Cousins Properties - 10-Q quarterly report FY

 

 

(Exact name of registrant as specified in its charter)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer oNon-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

     Certain matters discussed in this report are forward-looking statements within the meaning of the federal securities laws and are subject to uncertainties and risks, including, but not limited to, general and local economic conditions, local real estate conditions, the activity of others developing competitive projects, the satisfaction of certain conditions to and the formation of the venture arrangement with Prudential Real Estate Investors, as well as the effect of such transaction on the Company, the cyclical nature of the real estate industry, the financial condition of existing tenants, interest rates, the Company’s ability to obtain favorable financing or zoning, environmental matters, the effects of terrorism, the failure of assets under contract for sale to ultimately close and additional risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission, including the Company’s Report on Form 10-K for the year ended December 31, 2005. The words “believes,” “expects,” “anticipates,” “estimates,” “would” and similar expressions are intended to identify forward-looking statements. Although the Company believes that its plans, intentions and expectations reflected in any forward-looking statement are reasonable, the Company can give no assurance that these plans, intentions or expectations will be achieved. Such forward-looking statements are based on current expectations and speak as of the date of such statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise.

     Item 1. Financial Statements.

COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)

COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)

COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

     The condensed consolidated financial statements included herein include the accounts of Cousins Properties Incorporated (“Cousins”) and its consolidated subsidiaries, including Cousins Real Estate Corporation and its subsidiaries (“CREC”). All of the entities included in the condensed consolidated financial statements are hereinafter referred to collectively as the “Company.”

     Cousins has elected to be taxed as a real estate investment trust (“REIT”) and intends to, among other things, distribute 100% of its federal taxable income to stockholders, thereby eliminating any liability for federal income taxes. Therefore, the results included herein do not include a federal income tax provision for Cousins. CREC operates as a taxable REIT subsidiary and is taxed separately from Cousins as a C-Corporation. Accordingly, the condensed consolidated statements of income include a provision for CREC’s income taxes.

     The condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, these financial statements reflect all adjustments necessary (which adjustments are of a normal and recurring nature) for the fair presentation of the Company’s financial position as of March 31, 2006 and results of operations for the three-month periods ended March 31, 2006 and 2005. Results of operations for the three months ended March 31, 2006 are not necessarily indicative of results expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The accounting policies employed are the same as those shown in Note 1 to the consolidated financial statements included in such Form 10-K. Certain 2005 amounts have been reclassified to conform to the 2006 presentation.

     The following table summarizes supplemental information related to cash flows ($ in thousands):

     The following table summarizes the terms and amounts of the notes payable outstanding at March 31, 2006 ($ in thousands):

     Through March 7, 2006, the Company had an unsecured revolving credit facility with Bank of America and several other banks of up to $325 million (which could have been increased to $400 million under certain circumstances), with a maturity date of September 14, 2007. The credit facility bore interest at a rate equal to the London Interbank Offering Rate (“LIBOR”) plus a spread which was based on the Company’s ratio of total debt to total assets, as defined by the credit facility, according to the following table:

     On March 7, 2006, the Company recast its unsecured revolving credit facility (“Revolver”), increasing the size by $75 million to $400 million and extending the maturity date to March 7, 2010, with an additional one-year extension. The Revolver can be expanded to $500 million under certain circumstances, although the availability of the additional capacity is not guaranteed. The Revolver provides for additional flexibility in some of the financial covenants as compared to the previous facility. Additionally, the Revolver imposes restrictions on the level of common and preferred dividends only if the Company’s leverage ratio, as defined by the Revolver, is greater than 55%. Generally interest is calculated under the Revolver equal to LIBOR plus an additional spread based on the ratio of total debt to total assets, as defined, according to the following table:

     On March 7, 2006 and simultaneous with the recast of the Revolver, the Company entered into an unsecured $100 million construction facility. While this facility is unsecured, advances under the facility are to be used to fund the construction costs of the Terminus 100 project. This facility has the same maturity date and key provisions as the Revolver.

     The Company had $201.9 million drawn on the Revolver as of March 31, 2006 and, net of $23.5 million reserved for outstanding letters of credit, the Company had $174.6 million available for future borrowings under the Revolver. The Company had $35.1 million drawn on its construction facility as of March 31, 2006.

