Cousins Properties Incorporated (CUZ) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Cousins Properties Incorporated First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today Thursday, May 10, 2012. I would now like to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead sir.

Thank you. Certain matters the company will be discussing today are forward-looking statements within the meaning of Federal Securities Laws. For example, the company may provide estimates about expected operating income from properties, as well as certain categories of expenses along with expectations regarding development, acquisition and disposition opportunities. Such forward-looking statements are subject to uncertainties and risk, and actual results may differ materially from these statements. Please refer to the company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2011 for additional information regarding certain risk and uncertainties. Also, certain items the company may refer to today are considered non-GAAP financial measures within the meaning of Regulation G, as promulgated by the SEC. For these items, the comparable GAAP measures and related reconciliations may be found through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of its website at www.cousinsproperties.com. I'll now turn the call over to Larry Gellerstedt. Larry?

Good morning, everyone. This was another solid quarter highlighted by strong operating results and continued progress towards our long-term strategic plan. Cousins' strategy is threefold and you should expect to hear us often on this: simple platform, trophy assets and opportunistic investments. Our portfolio will be increasingly comprised of Class A office and retail assets that are well-placed within high growth Sun Belt markets where our expertise and long-term relationships are competitive advantages. Further playing to our strength, we will use this platform to seek additional returns through opportunistic investments. We are measuring our success across 3 categories: leasing, asset sales and new investments. To quickly sum up the first quarter, leasing was decent, asset sales exceeded expectations, and new investment opportunities were fairly scarce. However, I would note that we have a significant development pipeline in place and the volume of acquisition opportunities has increased a good bit in April and May. I'll provide some additional color on each of these 3 areas before passing it to Gregg for an overview of the financials. I'll start with leasing. On the office side there was nothing earth shattering about the quarter, but the portfolio held study at 90% on a same property basis. Our 3 key assets with remaining vacancies are 191 Peachtree Tower, American Cancer Society Center and Promenade and we feel very good about our prospects at all 3 buildings. In fact, current activity at both 191 and American Cancer Society is the strongest it has been in several quarters and we expect to have some announcements during the second quarter. As a side note at American Cancer Society Center, in an effort to drive new momentum and take advantage of existing infrastructure, we recently launched an extensive marketing campaign targeting data center tenants. This is still in the very early stages and it's already generated some solid prospects. Approximately 30% of the building is already occupied by data center tenants so this isn't a new use, it's simply an expanded marketing effort. As for Promenade, activity remains quite brisk. Just a few weeks ago we announced 6 signed leases totaling 126,000 square feet. This included a new lease with Norfolk Southern for 37,000 feet and a long-term renewal with PBS designed for 74,000 feet. The building is now 72% leased, up from 58% at the time of purchase in November of last year. We're in the early process with some large tenants right now focused on the Midtown market. One quick note that may explain some of the momentum we're seeing in Atlanta. The Bureau of Labor Statistics recently revised their employment numbers for Atlanta, the new data shows the Metro's job base didn't actually lose 8,000 jobs in 2011 as it had previously reported but actually expanded by 64,000 jobs for the year. Not only has growth been taking place in Atlanta, but Atlanta was ranked second in the nation for job growth among major metropolitan areas from January 2011 to January 2012. Atlanta still has a long way to go before it feels like a full recovery, but this was certainly a welcome bit of good news. On the retail side, overall the portfolio is in good shape. We did see a slight downtick in the lease percentage from 89% at yearend to 87%. This was driven mainly by the expected loss of a few tenants at Avenue Webb Gin. We are working to fill these vacancies and we feel confident about our ability to get this done in a reasonable timeframe. Overall, sales continued to improve across the portfolio, which bodes well for leasing trends over the long-term. Moving on to asset sales where we showed the most progress for the quarter. As you remember, in February we announced our intention to accelerate the sale of most of our remaining land and residential lots. We believe this will provide significant boost towards executing our strategic plan. The Forestar transaction which we announced in February where they agreed to purchase 18 of our 21 