Cousins Properties - 10-Q quarterly report FY

 

(Mark One)

(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 an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

     As of July 31, 2005, there were 50,509,471 shares of common stock outstanding.

     Certain matters contained in this report are forward-looking statements within the meaning of the federal securities laws and are subject to uncertainties and risks. These uncertainties and risks include, but are not limited to, general and local economic conditions, local real estate conditions, the activity of others developing competitive real estate projects, the cyclical nature of the real estate industry, the financial condition of existing tenants, interest rate volatility, the Company’s ability to obtain favorable financing or zoning, environmental matters, the effects of terrorism, and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission, including the Company’s Current Report on Form 8-K filed on December 10, 2003. The words “believes,” “expects,” “anticipates,” “estimates,” 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 statements are reasonable, the Company can give no assurance that such 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.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)

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. However, 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 June 30, 2005 and results of operations for the three and six-month periods ended June 30, 2005 and 2004. Results of operations for the three and six months ended June 30, 2005 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, 2004. Certain 2004 amounts have been reclassified to conform with the 2005 presentation. The accounting policies employed are the same as those shown in Note 1 to the consolidated financial statements included in such Form 10-K, with the following addition:

     Sales and related cost of sales of multi-family residential units are recognized using the percentage of completion method in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 66, “Accounting for Sales of Real Estate,” provided that the criteria in paragraph 37 are met. Multi-family residential unit sales are accounted for under the deposit method when criteria for percentage of completion profit recognition are not met. One of the unconsolidated joint ventures in which the Company is a partner recognized sales of multi-family residential units under the percentage of completion method in the second quarter of 2005 (see Note 2 contained herein).

     On June 30, 2005, the Company entered into a business combination with several entities, collectively called “The Gellerstedt Group.” The Gellerstedt Group was an Atlanta-based private real estate owner, advisor and development firm, specializing in for-sale multi-family urban residential projects. The cash purchase price of approximately $521,000 was first allocated to tangible assets acquired at their fair value. These consisted of approximately $30,000 of furniture, fixtures and equipment, which will be depreciated over a three-year life. Amounts were allocated next to

specifically identifiable intangible assets of approximately $153,000, which consisted of customer contracts and which will be amortized over the average remaining contract period. The remainder of the purchase price of $338,000 was allocated to goodwill.

     The Company is a member in 905 Juniper Venture, LLC (“905 Juniper”), a joint venture with Larry L. Gellerstedt III, that was accounted for on the equity method of accounting. When the Company purchased The Gellerstedt Group, it did not purchase Mr. Gellerstedt’s ownership interest in 905 Juniper. Mr. Gellerstedt became an employee and executive officer of the Company upon acquisition of his business. While the operating agreement for 905 Juniper did not change, management concluded that upon Mr. Gellerstedt’s appointment as an executive officer of the Company, the Company could exert indirect control over the management and operations of 905 Juniper by virtue of its employment relationship with him. Therefore, on June 30, 2005, the Company consolidated its investment, and Mr. Gellerstedt’s interest is recorded as a minority interest.

     905 Juniper is a venture which is constructing a 117-unit condominium project in Atlanta, Georgia. During both the three and six months ended June 30, 2005, the venture recognized profits in accordance with SFAS No. 66 on the percentage of completion method as follows ($ in thousands):

     The Company recorded its share of the net profits in income from unconsolidated joint ventures on the accompanying condensed consolidated statements of income.

     In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004) (“SFAS 123(R)”) entitled, “Share-Based Payment.” SFAS 123(R) will require the recognition of compensation expense for the grant-date fair value of all share-based awards granted to employees. The Company plans to adopt SFAS 123(R) in the fiscal quarter beginning January 1, 2006. The impact of this standard on the Company’s results of operations and financial condition has not yet been determined. See Note 7 for additional information regarding the Company’s stock-based compensation.

     Subsequent to the issuance of the condensed consolidated financial statements for the three and six month periods ended June 30, 2004, the Company determined that residential lot development and acquisition costs previously reported as investing activities should have been recorded within operating activities in the Company’s condensed consolidated statements of cash flows. As a result, the condensed consolidated statement of cash flows for the six months ended June 30, 2004 has been restated to reclassify $2,813,000 from investing activities to operating activities. In addition, the Company reclassified prepaid expenses of $1,038,000 from cash flows from investing activities to cash flows from operating activities and reclassified payments for deferred financing costs of $23,000 from cash flows from investing activities to cash flows from financing activities in the condensed consolidated statement of cash flows for the six months ended June 30, 2004.

     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, 2005 ($ in thousands):

     The Company had $47.8 million drawn on its $325 million revolving credit facility as of June 30, 2005 and, net of $33.8 million reserved for outstanding letters of credit, the Company had $243.4 million available for future borrowings under this facility.

     For the three and six months ended June 30, 2005 and 2004, 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 has several stock-based compensation plans that are described in Note 5 of “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The Company has elected to account for its plans under Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees,” which requires the recording of compensation expense for some, but not all, stock-based compensation, rather than the alternative accounting permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” No stock-based compensation was reflected in the condensed consolidated statements of income for options granted under the plans, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

     For purposes of the pro forma disclosures required by SFAS No. 123 and SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure,” the Company has computed the value of all stock grants and stock options granted during the three and six months ended June 30, 2005 and 2004 using the Black-Scholes option pricing model. If the Company had accounted for its stock-based compensation awards in accordance with SFAS No. 123, pro forma results would have been as follows ($ in thousands, except per share amounts):

     SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that the gains and losses from the disposition of certain real estate assets and the related historical operating results be included in a separate section, discontinued operations, in the condensed consolidated statements of income for all periods presented.

     During 2004, the Company sold six properties that met the criteria for classification as discontinued operations:

     In the second quarter of 2005, Hanover Square South, a 193,000 square foot retail center, of which the Company owns approximately 69,000 square feet, in Richmond, Virginia, was under contract to sell and met the criteria for classification as discontinued operations.

     The following table details the components of income from discontinued operations ($ 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 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.

     The management of the Company evaluates the performance of its reportable segments based on funds from operations available to common stockholders (“FFO”). The Company calculates 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 and six months ended June 30, 2005 and 2004. The notations (100%) and (JV) used in the following tables indicate wholly-owned and unconsolidated joint ventures, respectively, and all amounts are in thousands.