     For the three months ended March 31, 2006 and 2005, interest expense was recorded as follows ($ in thousands):

     Net income per share-basic is calculated as net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Net income per share-diluted is calculated as net income available to common stockholders divided by the diluted weighted average number of common shares outstanding during the period. Diluted weighted average number of common shares is calculated to reflect the potential dilution under the treasury stock method that would occur if stock options, restricted stock or other contracts to issue common stock were exercised and resulted in additional common shares outstanding. The numerators used in the Company’s per share calculations are the same for both basic and diluted net income per share. Weighted average shares-basic and weighted average shares-diluted were as follows (in thousands):

     The Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment,” in the quarter beginning January 1, 2006. SFAS 123(R) requires that compensation expense be recognized in the statement of income for the grant-date fair value of share-based awards which vested during the period.

     The Company has several stock-based compensation plans that are described in Note 6 of “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The Company previously accounted for its plans under Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” which required the recording of compensation expense for some, but not all, stock-based compensation. The Company did not record stock-based compensation expense for stock options in the condensed consolidated statements of income prior to January 1, 2006, as all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

     SFAS 123(R) applies to new awards and to awards modified, repurchased or cancelled after the required effective date, as well as to the unvested portion of awards outstanding as of the required effective date. The Company uses the Black-Scholes model to value its new stock option grants under SFAS 123(R), applying the “modified prospective method” for existing grants which requires the Company to value stock options prior to its adoption of SFAS 123(R) under the fair value method and expense the unvested portion over the remaining vesting period. Results of prior periods have not been restated. SFAS 123(R) also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation. In addition, SFAS 123(R) requires the Company to reflect the benefits of tax deductions in excess of recognized compensation cost to be reported as both a financing cash inflow and an operating cash outflow upon adoption.

     Compensation expense arising from restricted stock and stock options granted to employees is being recognized as expense in the 2006 condensed consolidated statement of income over the related awards’ vesting period. For the three months ended March 31, 2006, the Company’s total stock-based compensation expense included in general and administrative expenses in the accompanying condensed consolidated statements of income was $1.3 million after capitalization to projects under development. This expense is non-cash and had no effect on cash flows from operating activities. Included in this total stock-based compensation expense was incremental expense from stock options of approximately $0.7 million after capitalization to projects under development. The effect on income from operations, income before income taxes and net income from stock option expense also equaled approximately $0.7 million, as the income tax effect to the Company was minimal. Basic and diluted earnings per share decreased by approximately $0.01 per share in the first quarter of 2006 as a result of the implementation of SFAS 123(R).

     Upon adoption of SFAS 123(R), $8.5 million of unearned compensation related to the Company’s restricted stock, which was previously accounted for under APB No. 25 in a separate line item in the stockholders’ investment section of the balance sheet, was reclassified to additional paid-in capital. As of March 31, 2006, there was $11.9 million of total unrecognized compensation cost related to restricted stock and stock options, which will be recognized over a weighted average period of 2.8 years.

     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for options granted in the first quarters of 2006 and 2005:

     The risk free interest rate utilized in the Black-Scholes calculation is the interest rate on U.S. Treasury Strips having the same life as the estimated life of the Company’s option awards. Expected life of the options granted was computed using historical data reflecting actual hold periods plus an estimated hold period for unexercised options outstanding using the mid-point between 2006 and the expiring date. Expected volatility is based on the historical volatility of the Company’s stock over a period relevant to the related stock option grant. The assumed dividend yield is calculated utilizing the dividends paid for the previous one-year period and the average daily stock price of the Company for the same period.

     The Company computed the value of all stock grants and stock options granted during the three months ended March 31, 2005 using the Black-Scholes option pricing model. If the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s stock option plans during 2005, pro forma results would have been as follows ($ in thousands, except per share amounts):

     The following table summarizes stock option activity for the first quarter of 2006 ($ in thousands, except per share amounts):

     At March 31, 2006, the weighted-average remaining contractual life of options outstanding and exercisable was 6.6 and 5.8 years, respectively. The total intrinsic value of options exercised was $1.2 million and $3.7 million for the three months ended March 31, 2006 and 2005, respectively.