JV residential projects, officially closed in March. This transaction immediately eliminated nearly 40% of our residential holdings, generated $23.5 million of cash to be redeployed into income producing assets, reduced our annual land carry costs by approximately $2 million and eliminated approximately $80 million of required capital commitments associated with the build-out of these projects over the next 10 to 15 years. The remainder of our land disposition initiative is proceeding well as we have several additional holdings under contract. I have been around too many years in this business to let myself get ahead of the game on land contracts, but will also -- we hope to sell over $60 million in land and residential lots by year-end. It's important to note that our sales efforts are not confined to land. We also look to monetize mature operating assets from time-to-time. This includes holdings that fall outside of our core competency as well as core assets where we believe maximum value has been created and its appropriate time to harvest and recycle. Just a few weeks ago, we closed on the sale of Avenue Collierville, our 511,000 square foot lifestyle center located outside of Memphis for $55 million. Given this was one of our stronger retail assets, we were ultimately satisfied with the pricing. 10 Peachtree Place, our fully leased office building in Midtown Atlanta is under contract to an institutional buyer and should close within the next week. Due to the JV structure with Coca-Cola and existing debt on the property, net proceeds to Cousins will be fairly insignificant. Nevertheless, pricing was strong and we'll be pleased to exit this mature fully leased asset at a profit. Galleria 75, our 111,000 square foot, Class B building in the Galleria Market is also under contract and is expected to close in early June. As a general note on pricing, we've been extremely pleased with evaluations across the board. As I mentioned earlier, the key driver to these assets sales is the opportunity to recycle the proceeds into compelling acquisitions and developments. While we haven't executed any acquisitions so far this year, we're working diligently on a targeted list of assets, both marketed and non-marketed in our core markets. On the development side, our existing pipeline is fairly robust and in solid shape. Regarding the current pipeline, Emory Point, our $102 million multiphase, mixed-use development adjacent to Emory University and the Centers for Disease Control in Atlanta is progressing very well and remains on track to open this fall. Leasing interests for the residential portion continues to exceed all expectations. The 80,000 square foot retail portion of the project is also ahead of schedule at nearly 80% committed. We remain encouraged with prospects for Phase II at Emory Point, which is expected to comprise 240 additional apartment units and 40,000 square feet of retail space. If our predevelopment efforts remain on track, we'll be able to commence construction for this $60 million phase in the first half of 2013. Mahan Village, our $25 million, Publix supermarket-anchored development in Tallahassee, Florida is on schedule for a successful fourth quarter opening with nearly 85% of the space already committed. In 2013 we also expect to break ground on Phase I at University Square, our mixed-use development adjacent to the University of North Carolina at Chapel Hill, another outstanding infill opportunity and a high demand supply constrained submarket. The first phase is expected to have a total cost of approximately $70 million to $80 million. Additionally many -- many of you likely saw some news published on a proposed office tower in Austin, Texas. Our team is working on a 390,000 square foot office development opportunity at 3rd and Colorado in downtown Austin. We're still very much in the predevelopment phase, so it's difficult to gauge the likelihood of the project breaking ground at this point. If we are able to meet our preleasing hurdles, we could potentially break ground later this year. We're focusing a good bit on Texas for new opportunities such as this tower as well as potential acquisitions so stay tuned on that front. One additional opportunity of note, Cousins was part of the team selected to be the master developer for the redevelopment of the 488 acre Fort McPherson, a former U.S. Army Base located about mid way between downtown Atlanta and Hartsfield Jackson Airport. The team includes Four City Enterprises and Integral [ph] Group. We'll collectively negotiate a contract with the development authority over the next couple of months. The long-term prospects for this land are enormous. If things go well, this project could provide a 10- to 15-year pipeline of development activity. Coupled this with our multimodal project in downtown Atlanta and we've captured potential opportunities comprising nearly 600 acres of well-located, underutilized land inside the beltline in Atlanta. In closing, we have a comprehensive strategy in place based on simple platform, trophy assets and opportunistic investments. We're focusing on what we do best in successfully exiting our noncore holdings to provide additional capital to do so. We're off to a good start to the year and expect to report continued progress next quarter. Now, I'll pass it to Gregg for an overview of the financials.

