Feb 10, 2009
Executives
Tom Bell – Chairman and Chief Executive Officer Jim Fleming – Executive Vice President and Chief Financial Officer Dan DuPree – President and Chief Operating Officer Craig Jones – Executive Vice President and Chief Investment Officer
Analysts
[Sloan Vaughan] – Goldman Sachs Jay Habermann – Goldman Sachs Ian Weissman – Merrill Lynch Christopher Haley – Wachovia Capital Markets David Aubuchon – Robert W. Baird Cedrik Lachance – Green Street Advisors
Operator
Welcome to the Cousins Properties Incorporated fourth quarter 2008 conference. Today’s call is being recorded.
At this time for opening remarks and introductions, I would like to turn the call over to Tom Bell. Please go ahead, sir.
Tom Bell
This is Tom Bell, Chairman and CEO of Cousins Properties. With me today are Dan DuPree our President and Chief Operating Officer, Jim Fleming CFO and Craig Jones our Chief Investment officer.
Welcome to our fourth quarter conference call. At this time, I’ll call on Jim to review the financial results for the quarter.
Jim Fleming
Thanks 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 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 www.cousinsproperties.com.
This quarter we reported FFO of $0.20 per share compared with $0.41 last quarter. I’d like to highlight the factors that contributed to the difference.
You can follow by looking at our supplemental package beginning on page eight. Rental property revenues less rental property operating expenses from our properties increased slightly between the third and fourth quarters.
Our office properties held up well in the fourth quarter, but our retail properties suffered from the affects of the current economic environment. Operations at 191 Peachtree continue to improve as economic occupancy increased.
However, the Wachovia lease expired on December 31, 2008, as we have anticipated. So we expect rental property revenues less rental property operating expenses to decline in the first quarter of 2009 and then increase later in the year as additional tenants take occupancy.
FFO from Terminus 100 increased $627,000 in the fourth quarter due to an adjustment in operating expense accruals. One Georgia Center increased $314,000 between the third and fourth quarter, as a result of increased parking revenues and a true-up of operating expenses.
At our retail properties, the Avenue Webb Gin decreased $380,000 in the fourth quarter as a result of an increase in reserves for accounts receivable. San Jose Market Center decreased $333,000 in the fourth quarter from an increase in reserves for tenant receivables and adjustments to true-up our revenues for common area maintenance expenses passed through to tenants.
The Avenue Forsyth decreased $460,000 in the fourth quarter from an increase in non-recoverable expenses, a decrease in rental revenue from tenants paying percentage rent and an adjustment to straight-line rent on a ground leased outparcel. And Tiffany Springs Market Center increased $276,000 and leases have continued on this newly developed property.
We had no outparcel sales in the fourth quarter versus two that closed in the third quarter, which caused a decrease in FFO from outparcel sales. FFO from track sales decreased $1.2 million because the third quarter contained three joint venture tract sales, while we sold only one CL Realty tract in the fourth quarter.
Other joint ventures decreased $753,000 as a result of a $325,000 impairment charge on a residential project in CL Realty, and higher expenses associated with property taxes and carrying costs at certain residential projects. Multifamily FFO decreased by $851,000 because we closed four units at 10 Terminus in the fourth quarter compared to nine in the third quarter.
In addition, we closed three commercial units at 50 Biscayne in the fourth quarter compared to the third quarter closing of the bulk sale. Development income decreased $13.1 million because we received a $13.5 million fee in the third quarter.
Management fees increased $684,000 primarily as a result of an increase in out-of-pocket expenses incurred and billed to third-party managed properties. And leasing fees increased $1.3 million as a result of leases signed at buildings we manage for third-party owners in Dallas and Atlanta.
General and administrative expenses decreased $249,000 in the fourth quarter as a result of a true-up of our bonus accrual and a reduction in long-term incentive compensation expenses. For the year, our G&A expenses before capitalization decreased by $3.6 million, in large part as a result of a reduction in non-property personnel.
We continue to review our staffing and other discretionary costs in this challenging economic environment and seek to maintain a balance between cost control and maintaining a staff of talented real estate professionals who can allow us to act on opportunities in this environment and position us to take advantage of future opportunities that we expect to find when market conditions turn more favorable. Interest expense increased by $2.1 million in the quarter, primarily as a result of a decrease in capitalized interest because of lower levels of development activity in our residential projects and completion of other development projects.
The impairment loss of $2.1 million represents the write-down of our 10 Terminus condominium project of fair value. In the fourth quarter, we finished construction of 10 Terminus and had all units substantially complete and available for sale.
Accounting rules for projects held for sale stipulate that they be recorded at their fair value. While we believe this project will be profitable, in fact, recorded net gains on units sold in the third and fourth quarters, we expect to hold the units longer than originally planned because of current market conditions.
Because the discounted cash flows over the expected holding period are less than our carrying value, we will be required to record an impairment charge. If our original assumptions of pricing and cost prove to be correct, we will recover this impairment charge in profits as we sell future units.