     The following table summarizes restricted stock activity for the first quarter of 2006 ($ in thousands, except per share amounts):

     The Company also has a restricted stock unit (“RSU”) plan, which is accounted for as a liability award under SFAS No. 123(R). The value of the liability related to the RSUs is remeasured each reporting period based upon the fair value calculated using the Black-Scholes option pricing model at period end. The Company recognized expense related to RSUs in the first quarter of 2006 of approximately $0.2 million after capitalization to projects under development. As of March 31, 2006, there was approximately $8.7 million of unrecognized compensation cost related to RSUs, which will be recognized over a weighted average period of 4.6 years. A rollforward of restricted stock units at March 31, 2006 is as follows (in thousands):

     The Company has four reportable segments: Office/Multi-Family, Retail, Land, and Industrial. The Office division began developing multi-family properties in the fourth quarter of 2004 and changed its name to the Office/Multi-Family division in the second quarter of 2005. The Office/Multi-family division develops, leases and manages owned and third-party owned office buildings and invests in and/or develops for-sale multi-family real estate products. The Retail and Industrial divisions develop, lease and manage retail and industrial centers, respectively. The Land Division owns various tracts of land that are held for investment or future development. The Land Division also develops single-family residential communities that are parceled into lots and sold to various home builders or sold as undeveloped tracts of land. The Company’s reportable segments are categorized based on the type of product the division provides. The divisions are managed separately because each product they provide has separate and distinct development issues, leasing and/or sales strategies and management issues. The divisions also match the manner in which the chief operating decision maker reviews results and information and allocates resources. The unallocated and other category in the following table includes general corporate overhead costs not specific to any segment and also includes interest expense, as financing decisions are not generally made at the reportable segment level.

     Company management evaluates the performance of its reportable segments based on funds from operations available to common stockholders (“FFO”). FFO is a supplemental operating performance measure used in the real estate industry. For the first quarter of 2006 and 2005, the

Company calculated its FFO using the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition of FFO, which is net income available to common stockholders (computed in accordance with GAAP), excluding extraordinary items, cumulative effect of change in accounting principle and gains or losses from sales of depreciable property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures to reflect FFO on the same basis.

     FFO is used by industry analysts, investors and the Company as a supplemental measure of an equity REIT’s operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of a REIT’s operating performance that excludes historical cost depreciation, among other items, from GAAP net income. Management believes that the use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. In addition to Company management evaluating the operating performance of its reportable segments based on FFO results, management uses FFO and FFO per share, along with other measures, to assess performance in connection with evaluating and granting incentive compensation to its officers and employees.

     The following tables summarize the operations of the Company’s reportable segments for the three months ended March 31, 2006 and 2005. The notations (100%) and (JV) used in the following tables indicate wholly-owned and unconsolidated joint ventures, respectively, and all amounts are in thousands.

     On May 9, 2006, the Board of Directors of the Company authorized a stock repurchase plan, which expires May 9, 2009, of up to 5,000,000 shares of the Company’s common stock.

     Effective May 2, 2006, Cousins Properties Incorporated (the “Company”) entered into an agreement (the “Agreement”) to form a venture arrangement (the “Venture”) with The Prudential Insurance Company of America on behalf of a separate account managed for institutional investors by Prudential Real Estate Investors (“PREI”). Closing of the Venture is subject to the satisfaction of certain conditions. The parties anticipate the conditions to be satisfied and closing to occur (such date, the “Closing Date”) prior to the end of the second quarter of 2006. However, there can be no assurance that the conditions will be satisfied and that the Venture will ultimately close.

     In accordance with the Agreement, at the Closing Date, the Company would contribute its interests in five properties (the “Properties”) to the Venture. These properties are valued by the

Company and PREI based on arms length negotiations at an initial gross value of $342,450,074. The properties and the values to be allocated to each property under the Venture agreements are shown below:

     *Based on balance of mortgage as of May 1, 2006 plus a $4,000,000 defeasance amount to reflect current market interest rates.

     **Includes an outparcel with an agreed value of $1,560,000 that the Company may withhold from the Venture contribution and, if so, the agreed value of The Avenue Viera would be reduced by such amount.