Thanks, Larry. Good morning, everyone. In the spirit of our financial performance for the quarter, I'm going to keep my remarks simple, clean and upbeat. FFO for the first quarter was $0.13 per share, which is up from $0.08 last year. Earnings were driven by solid internal growth with same property NOI up 5.4% over last year and aggressive cost control. G&A was down 11% from last year. There are 2 other items on the income statement I'd like to point out. The first is contained within Other income, where we received a $1 million cash settlement during the quarter on a $2.2 million note we had with a previous partner that had been written down to 0 in 2010. The second is a $12 million impairment we took on the Avenue Collierville sale during the quarter. I'll talk about the economics of this deal in just a few minutes. I want to also point out the progress we continue to make in our balance sheet during the quarter, particularly the improvement we've made with our fixed charge coverage ratio, which is moved up to 1.93x this quarter from 1.76x in the same period last year. In part, this improvement has being driven by our sale of non-core land holdings. The number of residential lots we have in the books is down over 80% from this time last year. While the number of acres of commercial and residential land is down 17% in total, land and lots now represent less than 5% of our gross book value. With that quick introduction, I'd like to provide some details on several important transactions which we completed during the quarter. I'll start with our new unsecured credit facility. It was a well executed transaction that lowers our [indiscernible] interest spread by 65 basis points and extends the maturity out to 2016. We also placed a non-recourse fixed rate mortgage on 191 Peachtree, our headquarters office tower here in Atlanta. This is a $100 million note with a 3.35% interest rate that matures in late 2018. In addition, we are in the process of completing an early refinance of our mortgage at Emory University Midtown Hospital office tower that matures in 2013. We anticipate completing a rate block on this note in the near term, tying up another attractively priced piece of fixed rate debt on an asset we intend to hold long-term. Finally, subsequent to quarter end, the mortgages for 2 of our 4 North Point office properties in North Atlanta matured and we elected not to refinance. This now leaves the entire 4 building complex unencumbered and ready for potential capital recycling. Earlier in the call, Larry laid out the property transactions we completed during the quarter including our portfolio sale to Forestar, 10 Peachtree Place, Gallery 75 and The Avenue Collierville. I thought it might be helpful to provide a few more details on 2 of these transactions, 10 Peachtree and Collierville. At 10 Peachtree, we recently signed a lease extension with AGL Resources, the lead tenant, to essentially lease the entire building through 2026. This was a terrific outcome and prompted us to move forward with plans to harvest the value that had been created. As you can imagine, the pool of potential buyers for this Class A midtown Atlanta, 100% leased to a credit tenant for 14 years was a feat [ph]. The expected sales price generated stabilized cap rate consistent with other recent comparable sales in the bulkhead [ph] in midtown sub-markets of Atlanta. We expect our net proceeds to be approximately $5 million after debt repayment and accrued returns. We will provide more details on this transaction after the closing actually occurs. I also wanted to provide some specifics on the sale of the Avenue Collierville, our lifestyle retail center in Memphis that is already closed. This property was originally developed by us in 2005, stabilized in 2006, and since it struggled a bit during the recent economic cycle and the cash flows reflect this. Despite this performance as with 10 Peachtree Place, the buyer pool was deep and the bidding was very healthy with several potential buyers all bidding right around the eventual sales price. Using the 2011 GAAP and align numbers we provide in the supplement, this sales price reflects an 8.02% cap rate. However, as you know, these assets trigger forward 12 month cash basis, and using our current budget for this period, a $55 million sales price equates to a 7.36% of cap rate. With that, I would like to provide an update of our guidance for 2012. Before I start, I want to remind everyone that we only provide data for specific property assets where historical performance may not exist or may not be a good guidepost for future performance. We also provide guidance on fee income as well as G&A expenses. The only change we have today to the guidance I provided on our previous conference call is a positive change. If you remember, we said that Promenade which started the year generating about $1.5 million in quarterly NOI increasing to $2 million by year-end as we leased it up. It actually produced a little over $2 million in the first quarter alone. Although the leasing of Promenade year-to-date has exceeded expectations, most of this $500,000 feat was the result of some unforeseen expense savings in parking income. For modeling purposes, I would still recommend using our prior guidance for the balance of the year. Other than that I'm happy to report everything else continues to come in right on plan and we've got no other changes to guidance. With that quick summary, let me turn the call back over to the operator for your questions.

