPree
If as in when we lease up 3100 Wildwood you would expect that that would fall into that category. That will be a happy day.
Chris Haley - Wachovia Capital Markets
Are there any data points, they’re few and far between nowadays versus a couple of years ago but there are some assets that might be on the market, say the Tishman deal, are there any other assets that you would have us keep an eye on for pricing metrics in Atlanta?
Tom Bell
That are directly related to what we’re doing I can’t think of any right now.
Chris Haley - Wachovia Capital Markets
Nothing in terms of asset trades or any higher quality asset trades that are on the market that we should keep an eye on?
Dan DuPree
We’ve had some that have been on and taken back off again but I don’t think there’s much on right now.
Operator
Your next question is a follow-up from the line of Jay Habermann – Goldman Sachs
Jay Habermann – Goldman Sachs
With regards to the credit facility you drew another $110 million in the quarter; can you just give us a breakdown of what that’s backing?
Jim Fleming
There were two things on that. One is we continued to fund development projects and the other is because of some timing we ended the quarter with a little over $50 million in cash on hand so that number you see is higher than what really went into funding development projects.
What went into funding development projects was pretty much consistent with what you’d seen in previous couple of quarters.
Jay Habermann – Goldman Sachs
And then along the same lines how do you think about capital for those potential investments, distressed assets in the latter half of the year?
Dan DuPree
If we run the model out in what we consider to be the most likely scenario, and we fully fund all our existing development projects, the pipeline, I think we’ve got somewhere between $250 million and $300 million that we can spend on opportunities and we have a host of partners, financial partners, who are anxious to pursue opportunities with us, many of whom Craig has sort of pre-negotiated a structure with and some of whom we’ve done these deals with before so I don’t think we’d have any problem financing good opportunities and distressed opportunities when we find them.
Jay Habermann – Goldman Sachs
With regard to those investment opportunities I’m just curious, what sort of is the quality of the pipeline that you’re looking at and you mentioned sort of only the best positioned, best located properties are getting the leasing at this point in the cycle, obviously financing has been a major concern as well, but I’m just getting a sense of how are you going to price in the risk, what sort of returns are you going to look for in these opportunities?
Tom Bell
We have a very conservative underwriting process here and we would have to put it through that, or [inaudible] release process with probably extended lease-up as you would expect given these circumstances using our historic cost of capital, not today’s cost of capital etc. etc.
and we’d expect to get a plus nine going in yield and a 12 to 13 unleveraged IRR off those transactions and I have to say in terms of stabilized commercial assets we’ve not seen those types of opportunities yet. In fact we’ve not seen many distress commercial assets come back to the market at all.
Though we are aware of a lot of lending that we done in 2005 and 2006 some of which was done on properties which we sold and we would be surprised if those assets did not come back at the market at some point in time. Most of them we’d be delighted to have back.
Operator
Your final question comes from the line of Unidentified Analyst – Merrill Lynch
Unidentified Analyst – Merrill Lynch
I believe you mentioned that your average office lease contains a 3% rent bump, is that consistent in the retail portfolio as well?
Dan DuPree
It operates a little differently in retail because typically the bumps are every five years particularly on the bigger tenants, but on the smaller tenants it would run between 2% and 3%.
Unidentified Analyst – Merrill Lynch
And the bumps on the larger tenants, what would the average be?
Dan DuPree
Ten to 12% every five years.
Operator
There are no further questions at this time; I’ll turn the call back over to Mr. Bell for closing comments.
Please go ahead sir.
Tom Bell
Well as always we thank you for your support of and interest in Cousins Properties. If you come up with additional questions after the call, don’t hesitate to call any of us or Mark Russell and we’ll be glad to answer them if we can.
We’ll talk to you next quarter. Thanks so much.