     Under the Agreement, PREI would initially agree to contribute cash to the Venture equal to the initial agreed upon net value of the Properties, approximately $301,583,663 (the “Base Contribution Amount”). The Base Contribution Amount would be contributed in four installments as shown below. Also shown below are the percentages the Company and PREI would have, respectively, in the cash flow and capital proceeds from the Properties following the cash contributions on the indicated dates:

     In addition, PREI would contribute to the Venture up to an additional $20,549,926 (the “Contingent Contribution Amounts”) if certain conditions are satisfied with respect to the expansions of the The Avenue West Cobb and Viera MarketCenter, both of which are still under construction. The Contingent Contribution Amounts would be made, if at all, on or about December 29, 2006, June 30, 2007 and December 31, 2007.

     The Company would also agree to master lease a portion of the unleased space at The Avenue Viera during 2007. The maximum amount of rent payable to the Venture under the master lease would be $1,633,299 for rent, plus tenant improvement costs and commissions of up to $2,552,512. To the extent that any space subject to the master lease is actually leased to third parties pursuant to a qualifying lease, the Company would no longer be obligated under the master lease with respect to such space.

     Pursuant to the Agreement, the structure of the Venture is expected to be as follows: CP Venture IV Holdings LLC (“Parent”) would be the parent entity. Parent would own a 100% interest in

each of CP Venture Five LLC (“Property Activity LLC”) and CP Venture Six LLC (“Development Activity LLC”). Upon completion of the formation of the Venture, Property Activity LLC will hold the Properties and Development Activity LLC will hold the contributed cash.

     Following the final contribution of the Base Contribution Amount by PREI, the Company, through its interest in Parent and Parent’s interest in Property Activity LLC, would have an 11.5% interest in the cash flow and capital proceeds of the Properties, and PREI would have an 88.5% interest therein. Unless both parties agree otherwise, the Venture would not be permitted to sell the Properties until the end of a four-year lock-out period.

     The parties expect that the cash contributed by PREI and held by Development Activity LLC would be used by the Venture primarily to develop commercial real estate projects, or to make acquisitions (“Developments”), in all cases as directed by the Company. In addition, Development Activity LLC has the right to make loans to the Company with any excess cash that it may hold from time to time. The parties anticipate that some of the projects currently under consideration by the Company would be undertaken by the Venture, although the Company would have no obligation to make any particular opportunity available to the Venture. Prior to any other distributions with respect to the Developments from Development Activity LLC, PREI would receive a priority current return of 6.5% per annum on an amount equal to 11.5% of its capital contributions to the Venture. PREI would also receive a liquidation preference whereby it would first be entitled to receive a distribution sufficient to allow it to achieve an overall 8.5% internal rate of return on an amount equal to 11.5% of its capital contributions to the Venture, subject to capital account limitations. After these preferences to PREI, the Company would be entitled to certain priority distributions related to the Developments. After such priority distributions, the Company and PREI would share residual distributions with respect to the Developments, 88.5% to the Company and 11.5% to PREI.

     The Company would manage the Developments and the Properties on a day-to-day basis. In particular, the Venture would engage the Company to provide property management and leasing services with respect to each of the Properties. The management and leasing agreement for each Property would have an initial term of four years. The Company and PREI would have certain discretionary decision rights and approval rights with respect to the Developments and the Properties. The Company would serve as Administrative Manager of the Venture.

     The Company is a real estate development company with experience in the development, leasing, financing and management of office, retail and industrial properties in addition to residential land development. In addition, the Company has experience with the development and sale of multi-family products. As of March 31, 2006, the Company held interests directly or through joint ventures in 23 office or medical office properties totaling 7.4 million square feet, 13 retail properties totaling 3.8 million square feet, two industrial properties totaling 0.8 million square feet and 1,621 developed residential land lots held for sale. These interests include eight office, retail, and industrial projects under development totaling 2.8 million square feet, and two condominium projects containing 622 units. The Company also had 24 residential communities under development directly or through joint ventures in which approximately 11,900 lots remain to be developed and/or sold. In addition, the Company owns directly or through joint ventures approximately 9,300 acres of land held for future development.