[Operator Instructions] Our first question is from the line of John Guinee with Stifel.

Just a couple of house cleaning, on Mahan Village in Tallahassee, were you already booking on a current basis, it's one of these look back deals, you were probably able to book a fairly high return on invested capital?

John, it's Gregg. Mahan Village is a development property, so we're not booking any income at this time.

Okay. So your preferred return is not being realized at all right now?

The only thing that's running through there is, running through the balance sheet in terms of CST.

Okay. And then on Page 21 of the sup, you basically have all the lots of Callaway Gardens and Blalock Lakes were sold to a homebuilding venture which is a company, it's a joint venture partner et cetera, et cetera. Is this a new structure or the same structure and can you expand on what's going on in these 2 particular second home big developments?

There's no new structures, John, on Blalock Lakes in terms of what's going on. We have the property listed with a broker, and so it's out to the market for -- and we intend to hopefully get an attractive level of interest and dispose of that property. On Callaway Gardens that one will take a little bit longer. That's inside the development of Callaway Gardens and there's actually some positive things going on in the local market down there with a lot of growth and that will probably take 2 to 3 years before we work our way through that, but we do intend to while also exit that as the market improves down there.

Okay. And then the last question, I had mistakenly thought that the impairments were all behind us and then the Collierville's deal came on. When you look at your disposition plan for the rest of this year and next year, should we sort of be aware that there may be still more impairment charges?

Well, John it's a -- I think if you certainly look at Collierville, as I said it was not one of our strongest centers, but the Lifestyle portion of our portfolio was developed towards the end of the cycle and the performance of those centers on a square foot basis is fairly uneven. So, Collierville is a little bit at the lower side. If you go back into the pro [ph] assets that are in the mixing bowl, those are -- were developed going back to 2000, and so you might just like anything as we dispose of those, there might be some gains in some and there maybe some losses in others, but we really view the way to -- and hopefully the way most people will look at this is, we had -- as we look at that 4 or 12 year NOI -- I mean 12-month NOI, we saw this as a very, very strong outcome for the sale.

Our next question is from the line Anthony Paolone with JP Morgan.

You mentioned the investment opportunity side when you talked about the 3 items you're judging yourself on as just being scarce, is that that you're not seeing deal flow or is it that you're just not getting to pricing?

What we normally seen is the first quarter and the disposition market just across the country is usually a slow quarter, and just in terms of the number of assets that are out there and this first quarter of this year was no exception. So, it really wasn't and our case the assets that we've targeted and the markets we're looking at it wasn't a case of going after them and not being successful from a pricing standpoint, it and really was a lack of deal flow, and just as we saw last year as we looked both on the marketed and non-marketed side the deal flow is ramping up in the second quarter and we see that staying strong to the third quarter. We're -- our look is, is that the market is going to end up being about the same as last year in terms of total dispositions in the key markets that we're looking at, so it has really been deal flow versus, versus pricing but will know we may be sitting on the next call saying "it's pricing versus deal flow", but we are encouraged with some of the prospects we have for the next couple of quarters.

Is the stuff that you look out and see over these next few quarters is it more in the lines of development opportunities or is it existing assets?