Income tax changed from an expense of $916,000 in the third quarter to a benefit of $4.3 million in the fourth quarter, primarily because our taxable subsidiary, Cousins Real Estate Corporation, had a net profit in the third quarter due to a $13.5 million development fee, but had a net loss in the fourth quarter due to low lot and condominium sales as well as lower interest capitalization. Joint venture FFO was $352,000 higher in the fourth quarter as a result of the commencement of operations of Palisades West and the continued lease up of the recently developed Avenue Murfreesboro.
And finally, preferred stock dividends decreased in the fourth quarter because we repurchased 1.2 million shares, our Series A and B preferred stock, during the quarter. I’d like to bring a few items to your attention in our supplemental package.
First, as I just mentioned, we bought back 1.2 million shares of preferred stock last quarter. This was a very attractive buy with an average yield of over 14%.
Each year this yield on our investment will be a benefit to our FFO. We also considered repurchasing common stock but did not make any purchases last quarter.
Or common stock is selling at very attractive prices and buying it today should be accretive over time. However, any of these purchases would have been made with additional debt and we chose not to take on additional debt in today’s environment.
We will continue to balance these considerations as we go forward. Retail same-property results were down just over 11% between the third and fourth quarters and just over 2% for the year.
As I just noted when commenting on revenue changes at specific retail projects, most of this decrease is a result of conservative reserves on tenant receivables. While we hope we can recover some of these amounts in the future, they are indicative of the difficult economic environment in which we live today.
You may also have noticed that our overall leasing percentage for operating retail properties decreased from 91% last quarter to 84% this quarter, 4% of this drop is because development properties are not included in this calculation and the Avenue Murfreesboro, as well as Phase II of the Avenue Carriage Crossing, transitioned from properties under development last quarter to operating properties this quarter. The remaining 3% drop was because we experienced declines in the Avenue Carriage Crossing, North Point Market Center, the Avenue West Cobb and Los Altos Market Center mainly due to bankruptcies of Circuit city and Linens ‘N Things, which rejected leases at these locations in December.
You can see in our supplemental package that we have about 10% of our office leases expiring in 2009 with another 4% expiring in 2010, while our retail expirations are 3% in ’09 and 2% in ’10. Two thousand nine’s 10% rollover in office is consistent with a 10-year average lease term and it’s generally a very manageable number, but in today’s economic environment it will take more work than usual to re-lease office space.
The larger blocks of this space are in downtown Atlanta at the American Cancer Society building and in the Alpharetta North Point market north of Atlanta. At the American Cancer Society building, we’re working on direct leases with two subtenants, which would take care of 58,000 square feet.
And we’ll need to find another user for the 139,000 square feet of AT&T leased space that expires in September. In Alpharetta, we’re hopeful we’ll be able to renew about half the lease space.
Taking care of these lease expirations is part of our overall leasing goals for 2009. A question came up last night about our fixed charge coverage ratio, which is at the bottom of page seven in our supplemental package.
Fourth quarter number is 1.52 and the question was whether we had a concern under our bank credit facility, which requires a minimum coverage of 1.5. The ratio in our supplemental package is calculated using GAAP numbers and we’ve been publishing this number for as long as I can remember.
The idea is to give an indication of how we’re doing from our published numbers, but the bank calculation is different because our credit agreement provides a number of adjustments to FFO, as well as exclusions from fixed charges. We haven’t finalized our bank compliance calculations, but our preliminary estimate for the fourth quarter is 1.80.
It’s also important to understand that the ratio required under our credit agreement is calculated on a trailing four-quarter basis, and our estimate for the past four quarters is 2.23. As we discussed on the last call, refinancing risk and liquidity are serious concerns for some real estate companies today.
I want to reiterate that in 2009 we have maturities of only $8.6 million consisting of several small loans. In 2010, our two largest loan maturities are from the Avenue Murfreesboro of which our share is $55 million and San Jose Market Center, which is $83 million.
Both of these loans have extension options into 2011, although there are conditions we will need to meet to qualify for the extensions. The only other significant loan repayment obligation we have in 2010 is a $23 million loan on Meridian Mark Plaza, but we believe the cash flows from that property would support a significantly higher loan amount.
At the end of the year, we had approximately $83 million in cash. Since we have construction loans in place for both Murfreesboro and Terminus 200, this cash is sufficient to fully fund all anticipated development costs and capital expenditures through 2009.
We will maintain this cash as long as we feel it's appropriate, given the credit conditions in the overall market. And, of course, while we have cash on hand, our credit facility balance and our interest expense will be somewhat higher, but we feel this is a cost worth incurring to insure our ability to fund all of our obligations.
To mitigate our exposure to floating rate debt, we executed two interest rate swaps during the fourth quarter with a combined notional amount of $150 million. These swaps effectively fixed LIBOR the underlying rate on most of our floating rate debt at an average rate of 2.84% for two years.
I also want to reinforce a comment we made last quarter about our credit facility. Due to the cash we have on hand, we don’t anticipate needing to draw on our facility this year for any existing developments or capital needs so it's available for other opportunities.