       The Company’s strategy is to produce strong stockholder returns by creating value through the development of high quality, well-located office, retail, industrial, multi-family and residential land properties. The Company has developed substantially all of the real estate assets it owns and operates. A key element in the Company’s strategy is to actively manage its portfolio of investment properties and at the appropriate times, to engage in timely and strategic dispositions of developed property in an effort to maximize the value of the assets it has created, generate capital for additional development properties and return a portion of the value created to stockholders.

       Rental Property Revenues. Rental property revenues increased approximately $4.7 million for the three month 2006 period compared to the three month 2005 period. Of this increase, rental property revenues for the Office/Multi-Family Division increased approximately $1.3 million. This is primarily due to an increase of approximately $645,000 from Frost Bank Tower, as its average economic occupancy increased from 56% in 2005 to 69% in 2006. Additionally, rental property revenue from One Georgia Center increased approximately $396,000, as its average economic occupancy increased from 15% in 2005 to 32% in 2006.

       Rental property revenues from the Retail Division increased approximately $3.4 million, mainly due to an increase of approximately $2.2 million in rental property revenues from The Avenue Carriage Crossing, which became partially operational in the fourth quarter of 2005. Rental property revenues from the Avenue Viera also increased approximately $450,000 in 2006, due to increased occupancy and to an expansion of the center which opened in late March 2006. The remaining increase is primarily attributable to tenant openings at San Jose MarketCenter and Viera MarketCenter.

     Rental Property Operating Expenses. Rental property operating expenses increased approximately $1.9 million in the three month 2006 period compared to the same 2005 period, mainly due to the aforementioned opening of The Avenue Carriage Crossing and San Jose MarketCenter and the increased occupancy at Frost Bank Tower.

     Multi-family Residential Unit Sales and Cost of Sales. Multi-family residential unit sales increased approximately $6.6 million and cost of sales increased approximately $5.4 million in 2006 due to the consolidation of the venture constructing the 905 Juniper project and its continued construction. The Company began consolidating this venture in June 2005 and is recognizing profits utilizing the percentage of completion method of accounting.

     Residential Lot and Outparcel Sales and Cost of Sales. Residential lot and outparcel sales increased approximately $2.9 million in 2006 mainly due to an increase in residential lot sales of $2.6 million at The Lakes at Cedar Grove residential development. Residential lot cost of sales also increased approximately $2.1 million, also primarily due to the increased sales at The Lakes at Cedar Grove.

     Interest and Other. Interest and other income increased approximately $2.3 million in 2006, mainly due to a termination fee of the same amount recognized in the first quarter of 2006. Indus International, Inc. (“Indus”), the sole tenant at the 3301 Windy Ridge Parkway building, entered into a termination agreement on 62,000 square feet of its space in 2006, which contains a termination penalty of $2.3 million.

     General and Administrative Expenses. General and administrative expenses increased approximately $1.3 million in 2006. Salaries and related benefits, including stock-based compensation expense, increased approximately $2.9 million in 2006. This increase includes approximately $940,000 of expense related to stock options, which the Company began recording in the first quarter of 2006 in conjunction with the adoption of SFAS 123(R). The increase in salaries and related benefits was partially offset by an increase in capitalized salaries to development projects of $1.4 million, as the Company has increased its development activities in 2006 as compared to the same 2005 period.

     Depreciation and Amortization. Depreciation and amortization increased approximately $1.5 million. This increase was mainly due to an increase of approximately $1.3 million from the aforementioned opening of The Avenue Carriage Crossing. The increase was also due to an increase of approximately $382,000 from the 3301 Windy Ridge Parkway building, as amortization of tenant costs related to the aforementioned Indus termination was accelerated. The increase was partially offset by a decrease in depreciation and amortization of approximately $912,000 from The Inforum, as certain tenant costs were fully amortized in 2005.

     Interest Expense. Interest expense increased approximately $832,000 in 2006 as compared to the same period in 2005. Interest expense before capitalization increased approximately $2.5 million in 2006, mainly due to an increase in interest expense on the credit facility of $2.4 million. Average borrowings outstanding on the credit facility during the 2006 period were greater than the 2005 period, due to the Company having a large balance of unexpended cash in the 2005 period and to an increase in development activity in 2006. However, as a result of the increased development activity, interest capitalized to projects under development increased approximately $1.7 million during the 2006 period, as amounts expended on projects under development was higher during 2006 as compared to the same 2005 period.