We're -- our strategy is certainly looking at both and our focus continues to be over time to work down the percentage of our assets to a lower level that we have in Atlanta. We're focused on -- primarily on Texas and secondarily on North Carolina, in terms of outside of those markets and in Texas -- Austin, where we've been for 20 years, and Dallas where we've been for 20 years and in Houston where our primary focus is, and the Carolinas, it's more in the Raleigh-Durham market at that point, we like Charlotte but we're sort of a little less aggressive about looking at Charlotte just due to some uncertainty with the 2 big banks up there. So on the acquisition side, I think I'm optimistic we'll have some good success there in the balance of the year.

Okay, or in Emory Point you mentioned the resi coming in stronger than expected and having good traction on retail any updated yield, do you expect on that project and also just thoughts on where the second phase may pan soon [ph]?

Well, I think you -- I'd say that we're -- we've been able to have a fair amount of it -- early indicators that the apartments are going to be very successful both in terms of -- I think at this point we've had just under 500 people sign up for reservations and there's no model to look at yet and we had about the 30 of those, and we just started leasing in the past couple of weeks. We've had about 30 already convert and that's a very high conversion ratio because there's only so many people we can talk to. So the part -- and their leasing above pro forma and the retailers is leasing above pro forma. We can have the retail leased. We are just being very selective in terms of tenant mix for the health of the overall development. So, I'm not going to comment on spreads and those things versus what we've said before, but I would certainly say that we're very encouraged and our main -- our main reason that we have spaced out starting phase II is we just looked at leasing on both the retail and multifamily side, you would certainly have said it was strong enough to start phase II sooner. But we have certainly learned from the long-term value of mixed-use project. So it is really good to let our first phase get opened and work through any of the operational issues, whether it's parking or signage or traffic flow or those things before you come in with a second phase too quickly. So, we're quite optimistic that the second quarter of next year will have a start at Emory.

Okay. And then last question, you took down some variable cost with 191 Peachtree and re-did your line, you have some preferred stock out there. Any thoughts on, could that be something that you would use proceeds from potential stabilized sales to call in or how you're thinking about the preferreds that are out there?

Tony, it's Gregg. We treat the preferreds as an investment alternative and we compare it to the other alternatives that we have. And if and when it becomes the best alternative we have, we'll take a look at that. As we sit here right now, it's not our best alternative.

Our next question is from the line of Brendan Maiorana with Wells Fargo.

Larry, you talked about leasing activity that seems like it's better for you guys at least in midtown and downtown with Promenade II and 191 and American Cancer. Can you give us a little sense of the tenants that -- where it's more active and are those tenants actually expanding or is this just a little bit of musical chairs with some downsizing on the new lease agreement?

Brendan, I would say that the majority of the tenants that we're doing business with right now are in the downtown market or downtown tenants that are moving from other buildings to 191 Peachtree because of the value proposition that 191 Peachtree provides them. And 191 Peachtree, the downtown market is still slower than the midtown market, midtown is in bulkhead [ph], which certainly beat the most preferred submarkets right now, but in downtown if we really look at our competitive subset with just the quality of the building and the commerce club on top of 191 Peachtree and the base -- cost basis on which we have 191 Peachtree, it's in a pretty strong position and although our lease percentage number didn't move this quarter, I'm quite optimistic that you'll see the lease percentage number in the next quarter or 2 move up in a positive way on 191 Peachtree. American Cancer Society sort of an interesting story and the American Cancer Society, the developer of which was not Cousins, that developed that build, developed it for one purpose and that was to be a datacenter building. It sits on one of the largest intersection of fiber-optic cable in the Southeast and it's got all sorts of electrical capacity of that you see being built into today's datacenters that that building has always had. So, the focus on datacenters is really just a remarketing effort into that space because a lot of national users, it maybe not done up to speed with some of the deposit batch [ph] use of that building and a couple of other datacenter buildings in the downtown market are 100% full right now, so we're optimistic about that. Promenade is just a -- we're executing what we said we would execute, it's a great asset. We are selectively putting some capital in it to improve it, our sponsorship is driving good results and there you're seeing relocation of tenants within the midtown market, you're seeing other tenants relocating to midtown from other markets and so we're very encouraged on that front. We're also encouraged with leasing activity at Terminus as well as North Point.