None of the financial covenants under the credit facility are tied to our stock price and we're in good shape today with the covenants under this credit facility. All of this puts us in a much better position than many of our competitors as we look ahead to 2009 and beyond.
With that, I'll close my remarks and turn it back over to Tom.
Tom Bell
For those of you who have known me for awhile understand that I'm not exactly the glass is half full sort of a person. For the last couple years we've worked hard to reduce risks and to get our financial arrangements in the best possible shape.
Today, I think everyone would agree we're well below the half full point. So I'm very glad that we were able to sell a significant number of our assets during the boom and restructure our debt and credit facilities in early 2007.
As a result, as Jim says, we're in a much better position than many real estate companies to deal with today's downturn. Our stock price declined considerably towards the end of 2008, along with the rest of the REIT market.
And after recovering a bit, it has now dropped again. Despite our asset sales, special dividends, and healthy balance sheet, our stock price has fallen off pretty much in tandem with the rest of the REIT stock.
And I must say I'm disappointed the equity markets are not differentiating between real estate companies at this point in the cycle. Given the unbelievable market turmoil we experienced in 2008, it turned out to be a decent year for Cousins.
We were relatively successful in both leasing the space for our current properties and reducing our expenses, and our land and asset sales were right on plan. While we didn't move forward with any significant new developments or distressed acquisitions in 2008, I think that's turned out to be a good decision as prices continue to fall.
And while we continue to look for either distressed acquisition or development opportunities, so far we just haven’t seen new projects on either front where we felt the risk adjusted reward was worth pursuing. I look forward to a time when we can once again to talk about value creation, but it's hard to say when we'll get there.
Our key focus in 2009 is largely the same as in 2008, continue to lease the remaining space at our development projects, keep occupancy high as possible in our existing properties, keep our overhead as low as possible while retaining key talent, conserve capital to be able to take advantage of opportunities when they are presented, and continue to look for distressed acquisitions and potential development opportunities that meet our high standards. This morning I'd like to talk a bit about each of these objectives.
We spent a lot of time these days at Cousins focused on leasing. In our operating office properties, we've done quite well ending the year at 97% lease verses 92% at the end of last year.
We had a number of transactions that helped us accomplish this, including our sale of 3100 Wild Wood and some good leasing victories at North Point. Since the office leasing business is mostly a local business, our long established relationships and high quality assets continue to help us do better than most in these difficult markets.
As the recession continues and affects more and more businesses, we could see some fall out from our office tenants but so far things are holding up quite well. On the office development front, our most important leasing effort, of course, is Terminus 200.
Our office space at Terminus 100 is fully leased and we have some great amenities at Terminus. I think now Terminus is generally thought to be the top office location in Buckhead.
But with the economy where it is and with all the buildings coming on line at Buckhead over the next 12 months, most tenants have been playing the waiting game. It's been very difficult to get tenants to commit.
We're currently working with several prospects at Terminus 200 and our goal is to have the building 50% leased by the end of 2009. All I can really say at this point is that we'll continue to do what we do at Cousins, relying on our strong leasing team and relationships leased to building.
We do hope to have some leases to report the first half of the year, and we'll let you know where we stand on our next call. Our 191 Peachtree building continues to be a success with leasing now up to 74% after the long anticipated Wachovia termination at the end of last year.
Our momentum here remains quite strong because we're able to offer one of the best buildings in the market at a very compelling price. Our lobby renovations are now complete with El Molino, our high end Italian restaurant, open along with 191 Bistro and our coffee bar, and the health club is on track to begin operations mid-year.
And even in today's market we continue to see a good stream of prospects for 191. And we signed a new half-floor lease with a law firm in December and we're working with several prospects ranging from the 7 to 50,000 square foot level.
Retail leasing on the other hand is going to be more challenging in ‘09. As we all know, retailers had a difficult year last year and their prospects, at least in the first half of ’09, don’t look much better.
In the fourth quarter, we had a decline in our leased operating portfolio basically because of Circuit City and Linens ‘N Things bankruptcies. And suffice it to say, we will have our work cut out for us in holding on to an increasing occupancy in 2009.
We continue to monitor the health of our entire retail portfolio on a regular basis paying close attention to and anticipating and mitigating tenancy issues wherever possible. Despite all the retail turbulence in 2008, we successfully signed 304,000 square feet of new and renewed retail leases, and with a great deal of focus and effort, we hope to be able to do this again in 2009.
The initial phase of Avenue Forsyth finished the year at 56% leased and 60% committed, and we were able to sign 76,000 square feet of leases in 2008 at the Avenue Forsyth, but unfortunately we also took a step back late in year in losing a 20,000 square foot Circuit City store at the end of December. We're currently in discussions with several possible replacement users, as the size, layout and location of this space is very attractive.
We're also seeing some demand for our second story office space at Forsyth and we signed an 8,500 square foot lease in December. The overall Tiffany Springs project finished the year at 89% leased.
During 2008, we signed 42,000 square feet of new leases on this project, and in the fourth quarter we executed four smaller leases totaling 13,000 square feet and received a new lease commitment for 3000 feet. We have about 66,000 square feet left to lease at Tiffany Springs.