     Provision for Income Taxes from Operations. Provision for income taxes from operations increased approximately $1.5 million in 2006 as compared to the same period in 2005. The increase is mainly due to the increase in income from TRG Columbus Development Venture, Ltd, (“TRG”), CL Realty, L.L.C. and Temco Associates in 2006, as discussed in the following section. CREC, or an entity owned by CREC, is the partner in these ventures, and the Company’s share of results of operations for these ventures is included in CREC’s taxable income.

       Income from Unconsolidated Joint Ventures. (All amounts reflect the Company’s share of joint venture income based on its ownership interest in each joint venture.) Income from unconsolidated joint ventures increased approximately $6.9 million in the three months ended March 31, 2006, compared to the same period in 2005. This increase is attributable to the following:

       Gain on Sale of Investment Properties. The 2006 gain consisted of the following: the sale of undeveloped land at the North Point/Westside project ($740,000); and the amortization of deferred gain from CP Venture ($65,000).

       The 2005 gain consisted of the following: the sale of undeveloped land at the North Point/Westside project ($2.2 million); the sale of undeveloped land at Wildwood ($4.6 million); and the amortization of deferred gain from CP Venture ($65,000).

       Potential Sale of Assets. As a result of the potential sale of Frost Bank Tower and Bank of America Plaza discussed in the Liquidity and Capital Resources section below, the Company expects to recognize gains on sale of investment property upon closing of these transactions. In periods subsequent to the closing of these sales, the Company expects a reduction in rental property revenues, rental property operating expenses, depreciation and amortization, income from unconsolidated joint ventures and interest expense.

       Funds From Operations. The table below shows Funds From Operations Available to Common Stockholders (“FFO”) and the related reconciliation to net income available to common stockholders for the Company. In the first quarters of 2006 and 2005, the Company calculated FFO in accordance with the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition, which is net income available to common stockholders (computed in accordance with accounting principles generally accepted in the United States (“GAAP”)), excluding extraordinary items, cumulative effect of change in accounting principle and gains or losses from sales of depreciable property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures to reflect FFO on the same basis.

       FFO is used by industry analysts and investors as a supplemental measure of an equity REIT’s operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. Company management evaluates the operating performance of its reportable segments and of its divisions based on FFO. Additionally, the Company uses FFO and FFO per share, along with other measures, to assess performance in connection with evaluating and granting incentive compensation to its officers and employees.

     Stock-Based Compensation.

     The Company adopted SFAS No. 123(R), “Share-Based Payment,” on January 1, 2006 utilizing the modified prospective method. This standard requires that companies recognize compensation expense in the statement of income for the grant-date fair value of share-based awards that vest during the period. The Company calculates the grant-date fair value of its awards using the Black-Scholes model, which it also utilized under SFAS No. 123 pro forma disclosures. Assumptions used under SFAS No. 123 are not materially different from those used under SFAS No. 123(R). The impact of expensing stock options under SFAS No. 123(R) in the first quarter was approximately $0.7 million, after accounting for the effect of capitalizing salaries and related benefits of certain development and leasing personnel to projects under development and after the effect of income taxes.

     Financial Condition.

     Summary. The Company had a significant number of projects in its development pipeline at March 31, 2006 and does not expect the number of projects or the amounts invested in development projects to decrease in the near term. It also has a large amount of undeveloped land, both consolidated and at unconsolidated joint ventures, which may progress into development projects in 2006. Additionally, the Company and its joint ventures sold a significant number of operating properties in the last several years, some of which have been replaced by completion of new developments. Given those facts, the Company anticipates an increase in the need for cash in 2006, which management believes will be satisfied through one or more of the following alternatives: additional borrowings, formations of joint ventures, capital transactions, and the selective and strategic sale of mature operating properties or parcels of land held for investment. The financial condition of the Company is discussed in further detail below.

