Cousins Properties - 10-Q quarterly report FY

 

Commission file number: 0-3576

(Exact name of registrant as specified in its charter)

(770) 955-2200
(Registrant’s telephone number, including area code)

     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 o           Non-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, statements regarding the entry into purchase and sales agreements, the satisfaction of certain conditions to the agreements, the expected closing date of such transactions and the effect of such transactions on the Company. Other risks include general and local economic conditions, local real estate conditions, including downtown Atlanta, Georgia, the activity of others developing competitive projects, 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 purchase and 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 the Annual 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, except per share amounts)

     The condensed consolidated financial statements included herein include the accounts of Cousins Properties Incorporated (“Cousins” or “the Company”) 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 of America (“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 June 30, 2006 and results of operations for the three and six month periods ended June 30, 2006 and 2005. Results of operations for the six months ended June 30, 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 June 30, 2006 and December 31, 2005 ($ in thousands):

     The Company had $99.2 million drawn on its unsecured credit facility as of June 30, 2006 and, net of $9.5 million reserved for outstanding letters of credit, the Company had $291.3 million available for future borrowings under this facility. The Company had $45.2 million drawn on its construction facility as of June 30, 2006, with $54.8 million available for future borrowings under this facility. In conjunction with the venture formation on June 29, 2006, as described in Note 6 herein, the Avenue East Cobb mortgage note payable was assumed by CP Venture Five LLC.

     For the three and six months ended June 30, 2006 and 2005, interest expense was recorded as follows ($ in thousands):

     At June 30, 2006, the Company had outstanding letters of credit and performance bonds of $28.5 million. The Company has several projects under development for which it estimates development commitments of $191.0 million at June 30, 2006. Additionally, the Company has obligations as a lessor of office, retail and industrial space to fund approximately $14.1 million in tenant improvements

as of June 30, 2006. As a lessee, the Company has obligations under ground and office leases of approximately $47.5 million at June 30, 2006.

     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):

     Because the Company reported a net loss available to common stockholders for the three months ended June 30, 2006, the effect of all outstanding options on per share earnings was anti-dilutive, and these options were excluded from the calculation of weighted average shares-diluted.

     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 — stock options, restricted stock and restricted stock units — 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 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 share-based payment arrangements granted to employees is being recognized in general and administrative expense in the 2006 condensed consolidated statement of income over the related awards’ vesting period. A portion of share-based payment expense is capitalized to projects under development as it is a part of the total compensation of certain leasing and development personnel. Compensation expense for the Company’s share-based payment arrangements is as follows ($ in thousands, except per share amounts):

     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, was reclassified to additional paid-in capital. As of June 30, 2006, there was $10.1 million of total unrecognized compensation cost related to restricted stock and stock options, which will be recognized over a weighted average period of 1.4 years.

     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. 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. No options were granted in the second quarter of 2005. The second quarter 2006 grant had the following weighted average assumptions and fair value:

     If the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s stock option plans prior to January 1, 2006, pro forma results would have been as follows ($ in thousands, except per share amounts):

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

     At June 30, 2006, the weighted-average remaining contractual life of options outstanding and exercisable was 6.4 and 5.4 years, respectively. The total intrinsic value of options exercised was $2.3 million and $3.5 million for the three and six months ended June 30, 2006, respectively.

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

     The Company also has a restricted stock unit (“RSU”) plan whereby employees are paid cash based on the value of the Company’s common stock on vesting dates in the future. Certain of the Company’s RSUs provide for the payment of dividends equal to the Company’s quarterly dividend.

All RSUs are accounted for as liability awards 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 three and six month periods ending June 30, 2006 of approximately $0.3 million and $0.5 million, respectively, after capitalization to projects under development and income taxes. As of June 30, 2006, there was approximately $6.8 million of unrecognized compensation cost related to RSUs, which will be recognized over a weighted average period of 3.8 years. A rollforward of RSUs at June 30, 2006 is as follows (in thousands):

     Effective May 2, 2006, 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”). The Venture closed on June 29, 2006 (the “Closing Date”).

     In accordance with the Agreement, at the Closing Date, the Company contributed its interests in five properties (the “Properties”) to the Venture. The Properties were valued by the Company and PREI based on arms length negotiations at an initial gross fair value, before contingent value as described below, of $340,890,074. The Properties and the values allocated to each property under the Venture agreements are as follows:

     Under the Agreement, PREI is obligated to contribute cash to the Venture equal to the initial agreed upon net value of the Properties, approximately $300,062,747 (the “Base Contribution Amount”). The Base Contribution Amount will be contributed in three installments in the amounts and on or about the dates shown below. Also shown below are the percentages the Company and PREI will have, respectively, in the cash flow and capital proceeds from the Properties following the cash contributions on the indicated dates:

     In addition, PREI will 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 on or about December 29, 2006, June 30, 2007 and December 31, 2007.