At the Avenue Murfreesboro, we had 75% leased and 77% committed on the phases built to date, and we have about a 188,000 square feet left to lease. We don’t see a lot of opportunity in 2009 in our residential markets.
We sold 199 lots in 2008, and there is significant overhang in our markets from completed lots, and local home builders are having a hard time getting bank financing. So I don’t expect to see much pick up this year.
On the condominium side, we have only one project this year and that's 10 Terminus Place at Buckhead. In today's financing market it’s quite difficult for buyers to sell their existing homes and to get financing on new ones.
So our sales have been slow closing just 13 units since our completion in August 2008. However, 10 Terminus has access to all the Terminus amenities and our value proposition is substantially better than our competition's.
So to date none of our units have been sold at a discounted price and some are even sold above our pro forma. We still have 16 units under contract and we expect to close many of these as soon as buyers secure financing or sell their existing homes.
The key issues for us are at 10 Terminus are the buyers fear of further price reductions in this difficult residential market and, of course, unit financing. We're working on two programs here at Cousins to deal with these issues.
Jim talked about our overhead and I just want to say that this is something we're very aware of and we're working to reduce it wherever possible. We've cut our non-property headcount by about 25% from the end of 2007 and we've also made significant reductions in our discretionary spending.
In order for us to succeed in the long term it's important that we remain strong – maintain our strong team to the degree possible. So far, even with the cuts we've made we've been able to keep a very talented core group of people.
We have increased our fee-based activities for third parties to help keep our people fully occupied and produce additional revenues. Some of our most recent fee-based projects include the Center for Civil and Human Rights in Atlanta and the Green Line, a major development plan sponsored by Central Atlanta Progress.
In November our board decided to reduce our common dividend from $1.48 a year to $1.00. Given the current credit environment and today's premium on liquidity, the board felt it would be wise to have more cash available, both to reduce leverage and to pursue opportunities when they become available.
It did not reduce the dividend below $1.00 because it wanted to make sure that our dividend fully covers our taxable income. Later this month we'll have another board meeting and I'm sure the directors will take up the issue of a possible partial stock dividend which several REITs have already announced, including two of the largest.
On the opportunity side I'm sorry to say it's the same old story and I'm starting to feel a bit like a broken record. Debt markets remain constipated with the result of very little transaction activity.
And while I still believe the severe downturn will lead to some unprecedented buying opportunities at some point for companies like ours who have cash and access to capital, unfortunately to date we just haven't seen any distressed acquisition opportunities that meet our standards. We've been focusing on this throughout 2008 and we have two of our very best, Craig Jones, our Chief Investment Officer and David Nelson working in this area almost full time.
We're going to keep looking and at some point I'm confident we'll begin to see some very good opportunities. I want to just conclude by recapping were we are.
As Jim pointed out we have more than enough cash on hand to fund all of our expected needs in 2009 and we have about $200 million available on our credit facility to use for opportunities, as well as good access to additional joint venture funding for acquisition. Our debt maturities over the next couple years are manageable and we continue to have good relationships with our banks.
So we'll keep doing what we've been doing, focusing on our leasing and overhead efforts where they will have the greatest short-term impact for our company and keeping an opportunistic eye on acquisitions and development opportunities that will provide the best long-term value creation for our shareholders. With that I'll turn it back and ask for any questions.
Operator
Thank you sir. We will now begin the question-and-answer session.
(Operator Instructions). Your first question comes from [Sloan Vaughan] – Goldman Sachs.
[Sloan Vaughan] – Goldman Sachs
I'm here with Jay as well. Just a quick question on the retail reserves taken in the quarter, are those specific to particular retailers?
And then more broadly speaking can you give us a sense of what your rent expectations are for what the mark-to-market could on if those spaces become available again?
Jim Fleming
They were on specific tenants. They were done property by property.
They tended more to be smaller tenants, more local tenants, and we feel that we've been conservative about those but we generally where we had tenants that hadn't paid us we reserved those. The second part really was, had to do with where we're going to come out on leasing.
Tom Bell
Sloan, the question is how we expect vacant property leases to roll down or releasing to roll down?
[Sloan Vaughan] – Goldman Sachs
Yes.
Tom Bell
You know, it depends very much on the tenant and the center, but if you wanted to make sort of a generic across the board prediction I would say in 2009 5% to 10% rolled out.
[Sloan Vaughan] – Goldman Sachs
And then if you could answer a similar question on the office portfolio and then specifically for the AT&T lease?
Tom Bell
Well once again, office portfolio depends very much on the asset and the market. You know most of our leases, office leases are long-term ten years generally include 3% bumps so by the end of the lease term the leases are quite high.
On the AT&T lease specifically you can expect some roll down there and once again it's very asset-specific but I would say if you had a 10-year term on a newer building with 3% bumps you'd have to expect to see roll downs in the 10% range. On AT&T specifically, however, that space was leased at a very low rate.