     At March 31, 2006, the Company was subject to the following contractual obligations and commitments ($ in thousands):

     A key element in the Company’s funding strategy for near term commitments is the formation of the venture with the Prudential Insurance Company of America on behalf of a separate account managed for institutional investors by Prudential Real Estate Investors (“PREI”) discussed in Note 7 in notes to condensed consolidated financial statements included in this report (the “Venture”). Under the terms of the proposed Venture, the Company is expected to contribute its interests in five retail properties and PREI is expected to contribute cash to the Venture equal to the agreed upon net value of the properties contributed to the Venture. The Properties are expected to be held in a limited liability company owned 11.5% by the Company and expected to be 88.5% by PREI (the “Property Activity LLC”). The cash is expected to be held in a limited liability company (the “Development Activity LLC”) which is expected to be 88.5% owned by the Company and 11.5% owned by PREI. The PREI contributions to the Venture are expected to be made in installments over the remainder of 2006. In addition, PREI may make additional contributions to the Venture in 2007 based on future leasing and development performed by the Company on the contributed properties.

     The cash held by Development Activity LLC is expected to be used to fund development projects of the Venture. The funds may be loaned to the Company in the interim until utilized for development. During 2006, the Company expects PREI to contribute $301.6 million, with additional contributions based on leasing and development of up to an additional $20.5 million in 2006 and 2007. The Company is expected to be manager of Property Activity LLC.

     In addition to capital generated from the venture formation, the Company intends to sell Frost Bank Tower and through its interest in CSC Associates, the Company intends to sell Bank of America Plaza. The Company decided to sell these assets as a result of the continued strategic review and analysis of assets it holds. These sales are expected to close in 2006 and are expected to result in capital gains that may be distributed to stockholders in the form of a special dividend.

     The Company also expects to utilize indebtedness to fund a portion of its commitments. In the first quarter, the Company created additional capacity for debt funding by expanding its existing revolving credit facility and by adding a construction facility. In March 2006, the Company recast its unsecured revolving credit facility (“Revolver”), increasing the size by $75 million to $400 million and extending the maturity date to March 2010, with an additional one year extension. The Revolver can be expanded to $500 million under certain circumstances, although the availability of the additional capacity is not guaranteed. The Revolver provides for additional flexibility in some of the financial covenants. Additionally, the Revolver imposes restrictions on the level of common and preferred dividends only if the Company’s leverage ratio, as defined in the Revolver, is greater than 55%. Generally interest is calculated under the Revolver based on the then current LIBOR interest rate plus an additional spread based on the ratio of total debt to total assets.

     As of March 31, 2006, the Company had $201.9 million drawn on its $400 million credit facility. The amount available under this credit facility is reduced by outstanding letters of credit, which were approximately $23.5 million at March 31, 2006. As of March 31, 2006, the spread over LIBOR was 0.90%.

     Also in March 2006 and simultaneous with the recast of the Revolver, the Company entered into an unsecured $100 million construction facility. While this facility is unsecured, advances under the facility are to be used to fund the construction costs of the Terminus 100 project. This facility has the same maturity date and key provisions as the Revolver. As of March 31, 2006 the Company had $35.1 million drawn on its construction facility.

     The Company’s mortgage debt is primarily non-recourse fixed-rate mortgage notes payable secured by various real estate assets. As of March 31, 2006, the weighted average interest rate on the Company’s debt was 6.58%. In addition, many of the Company’s non-recourse mortgages contain covenants which, if not satisfied, could result in acceleration of the maturity of the debt. The Company expects that it will either refinance the non-recourse mortgages at maturity or repay the mortgages with proceeds from other financings.

     As of March 31, 2006, the Company’s debt to total market capitalization ratio was 22.5%.

     The Company may also generate capital through the issuance of securities that may include but not be limited to preferred stock under an existing shelf registration statement. As of March 31, 2006, the Company had approximately $100 million available for issuance under this registration statement.

     Over the long term, the Company expects to continue to actively manage its portfolio of income producing properties and strategically sell assets to capture value for shareholders and to recycle capital for future development activities. The Company expects to continue to utilize indebtedness to fund future commitments and expects to place long term permanent mortgages on selected assets as well as utilizing construction facilities for other development assets. The Company may enter into additional joint venture arrangements to help fund future developments and may enter into additional structured transactions with third parties. While the Company does not foresee the need to issue common equity in the future, it will evaluate all public equity sources and select the most appropriate options as capital is required.