That's really helpful. Can you -- I don't if you kind of want to give specifics, but can you give us a sense of where do you would expect to be on a leased rate for 191, American Cancer and Prom 2, either at end of this year or maybe within 12 or 18 months?

You mean in terms of lease percentage?

Yes, if you're low 80s, the 2 Downtown buildings in your low 70s at Prom, where do you think those go in the next 12 months or so?

I hope they go up. Brendan, I'm not going to give specifics on the numbers but I would say that certainly Promenade, we are executing the plan we thought we had a fairly aggressive plan when we bought the building and we're ahead of where we'd expected to be and I continue to expect us to outperform. 191 Peachtree, which is for a few quarters has been a little stagnate in the low 80s, I'm very optimistic that you'll see it pop up above 85% in the next few quarters. American Cancer Society is a little bit harder to predict, because American Cancer Society is a very unique building, and so the deal flow there is more sporadic, but when it does happen, I mean the reason the vacancies there is you had a very large tenant move out. And it tends to move in big blocks and so that one is a little bit harder for me to forecast where we may be, but you'll continue to see Promenade and 191 Peachtree move up.

Okay, now that's helpful. And then how -this might be more for Gregg, but notwithstanding the straight line, the leasing activity that you guys expect to get done over the next 12 months or so, maybe a little less than that, the straight-line rent number has remained higher after you guys did some very nice leasing in 2010 and 2011, on a sort of same space basis, when would we expect that number to start moving down more significantly?

Brendan, it's a great question. But I think I've got to stick with Larry's comments and we gave you really good by-property data guidance and I think that's really the only guidance I can provide at this time.

Okay, all right. The last question I had was with the respect to Concourse Corporate Center, which is on the market and is an asset that you guys third party manage and lease. And I think it makes up a sizeable portion of that line item within your business. I know you'd probably feel confident that you guys could retain that management agreement, but to the extent that you didn't, can you provide some insight into how significant of an impact that would be on that particular line item?

Well the -- you're right, I mean the Williams Square which was a significant asset that traded last quarter that TIAA sold in Dallas, we -- with a new owner, Brookdale Group, we did retain the leasing and the property management and we added [ph] both of the assets for over 10 years and have fabulous teams in place. And so if a buyer of those -- unless that the buyer of Concourse happens to self lease and self manage, then we feel optimistic about our chances there just based upon track record, history and results. In terms of this impact on the overall fee business if we were not to retain it, probably the easiest way to look at it is, it's about 2 million square feet and you can sort of figure out just on a percentage basis what that would be if the -- of the portfolio we had and a lot of the cost of that asset is property level type expenses, so hopefully that gives you enough guidance to sort of guess....

Yes, meaning that it's scalable.

Right.

Our next question is from the line of Dave AuBuchon with Robert W Baird & Co.

Can you give an update on where you stand relative to your original $10 million to $12 million I think of cash NOI growth from lease up of your in place portfolios sort of inclusive of some of the trades that you've made recently?

Dave, it's Gregg, good morning. We provided that guidance a couple of years ago and so much has happened in the portfolio since then, it's really not a relevant data point, I mean if we had to put a number on it where we put it between 80% to 90% of that metric has been completed to date, but it's really hard, I mean we've sat down and tried to [indiscernible] so much has happen in the portfolio since then, it was meant to be a static metric that it really isn't relevant anymore.

Right and Galleria 75, was under leased at that point in time correct?

That's right.

Yes, that's fine thanks. Can you -- Larry, you mentioned the potential development in Austin, and that you could start it if you got some preleasing done. Can you just sort of help us understand what the potential ownership structure would look like in your potential capital commitment to that project if it -- the leasing didn't work on it.