You'll remember we bought that building basically out of a foreclosure at a very attractive price and it had a 300,000 square foot lease with AT&T prior to closing. I think we actually made the lease, so that one has a good chance of rolling up.
Jay Habermann – Goldman Sachs
It's Jay. I had a question on the retail.
You mentioned the small shop space. Can you give us a sense of the types of retailers?
I mean is this local retailers? Are these mom-and-pops type locations?
I mean what are you seeing in terms of trend? Is there any specific category that's being affected more so than another?
And I guess I'm asking in the context of Q4 retail sales, as we all know, were so abysmal and sort of the implications for the latter part of the year.
Tom Bell
Yes, I think that we, for instance, signed – or had three new commitments in the last week for Avenue Murfreesboro so there are still tenants committing, though it's definitely tougher. One of the things we're seeing that's interesting, and I have to admit we've been working at it, is moving top local tenants who generally do perceive themselves as an Avenue customer into Avenues.
We're having some success there and I think that is probably going to work out pretty well. The fashion retailers I think are having the most difficulty and you don't see hardly any expansion on the part of fashion retailers.
Jay Habermann – Goldman Sachs
Now, are some of the losses here due to the losses of big boxes or is this simply small tenant fallout?
Tom Bell
The losses, our losses are almost exclusively Circuit City and Linens 'n Things.
Jay Habermann – Goldman Sachs
Okay, and just switching gears for a moment, can you talk about your land inventory? I mean it looks like the pace you're going is possibly a 10-year inventory with $120 million at this point.
I mean can you give us a sense of just valuation there and what you think? How that could be tested going forward?
Tom Bell
Well, the land inventory breaks into several different pieces. We have land that we hold for development, for commercial development and if I wanted – if I had to guess, and sometimes we title that and sell it to other developers and sometimes we develop it ourselves.
So that's probably a three to five-year cycle I would say. Other land is in developed or partially developed residential properties and I think we have 23 currently in partnership mostly with our Four Star partner, and those are dependent on when the markets come back and you know, I would say that's probably if the markets come back in '10 as we expect they will, that's probably a three or four-year process to sell those lots out.
And we take a close look at those every quarter, obviously, to see if we need to take impairment and thus far with the one exception Jim discussed as to our single family residential business, we've only had that one situation because our basis is pretty good in most of those properties. And then the third category is big tracts of land, some in Paulding County, about 6,000 acres plus in Paulding County that we own with Four Star and that land by and large will get sold off in big chunks.
It's not going to be developed by us. Some of it will but a large portion of it will not.
When that comes back I suspect that land will sell pretty quickly and as you know we have a very low basis in that land and the last time we sold some of it we sold it in the $10,000 to $12,000 an acre range. So we're not too worried about that.
So it sort of depends. I think if you wanted to put an aggregate number on it probably depending on the property type, three to eight years and thus far we don't see any impairment in the vast majority of it, and in fact think there are significant gains in most of it.
Jay Habermann – Goldman Sachs
That's helpful and then back to Jim for just a second, the fee income you'd referenced? I mean obviously the third quarter you had the big one-time item.
Could you give us sense of, as you look at the level for 2009, I mean clearly the $48 million number is probably not sustainable. Is even the prior year number, $36 million, realizable?
Jim Fleming
I think what you have to do there, Jay, is to take away the $13.5 million fee that we got in the third quarter. You’d also need to take away the commission that we paid that was $3.4 million in the third quarter to a more normalized level.
It’s hard to say where we are going with the business, but I think really ‘08 was pretty consistent with ‘07 if you take those out.
Tom Bell
Our third-party business is looking pretty good, actually, and it continues to grow, it’s a little bumpy because of leasing. A couple of big leases you get a $2 or $3 million hit.
What we are doing is we’re seeing a lot more opportunities to use our development talent in fee-based situations where you have financial institutions or organizations who need help in finishing up projects or trying to figure out what to do with projects that they either have back or they think they are going to get And so we are pursuing that pretty hard trying to keep our development team busy and paid for while we go through this downturn.
Jay Habermann – Goldman Sachs
Tom, just sticking with you, you mentioned obviously not seeing the opportunities yet, give us a sense of what sort of return you need today. Is it mid to upper teens?
Where do you want to deploy capital in this market?
Tom Bell
I think on an unleveraged basis, if we could see something that’s got a 13 percent unleveraged IRR we would probably take a hard look at it. Of course, we would have to take a really hard look at risks, so the underwriting would be very strict and on a leverage basis high teens low twenties.
Operator
Our next question is from the line of Ian Weissman – Merrill Lynch
Ian Weissman – Merrill Lynch
One or two questions, Tom, you’ve talked in the past about the challenges of dealing with these co-tenancy clauses in your retail portfolio. I’m not even sure there is a way to quantify it, but in this environment I have to imagine that’s even a bigger challenge.
How much of this occupancy issue is related to that co-tenancy situation?
Tom Bell
Well, none of the occupancy issue is related to co-tenancy, but co-tenancy is an issue for all retail landlords because over the last, I’d say five years, it’s become basically a part of every lease that you sign in a mall or a life-style center. So we are very proactive on our co-tenancy issues.