     The Company’s business model is highly dependent upon raising capital to meet development obligations. If one or more sources of capital are not available when required, the Company may be forced to raise capital on potentially unfavorable terms which could have an adverse effect on the Company’s financial position or results of operations.

     Cash Flows.

     Cash Flows from Operating Activities. Cash flows from operating activities increased $15.4 million between the three months ended March 31, 2006 and 2005. This increase is attributable to an increase in distributions received from joint ventures in excess of income of $4.8 million related to a large tract sale and distribution of net proceeds therefrom. Proceeds from lot sales also increased by $2.9 million during the quarter as a result of higher consolidated lot sales activities. The Company also received a lease termination fee of $2.3 million during the quarter. In addition, cash flows from property operations increased during the quarter.

     Cash Flows from Investing Activities. Cash used in investing activities increased $18.5 million between the three months ended March 31, 2006 and 2005. This increase is primarily the result of an increase in property acquisition and development expenditures. During the quarter, the Company purchased land for its second industrial project in Jackson County, Georgia and purchased a tract of land in Austin, Texas for a future office development, which accounted for most of the increase in property acquisition and development expenditures. In addition, proceeds from investment property sales decreased during the quarter due to fewer acres sold at the Company’s Wildwood and North

Point/Westside projects. Partially offsetting the increase in net cash used in investing activities was a change in joint venture activity in 2006. The Company made higher contributions to its unconsolidated joint ventures in 2005 as compared to 2006, in addition to receiving higher distributions from its unconsolidated joint ventures in 2006 as compared to 2005, both of which combined to decrease net cash used in investing activities.

     Cash Flows from Financing Activities. Cash provided by financing activities was $60.0 million for the three months ended March 31, 2006 compared to cash used in financing activities of $10.1 million for the three months ended March 31, 2005. The primary reason for the change is the increase in debt in the first quarter of 2006, which included net new borrowings under the Company’s credit facility, new borrowings under the unsecured construction facility and additional borrowings under the 905 Juniper construction loan. During the first quarter of 2005, the Company borrowed only $10.9 million as a result of beginning the year with $89.5 million in cash on hand.

     The Company participates in a number of joint ventures, some of which it accounts for on the equity method of accounting. At March 31, 2006, the Company’s unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of approximately $342.4 million, of which the Company’s share was $144.6 million. These loans are generally mortgage or construction loans that are non-recourse to the Company. In certain instances, the Company provides “non-recourse carve-out guarantees” on these non-recourse loans. The unconsolidated joint ventures also have letters of credit and/or performance bonds which the Company guarantees, which totaled approximately $8.0 million at March 31, 2006.

     Two of these ventures are involved in the active acquisition and development of residential real estate. As capital is required to fund the acquisition and development of this real estate, the Company must fund its share of the costs not funded by operations or outside financing. Based on the nature of the activities conducted in these ventures, management cannot estimate with any degree of accuracy amounts that the Company may be required to fund in the short or long-term. However, management does not believe that additional funding of these ventures will have an adverse effect on its financial condition.

     The Company does not expect to make significant capital contributions to any of its remaining unconsolidated joint ventures in the foreseeable future.

     There has been no material change in the Company’s critical accounting policies from that disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

     There has been no material change in the Company’s market risk related to its notes payable and notes receivable from that disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. We also have investments in certain unconsolidated entities. As we do not always control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily more limited than those we maintain with respect to our consolidated subsidiaries.

     The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected. However, these inherent limitations are known features of the financial reporting process and were taken into account in designing the Company’s processes.

     As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer along with the Chief Financial Officer, of the effectiveness, design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures are effective at providing reasonable assurance that all material information required to be included in our Exchange Act reports is reported in a timely manner. In addition, based on such evaluation we have identified no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

     The Company is subject to routine actions for negligence and other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material impact on the financial condition or results of operations of the Company.

     There has been no material change in the Company’s risk factors from those outlined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

     The following table contains information about the Company’s purchases of its equity securities during the first quarter of 2006:

     None.

     The Company’s Annual Meeting of Stockholders was held on May 9, 2006. The following proposals were adopted by the stockholders of the Company at the annual meeting:

     (i) The election of ten Directors.

          The vote on the above was:

 The vote on the above was:

 The vote on the above was: