Business Context and Reporting Period
Company: Cousins Properties Incorporated (CUZ)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Cousins is a self-administered REIT focused on the acquisition, development, and management of office, retail, industrial, and residential properties, primarily in the Southeastern United States. The company also provides third-party management and leasing services.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues | $224.9 million | $214.7 million |
| Net Income | $29.5 million | $24.9 million |
| Net Income Available to Common Stockholders | $14.4 million | $7.6 million |
| Funds From Operations (FFO) Available to Common Stockholders | $(92.0) million | $61.0 million |
| Total Assets | $1.49 billion | $1.69 billion |
| Total Debt (Notes Payable) | $590.2 million | $942.2 million |
| Cash and Cash Equivalents | $9.5 million | $83.0 million |
| Dividends Declared per Common Share | $0.74 | $1.36 |
Material Changes vs. Prior Period
- Impairment Charges: The company recorded significant impairment losses totaling $40.5 million in 2009 (compared to $2.1 million in 2008). This included a $34.9 million charge on the 10 Terminus Place condominium project, a $4.0 million charge on the corporate airplane, and a $1.6 million charge on a note receivable. Additionally, $51.1 million in impairments were recorded on investments in unconsolidated joint ventures.
- Gain on Sale of Investment Properties: A non-recurring gain of $168.6 million was recognized in 2009, primarily due to the recognition of $167.2 million in deferred gain related to a 2006 venture formation with Prudential. This gain significantly offset operating losses.
- Debt Reduction: Total notes payable decreased by approximately $352 million (37%) from 2008 to 2009. This reduction was driven by a $318 million common equity offering in September 2009 and the early repayment of the San Jose MarketCenter mortgage for $70.3 million (face value $83.3 million), resulting in a $12.5 million gain on extinguishment.
- Operating Performance: Rental property revenues increased slightly by 2% to $149.8 million. However, fee income decreased by 29% to $33.8 million, largely due to the absence of a $13.5 million non-recurring development fee recognized in 2008.
Guidance, Outlook, and Risks
- Management Outlook: Management expects to continue aggressively liquidating condominium holdings and selling non-strategic land to improve the financial position. Leasing of vacant office and retail space is identified as the most significant value-creating activity for 2010. New development opportunities are expected to remain limited, with a focus on distressed real estate acquisitions and joint ventures.
- Liquidity and Capital Resources: The company raised $318 million in equity in 2009, reducing its debt-to-market capitalization ratio from 73% to 47%. As of December 31, 2009, the company had $40 million drawn on its $500 million credit facility. In February 2010, the credit facility was amended, reducing capacity to $250 million but adjusting interest spreads and covenants.
- Key Risks:
- Market Conditions: Continued adverse economic conditions, high unemployment, and a depressed real estate market pose risks to leasing, sales, and property values.
- Impairment Risk: Ongoing market volatility increases the likelihood of additional impairment charges on real estate assets and joint venture investments.
- Financing: Tightened credit markets may limit the ability to refinance maturing debt or fund new developments on favorable terms.
- REIT Status: Failure to qualify as a REIT would subject the company to federal income taxes at regular corporate rates.
Important Facts for Investor Verification
- Quality of Earnings: Verify the sustainability of the 2009 net income, which was heavily influenced by a $168.6 million non-recurring gain on the sale of investment properties. Without this gain, the company reported a loss from continuing operations before taxes.
- FFO Decline: Note the significant swing in Funds From Operations (FFO) from positive $61.0 million in 2008 to negative $(92.0) million in 2009, driven primarily by impairments on joint ventures and real estate assets.
- Condominium Inventory: Assess the remaining inventory and carrying value of the 10 Terminus Place project (82 units remaining) and other multi-family units held for sale, which have already incurred substantial impairments.
- Joint Venture Exposure: Review the specific risks associated with unconsolidated joint ventures (e.g., CL Realty, Temco, Terminus 200), which accounted for $51.1 million in impairment charges in 2009.
- Debt Covenants: Monitor compliance with the amended credit facility covenants, specifically the minimum Consolidated Fixed Charge Coverage Ratio (reduced to 1.30) and leverage ratios.