We schedule them, we stay out in front of them, we negotiate where required, but it’s important to remember, at least for us, the vast majority of co-tenancies basically have a one-year window. In other words, if you follow the low co-tenancy requirements the tenant has the right to do something.
In some cases it’s reduce their rent and in some case put it’s on percentage rent. But that opportunity lasts for a year.
At the end of the year, they have to make a decision. We call it fish or cut bait, you either have to go back to your original lease or leave the center.
So if the tenant is performing well, in other words, if their occupancy costs are reasonable as a percentage of their total sales per foot, then they are not going to go anywhere and they usually revert back to their original lease. If the tenant is doing poorly, then you try to get out in front of that process so that you have some good prospects for re-leasing that space because you can assume that their probably not going to stick around when they have to make that decision.
Or, conversely, if you think the retailer has a good shot in the future their problems are temporary then you might renegotiate something for another year. I think some people have the mistaken impression that this is forever.
Fall below co-tenancies and the tenant has the right to leave the center immediately or the tenant has the right to reduce their rent forever and that’s generally, at least in our case, not evident in our leases.
Ian Weissman – Merrill Lynch
So they have a year to make a decision, so you’ve lost a number of boxes, large boxes, in the last quarter or so, Circuit City, Linens ‘N Things, and what have you. The tenants that are in those centers, potentially within the year could, I don’t know how the leases are written or if those co-tenancies in those specific centers, but say they are, you might actually see occupancy dip because they’re going to move out towards year-end.
They have a year to do it right?
Tom Bell
Yes. They have a year to make the decision, but those particular, Linens ‘N Things that had some co-tenancies associated with it, but most co-tenancies are you have to have five of the eight or three of the six in your center.
One retailer leaving does not generally create a waterfall of co-tenancies issues. It would take more than that.
Then Circuit City is generally not on most lists.
Ian Weissman – Merrill Lynch
Looking into sort of, your crystal ball, if you had to look out year-end ‘09 where do you think retail occupancy ends the year?
Tom Bell
I don’t have a crystal ball anymore but I’d say somewhere between 80% to 85% leased.
Ian Weissman – Merrill Lynch
So we could lose another couple hundred basis points and maybe win some battles and be a little bit higher from here.
Tom Bell
Yes. I think if we ended the year where we started the year, we would feel pretty good about our activities for the year.
Ian Weissman – Merrill Lynch
Finally, one question on Terminus 200, and you’ve been marketing the space for a while now, I know there’s a lot of product out there. Are you or your peers who are building new product capitulated on space rent, if so, how much?
Tom Bell
Can’t speak for our peers, but we have not. I would guess most of the guys are trying to hold their space rent.
You know we’ve seen the TI allowances go up and free rent go up a bit, but until somebody actually signs a lease so that we can sort of get a picture of what the environment looks like, at least in that building, it’s going to be hard to say. I can say that with the three leases that we are in deepest discussions with so far, space rates have stayed about the same and TI has moved up $10 to $15 a foot and free rent has been extended.
Ian Weissman – Merrill Lynch
By how much?
Tom Bell
It’s not the same in every case, but I’d say 30% to 40%.
Ian Weissman – Merrill Lynch
Just finally, what type of tenants are sniffing around for space and are we looking at people looking for 5,000 square foot blocks or are there much larger users out there?
Tom Bell
These are 50 to 100,000.
Ian Weissman – Merrill Lynch
In what industries?
Tom Bell
Technology, law, consulting
Operator
Next question is from the line of Christopher Haley – Wachovia Capital Markets
Christopher Haley – Wachovia Capital Markets
On the reserving amount reserving for retailers, did you offer an amount?
Jim Fleming
We went through it property by property so I think you can tell it. You can also look at it on a property by property basis in our NOI and our supplemental.
So I would be glad to walk you back through it if you want to after the call, but I think we went through it item by item for the different properties.
Christopher Haley – Wachovia Capital Markets
When we think about the forward quarterly run rate off of the assets where reserves were taken or where occupancy was impacted due to bankruptcy, which typically occurred in December, is it fair to say that the run rates on these assets, the retailing assets will be equal or lower in the first quarter?
Jim Fleming
There’s a combination of two things, Chris. One of them will be repeated and the other one will not.
The one that will be repeated is we do have reserves in there for Circuit City and Linens ‘N Things. So that as we go forward, there is one Circuit City that will continue through the first quarter, the other two have been terminated and the Linens ‘N Things are gone.
So, yes, that will continue. For the smaller tenants, wherever smaller tenants have not paid us rent, we reserve the rent and so we are hopeful that we’ll be able to recoup some of that and collect rent on that space so, if things work out the way we hope, that would not repeat and would in fact, turn in the other direction.
So, there’s two things working against each other, Chris, and I don’t want to get into the issue of predicting what our revenues are going to be next quarter. Those are really the two factors to keep in mind.
Tom Bell
Chris, it’s Tom, I probably should have said this earlier. There is a lot of focus on retail, obviously.