     The Company also agreed 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 as follows: CP Venture IV Holdings LLC (“Parent”) is the parent entity. Parent owns a 100% interest in each of CP Venture Five LLC (“Property Activity LLC”) and CP Venture Six LLC (“Development Activity LLC”). Property Activity LLC holds the Properties and Development Activity LLC holds rights to 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, will have an 11.5% interest in the cash flow and capital proceeds of the Properties, and PREI will have an 88.5% interest therein. Unless both parties agree otherwise, the Venture is not permitted to sell the Properties until the end of a four-year lock-out period.

     The parties expect that the cash contributed by PREI will be used by Development Activity LLC primarily to develop commercial real estate projects or to make acquisitions, in all cases as directed by the Company (“Developments”). 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 will be undertaken by the Venture, although the Company has 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 will 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 may also receive a liquidation preference whereby it would 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 will be entitled to certain priority distributions related to the Developments. After such priority distributions, the Company and PREI will share residual distributions, if any, with respect to the Developments, 88.5% to the Company and 11.5% to PREI.

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

     The Company is accounting for its interest in Property Activity LLC under the equity method of accounting in accordance with APB No. 18 and consolidating the assets and results of operations of Development Activity LLC, with PREI’s share in this entity recorded as minority interest. Development Activity LLC loaned the first contribution of $167 million from PREI to the Company, which utilized the contribution to reduce amounts outstanding under its credit facility and recorded the remaining two contributions of $133 million as a receivable from venture partner at June 30, 2006. The net book value of the Properties was removed from operating properties and projects under development as of the Closing Date, and an investment in unconsolidated joint ventures was recorded using 11.5% of the Company’s original basis in the Properties. The Company is entitled to 51% of the operations of the Properties until the second contribution is received in September 2006, at which point it will recognize 31% of the operations until December 2006, at which time it will reach its ultimate ownership percentage of 11.5%.

     The contribution of the Properties was treated as a sale for accounting purposes using guidance as outlined in SFAS No. 66, “Accounting for Sales of Real Estate.” However, the Company did not recognize any gain in the income statement related to the Venture formation as the consideration received did not meet the rules in SFAS No. 66 for income statement gain recognition. The gain was included in the Deferred Gain line item on the Company’s Condensed Consolidated Balance Sheet and was calculated as 88.5% of the difference between the book value of the Properties and the fair value as detailed above. The Avenue East Cobb was contributed to the Venture encumbered by a mortgage note payable. As discussed above, the Base Contribution amount was adjusted for an estimate of the difference between the stated interest rate per the mortgage note payable and current interest rates. The Company calculated a mark-to-market debt adjustment upon closing and recorded 88.5% of this adjustment as a loss on extinguishment of debt in the Condensed Consolidated Statement of Income.

     The Company sold Hanover Square South, a 193,000 square foot retail center, of which the Company owned 69,000 square feet, in the third quarter of 2005. For the three and six month 2006 periods, gain on sale of investment properties includes an adjustment to cost on sale of this property of $120,000 and $185,000, respectively. In addition, the Company had adjustments to cost on sale of properties sold in 2004 of $15,000 and $141,000 in the three and six month 2006 periods, respectively.

     The following details the components of income from discontinued operations for Hanover Square South ($ in thousands):

     The Company describes its investments in unconsolidated joint ventures in Note 4 to its Annual Report on Form 10-K for the year ended December 31, 2005 and discusses CP Venture IV and related entities in Note 6 of this Form 10-Q. The following table summarizes balance sheet financial data of unconsolidated joint ventures in which the Company had ownership interests at June 30, 2006 and at December 31, 2005 and income statement financial data for the six months ended June 30, 2006 and June 30, 2005 ($ in thousands):

     The Company has four reportable segments: Office/Multi-Family, Retail, Land, and Industrial. 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 homebuilders 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, interest expense, as financing decisions are not generally made at the reportable segment level, income taxes and preferred dividends.

     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. The Company calculated 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. The Company has presented the NAREIT-defined calculation and an adjusted NAREIT-defined calculation of FFO in 2006 to add back the loss on extinguishment of debt recognized in the second quarter of 2006 related to the Venture formation described in Note 6 herein. The Company presented this additional measure of FFO because the loss on extinguishment of debt related to the sale or exchange of real estate, and all other amounts related to sales or exchanges of real estate are excluded from FFO.

     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 and six months ended June 30, 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.