Sure, I will be. I hope you can see we're trying to mute our excitement about the opportunity there. We've had -- we developed Frostbite Tower in downtown Austin and it sold for a record price and still is one of the leading assets in downtown Austin, so we have a lot of credibility with tenant base there, based on our history. We have a fabulous site at Third and Colorado that was -- that is owned by group out of San Antonio, and we've partnered with them where they put the land in the venture and we're doing all the predevelopment activities. Rents in downtown Austin -- for those of you that follow that market are very healthy. It's one of the healthiest downtown markets certainly that we are aware of and so rents are generally in that downtown market or at or above replacement cost and so we think that somebody -- there is demand for somebody to do a office tower down there. We think our site is fantastic. Our credibility is strong. We like the design and tenant response has been great. With that said, we got to convert that to something that's bankable, and we are hard about doing that. We took it to the design view commission in Austin, which is no easy task. I think only maybe Chapel Hill is more hard -- more difficult there. The University towns tend to have tough design commission. We got an [indiscernible] vote this week. So, we got a good design. Now, we just have to get the tenants, so that we can start. The venture structure will be determined just by the pre-leasing of where we are, pre-leasing the land would typically be -- would be expected to be put in and whatever by the owners of the land into the venture and would reflect whatever percentage that ends up being and they've got the opportunity to invest more, but it would be some type of venture structure, but our main focus right now is getting that pre-leasing done.

And so sort of hard comp to is that somewhere around $350 a foot?

That's probably as a good number as any.

Okay and you mentioned you are doing some pre-development work. Just sort of -- with that project and then the university square project, how much have you sort of spent to-date on those 2 initiatives?

In terms of pre-development cost?

Yes, sir.

Very little. The structure that we have with the university has been and continues to be a joint funding of all predevelopment cost until zoning is obtained, which we hope to obtain in the next few months. So, it's -- I don't have the exact number, but it is well short of $1 million on our side of the venture. And if that venture does not take place for whatever reason the university decided to proceed on a different path, then we get reimbursed for any out of pocket costs that we have. We certainly don't anticipate that happening and our real expense so far on Third and Colorado has just been getting schematic design, so that we can get construction costs accurate and then it's just -- time cost with our team out there going -- getting it zoned and doing prospective tenants. So, both of those are very, very manageable at this point.

Okay, and then relative to ACSE the -- the datacenter strategy, what sort of CapEx have you sort of thought about or underwritten just in terms of leasing space on the datacenter side there?

It really it's, it's I think it's one of the things that the prospects that have reached out to us are really -- very intrigued with is that the CapEx that you normally associate with trying to convert anything to a datacenter space, largely it's already been spent on this building. It was spent when the building was developed. So even though 30% of the building currently is with datacenter users, we still have tremendous power availability and generator capacity, and all those types of things, so we really don't see it being much outside the norm of what we've been doing with, with existing leasing.

And what would be the potential lease up of [indiscernible] inner space in that building to the way you see it?

We could take all the rest of the vacancy. Then absolutely do data center space in it and that's what we hope to do. We've got plenty of capacity to do that.

Okay and how we would we think about sort of rents off of that? They were similar to what you are getting in that space already?

I think that's the safest way to think about it, Dave. When you would -- you see data center rents in the space is a lot higher and those things on specially built facilities, but I think the safest way to look at it would be the same that the rent structure would be comparable to what we have been getting in there.

Okay, last question would be relative to the Fort McPherson and the Gulch project, how should we think about any fees that are generated off of those projects and what's sort of a near-term impact that would have?

I would just look at the fees as -- for the next year or 2 as a wash than any cost we are spending or being offset by the fees and hopefully a little bit better, but these projects are both projects that are -- just given their size and complexity have a couple of years of environmental permitting in terms of Fort Mac, you got to go through the BRAC group of getting the Department of Defense to turn it over to this development -- master development group. So, I would look at it as a sort of a wash for the next 12 to 18 months.