Because all of you know that retailers are having a really hard time, but it’s important to remember that about 25% of our NOI comes from retail. So if we lost half the tenants, we’re talking about 12.5%.
So I don’t want people to be overly concerned about retail. Thus far by being aggressive and preemptive and paying attention, we’ve been able to significantly improve our retail situation in terms of helping tenants stay in the centers, in business and helping them have a successful business in our centers, that’s what we’ll continue to do.
Christopher Haley – Wachovia Capital Markets
I would agree your office NOI is about 2.5 times your retail NOI, however, obviously we can focus on the cautionary signs, which occurred in the quarter. So just want to understand what type of run rate we’re looking at into the early part of 2009 knowing that you do not provide guidance.
Jim Fleming
Well one thing I will say Chris on that is we talked in our last call about Circuit city and Linens ‘N Things and I think if you refer back to that that will give you a little bit of help. We said in the last call that we had four Linen ‘N Things leases, those are now gone, and that our total exposure to Linens ‘N Things was $978,000 on an annual basis for both base rent and reimbursements.
And then Circuit City we had three stores and the total exposure to Circuit City was $606,000.
Christopher Haley – Wachovia Capital Markets
The reserving, though, is a new piece of information, which few have been able to offer specific details on. We should see that in your balance sheet, correct, though on the left hand side in terms of receivables and delinquencies.
Is that correct? Will that be detailed in your 10-K?
Jim Fleming
Chris I don’t know that it’s large enough to be material. But clearly in the MD&A section of the 10-K we’ll talk about retail trends and what we’re seeing and what’s going on with our tenants.
Christopher Haley – Wachovia Capital Markets
Bigger picture question, Tom, recognizing that you don’t have your crystal ball anymore, I’ll ask anyway. We have various ideas and proposals regarding federal funding and intervention on the debt markets, when you think of trying to invest capital at an attractive risk adjuster rate of return the hardest part of that is really looking at the risk.
Could you offer your view as to what positive short-term or long-term you view or negative you view of intervention on the real estate debt markets?
Tom Bell
Well I think the markets today, Chris, remain basically frozen for several reasons. The most obvious is that most financial institutions have too much real estate on their books and too much bad real estate.
But another big reason, in my opinion, is that nobody knows what the government is going to do so nobody is willing to do anything until they get some clear signals from the government. And since the signals have been changing about every 30 days, it’s hard for them to really commit to anything.
We’ve had two or three projects that Craig and his folks have been looking at that we had some interest in, it looked like they were moving along, but then the government would come along with TARP or talk about some future program they might do and then the financial institution would withdraw and say well wait a minute I want to see what this is going to look like. So I had breakfast this morning with a major home builder who told me that his sales, which have been actually improving, had suddenly stopped because nobody wants to buy anything until they see whether they are going to get a $15,000 tax credit or not.
So there are unintended consequences in the government’s actions, and I think that caused the markets to stay frozen pretty tight. Personally, having no benefit of crystal ball, I think in the second half of the year most of this gets resolved that we will see a debt market.
It’s not going to be very pretty but we will see a debt market working within the real estate world and we will begin to see transactions. So I would guess those transactions will look pretty ugly, and that’s sort of what we’re thinking here.
Second half of ’10 when some of this debt starts to rollover, some of the debt that was actually held in financial institutions that never got into the CMBS pipe starts to rollover we’ll see some opportunities. The CMBS debt, our view on that is it's going to be very, very difficult.
In fact, we don’t really know how those credits are going to get resolved one way or the other. And we think that’s possibly going to slow the process down a bit.
Christopher Haley – Wachovia Capital Markets
Last question on Terminus, you’re looking at a 50% lease rate by year-end 2009, is that correct?
Tom Bell
That’s correct.
Christopher Haley – Wachovia Capital Markets
I understand there have been some leases or leased 3344 is moving up your leased rate, I believe they’re doing well, that’s obviously been a project that’s been in the market for a while. We understand that there were several reasonable sized tenants that area marketing in the 50, 60,000 square foot range, and you mentioned three.
I’m assuming they’re all playing the assets off of each other. What do you think has to happen to get these folks kind of off their chair?
Tom Bell
The ones that are going to make a decision are the ones that have to move. I mean two of these three that we’re talking about have an immediate issue.
They have to make a decision pretty soon one way or the other because they have to move out of the space that they’re in. The third one has a little more time, but I mean I think that’s basically what it is.
You’ll see leases getting made when tenants have to move and there are a couple of other big tenants out there, was is Zurich was that the name of the Munich Ray, I think, is close to signing a lease somewhere, not with us because they have a situation they have to get out of. Marsh is now back into the market, I assume Marsh could probably stay where they are if they wanted to, but I think that is what you’re going to see first.
Tenants in the Buckhead market, or in any of the greater Atlanta markets, who have a situation where they have to move by x date and they’re looking at Buckhead. And I guess one of the interesting things going on we have tenants looking at Buckhead now who had not normally looked at Buckhead because they think it’s going to provide them with the more attractive value.
So once we see some of that and we see the market sort of get set as to pricing then I think we’ll see some more activity.
Operator
Our next question is from Cedrik Lachance – Green Street Advisors.
Cedrik Lachance – Green Street Advisors
In regards to the write-down at 10 Terminus, can you walk us through your thought process and assumptions there?
Jim Fleming
Hey Cedrik this is Jim. The issue there, as it was with the one single-family project where we had a write-down, was that we had everything complete.
So we had all the units substantially complete and available for sale. And when we got to that point we were required to mark them to fair value.
We still believe, as I said a few minutes ago, we still believe this will be a profitable project, but when you come up with a fair value in today’s market, you’ve got to apply some discounting of the cash flows and we assume that it will take us longer than we originally anticipated to sell the units. The accounting rules are fairly arcane, and I won’t get into them.
I think the more logical way to think about this is that you take the cash flows that you’re expecting from sale of the units and you discount them to a present value at an appropriate discount rate. You do that we had a small impairment.
So it was as we said $2.1 million, we have about a $70 million number on our books at this point.
Cedrik Lachance – Green Street Advisors
What kind of discount rate did you have to use?
Jim Fleming
Well now you’re going to force me to get into the accounting rules. Actually, the way that you do this is you go through a number of different scenarios.
You take a base case and you construct some other scenarios to take the risk out of the equation. And what we did there was to assume extended periods and even though we don’t anticipate it, wee assumed some discounting on the pricing.
And when we did that you, then you discount that at the risk free rate. That’s the way the accounting rules work.
So it’s a complicated analysis, I would say it's equivalent based on our pro forma is probably low teens in terms of the discount rate.
Cedrik Lachance – Green Street Advisors
In regards to your decision to buyback some of your preferred, can you walk us through how you evaluated this discount allocation versus buying back your common versus retirement debt or any other options that are available to you.
Jim Fleming
Sure. It’s an art not a science.
We’re not in the position that some REITS are where we have public debt out there that could be bought at a discount, so really retiring debt would be negotiating with lenders and that really isn’t the same kind of opportunity you’d find with some REITS that have got public debt. We also don’t have any convertible securities out there to go by, so really for us the choices are common or preferred.
In either case, you’ve got to go use debt, which would come from the line of credit, typically, and we will ultimately have to repay in 2010. It’s a very low interest rate on the debt, but we will have to repay that and redo a credit facility by 2012.
So you’ve got a somewhat short-term issue. You will have positive arbitrage because you can borrow money on a credit facility at a low rate, but you are having to use your credit facility borrowings and take on debt.
So it’s a balancing act. For the common, it looks to us like a great value.
It should be accretive over a long period of time. The nice thing about the preferred is that it’s accretive in the short-term, as well as the long-term, and it helps our fixed charge coverage ratio under our line of credit to us because it counts as equity and not debt for that purpose.
So we did a modest amount and we will keep balancing these issues as we go forward.
Cedrik Lachance – Green Street Advisor
Obviously [inaudible] what you perceive to be the value of your common versus where it’s trading at. Is there a point at which, though, it could be interesting for you to actually issue equity in order to take advantage of future opportunities you might see?
And what kind of prices do you think it would be reasonable to do so?
Tom Bell
I think the answer is, yes. It is something that we think about and I wouldn’t want to comment on the pricing issue.
Cedrik Lachance – Green Street Advisors
Just one final question, you seem to have bought some more residential land or residential tracts in suburban Atlanta. Can you give me or can you explain the thought process behind that acquisition?
Tom Bell
We bought the land at about 50% of its value and we had a builder, who’s still building and selling homes quite successful, who wants to build on it so that’s what we did. And we’ve sold the first two and basically the plan is he builds two and we keep two out there in front of him at all times and we’ll work through it over the next 18 months or so.
Cedrik Lachance – Green Street Advisors
Where was it at in terms of infrastructure at this point?
Tom Bell
It’s completed.
Operator
(Operator Instructions) Your next question comes from David Aubuchon – Robert W. Baird.
David Aubuchon – Robert W. Baird
Just one quick question, I’m assuming you looked at debt in terms of your investment alternatives can you just describe your thoughts behind that?
Jim Fleming
Dave, we had a little trouble hearing you, but I think the question was have we looked at debt as an investment for us and describe our thought process, is that right?
David Aubuchon – Robert W. Baird
Yes.
Jim Fleming
We have looked at a couple debt issuances. Most specifically on buildings that we used to own, but we haven’t sent out anything yet that we felt fell within our risk reward parameters.
Operator
(Operator Instructions) There are no further questions. I would like to turn the call over to Mr.
Bell for any closing remarks.
Tom Bell
Well, thank you everybody for joining us once again. As always, if you have any other questions feel free to call Jim or me or any of us and we’ll answer them to the best of our ability and we’ll see you next quarter.
Thanks for participating.
Operator
Ladies and gentlemen, this concludes the Cousins Properties Incorporated fourth quarter 2008 conference call. Thank you for your participation.
You may now disconnect.