And Gregg, that would be sort of netted out in the fee income line?

Yes, exactly.

[Operator Instructions] Our next question is from the line of Michael Knott with Green Street Advisors.

Good morning guys, its Jed Reagan here with Michael. Can you just remind us when you expect Promenade to be stabilized and does the success there to-date accelerate at all the timelines for that?

Our model think we've given a timeline for it, just needless to say we said that we're sitting at -- somebody, I think maybe you all asked in a call would we be happy if it was sitting in the low 80s 3 years from now and I said no. So, that's sort of my answer. It's moving ahead of expectations and we continue to be very, very bullish. It's actually, even with our leasing it's got one of the largest, the largest contiguous block of space in Midtown of a building of similar size and quality. So, by the time we get done with midtown we might shift you to those beer goggles back. We actually think -- we actually think it's doing pretty well. That was just a joke.

Okay. And sort of a related question, are you seeing any potential larger Atlanta leasing requirements out there from tenants who are looking to move in from the suburbs or even out of state?

Yes, I think I mentioned in my remarks. We do have some large tenant prospects particularly for the space we have in Promenade. And that's what we anticipated. It's, not only is it attractive submarket, but it's got the contiguous space there and there could be some signage opportunities. So, and those prospects vary in terms of relocations within Atlanta as well as some locations of businesses or national businesses looking to increase their regional presence in Atlanta.

Okay, thanks. And just a quick one for Gregg, how much of the reduction you guys are seeing in same store expenses year-over-year do you attribute to the mild winter and were there other factors that had played there kind of in those numbers that we should think about?

No, when you take a look at that reduction in same-store expenses year-over-year, it really is kind of spread out among different line items. I can't point to utilities specifically or taxes specifically. Now some of that is focused in some of our large properties. We're really making terrific headway on 191 Peachtree for example in our Forsyth [ph] 2 very large property in our portfolio. But beyond that focus on the larger properties, the expense savings are just a function of, I think of our management team just executing better and tighter.

Okay. So relatively little kind of due to the warmer weather you think.

That's correct.

Our next question is a follow-up from the line of John Guinee with Stifel.

First on 555 North Point Tower, we saw the FFO bounce around a little bit, leasing bounce around while occupancy stayed pretty steady. Can you sort of walk us through that? And then I'm assuming you're going to put the whole package on the market later this year, just correct us if we're wrong on that. And then the second question was, did you take a look at the Hurst power transaction in Charlotte and what did you think of that?

The -- on the Hurst transaction at Charlotte, we certainly because it's in -- the geography we're interested in, we certainly took a look at it. We did not put a bid in on it. We think it's a -- we think it's a great asset, but we were not comfortable right, now even though downtown Charlotte has got a low vacancy 10%, 12% that's relatively -- that's high actually for downtown Charlotte and we really, just at this point wanted to see how the banking in terms of how much of the space that the, the bank committed to, they are actually going to occupy. We just let things settle down a little bit more Charlotte before we're going to be real interested in Charlotte, so we did not price the transaction.

On 555, John, as you know, we had kids [ph] to a very large tenant there move out of that space recently which was the cause of the bumpiness in NOI that you saw, but we have successfully backfilled that space with 2 tenants. One took occupancy on March 1 and the other moves in next month, so you'll start to see that cash flow even back out as we move forward.

And we have not -- when Gregg said we've got it, so that we've got the flexibility for sale. We don't have a timeframe on when we're going to look at recycling that. What's really going to drop our recycling, we want to have and we now do have the flexibility to move on a number of assets when we are ready to move, but we are trying to balance that where we see the investment opportunities. So, not going to put a timeframe on those assets or any of the other ones -- other than land.

Thank you. There are no further questions at this time Mr. Gellerstedt. I will now turn the conference back over to you to continue with your presentation or closing remarks.

Thanks, everybody, for listening today. We look forward to seeing you soon and hope everybody has a great day. Thank you.

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