Cousins Properties 10-K 2012
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2011
For the transition period from to
Commission file number 001-11312
COUSINS PROPERTIES INCORPORATED
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 30, 2011, the aggregate market value of the common stock of Cousins Properties Incorporated held by non-affiliates was $763,722,037 based on the closing sales price as reported on the New York Stock Exchange. As of February 14, 2012, 104,142,932 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants proxy statement for the annual stockholders meeting to be held on May 8, 2012 are incorporated by reference into Part III of this Form 10-K.
Table of Contents
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, as itemized in Item 1A included in this Form 10-K. These forward-looking statements include information about possible or assumed future results of the Companys business and the Companys financial condition, liquidity, results of operations, plans and objectives. They also include, among other things, statements regarding subjects that are forward-looking by their nature, such as:
The forward-looking statements are based upon managements beliefs, assumptions and expectations of the Companys future performance, taking into account information currently available. These beliefs, assumptions and expectations may change as a result of many possible events or factors, not all of which are known. If a change occurs, the Companys business, financial condition, liquidity and results of operations may vary materially from those expressed in forward-looking statements. Actual results may vary from forward-looking statements due to, but not limited to, the following:
The words believes, expects, anticipates, estimates, plans, may, intend, will, or similar expressions are intended to identify forward-looking statements. Although the Company believes 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. 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, except as required under U.S. federal securities laws.
Item 1. Business
Cousins Properties Incorporated (the Registrant or Cousins) is a Georgia corporation, which, since 1987, has elected to be taxed as a real estate investment trust (REIT). Cousins Real Estate Corporation and its subsidiaries (CREC) is a taxable entity wholly-owned by the Registrant, which is consolidated with the Registrant. CREC owns, develops, and manages its own real estate portfolio and performs certain real estate related services for other parties. The Registrant, its subsidiaries and CREC combined are hereafter referred to as the Company. The Company has been a public company since 1962, and its common stock trades on the New York Stock Exchange under the symbol CUZ. Unless otherwise indicated, the notes referenced in the discussion below are the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K on pages F-7 through F-36.
The Companys strategy is to produce stockholder returns through the acquisition, development and management of high-quality office and retail properties in its core markets of Georgia, Texas and North Carolina. The Company also owns interests in residential development projects, undeveloped land tracts held for investment, and manages properties for third party owners. The Company intends to focus on increasing the value in its current portfolio through lease-up, cost control and superior customer service, as well as making opportunistic investments in office properties within its core markets. The Companys long-term strategy also includes recycling capital not invested in its core markets or property types, reducing its holdings of undeveloped land and residential lots, and diversifying its holdings geographically in order to reduce the current level of asset concentration in Atlanta, Georgia. Through this capital recycling and other capital sources, the Company expects to maintain its leverage near its current levels.
Detail of Properties
For a description and list of the Companys properties, see Item 2 of this report.
2011 Significant Activities
The following is a summary of the Companys 2011 activities by business line and in the financing area.
As of December 31, 2011, the Company owned directly or through joint ventures 21 operating office properties totaling 7.8 million square feet. The Company developed many of the office properties it currently owns. While the Company maintains expertise in the development of office properties, given the current economic real estate environment, it may also seek to opportunistically acquire operating office properties within its core markets. These acquisitions may take the form of operationally or financially distressed properties that are well-located and to which the Companys leasing and management expertise could add value over time. During 2011, the Company had the following activity in its office property portfolio:
As of December 31, 2011, the Company owned directly or through joint ventures 17 operating retail centers totaling 4.8 million square feet. The Company developed most of the retail properties it currently owns. Similar to its strategy for office properties, given the current economic real estate environment, the Company may seek to opportunistically acquire retail properties within its core markets. During 2011, the Company had the following activity in its retail property portfolio:
Third Party Management and Other Fee Income
As of December 31, 2011, the Company managed and/or leased 12.7 million square feet of office and retail properties for third party owners. In addition, the Company has contracts to provide development and construction management services for third party owners.
As of December 31, 2011, the Company owned directly or through joint ventures, 22 residential development projects and residential and commercial undeveloped land, the Companys share of which was approximately 5,000 acres. During 2011, the Company had the following activity related to its other investments:
The Companys financing strategy is to provide capital to fund its investment activities, while maintaining, over time, a relatively conservative leverage ratio, debt maturity dates which are staggered and actively managing borrowing costs. Historically, the Company has generated capital using bank credit facilities, construction loans or mortgage notes payable secured by underlying properties. The Company has also raised capital through sales of assets, contribution of assets into joint ventures, and the issuance of equity securities. During 2011, the Company had the following financing activities:
The Companys business operations are subject to various federal, state and local environmental laws and regulations governing land, water and wetlands resources. Among these are certain laws and regulations under which an owner or operator of real estate could become liable for the costs of removal or remediation of certain hazardous or toxic substances present on or in such property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may subject the owner to substantial liability and may adversely affect the owners ability to develop the property or to borrow using such real estate as collateral. The Company typically manages this potential liability through performance of Phase I Environmental Site Assessments and, as necessary, Phase II environmental sampling, on properties it acquires or develops, although no assurance can be given that environmental liabilities do not exist, that the reports revealed all environmental liabilities or that no prior owner created any material environmental condition not known to the Company. In certain situations, the Company has also sought to avail itself of legal and regulatory protections offered by federal and state authorities to prospective purchasers of property. Where applicable studies have resulted in the determination that remediation was required by applicable law, the necessary remediation is typically incorporated into the development activity of the relevant property. Compliance with other applicable environmental laws and regulations is similarly incorporated into the redevelopment plans for the property. The Company is not aware of any environmental liability that the Companys management believes would have a material adverse effect on the Companys business, assets or results of operations.
Certain environmental laws impose liability on a previous owner of property to the extent that hazardous or toxic substances were present during the prior ownership period. A transfer of the property does not necessarily relieve an owner of such liability. Thus, although the Company is not aware of any such situation, the Company may be liable in respect to properties previously sold. The Company believes that it and its properties are in compliance in all material respects with all applicable federal, state and local laws, ordinances and regulations governing the environment.
The Company owns several different real estate products, most of which are located in markets that include other real estate products of the same or similar type. The Company competes with other real estate owners with similar properties located in its markets, and distinguishes itself to tenants/buyers primarily on the basis of location, rental rates/sales prices, services provided, reputation and the design and condition of the facilities. The Company also competes with other real estate companies, financial institutions, pension funds, partnerships, individual investors and others when attempting to acquire and develop properties.
Executive Offices; Employees
The Registrants executive offices are located at 191 Peachtree Street, Suite 500, Atlanta, Georgia 30303-1740. At December 31, 2011, the Company employed 320 people.
The Company makes available free of charge on the Investor Relations page of its website, www.cousinsproperties.com, its filed and furnished reports on Forms 10-K, 10-Q and 8-K, and all amendments thereto, as soon as reasonably practicable after the reports are filed with or furnished to the Securities and Exchange Commission (the SEC).
The Companys Corporate Governance Guidelines, Director Independence Standards, Code of Business Conduct and Ethics, and the Charters of the Audit Committee, the Investment Committee and the Compensation, Succession, Nominating and Governance Committee of the Board of Directors are also available on the Investor Relations page of the Companys website. The information contained on the Companys website is not incorporated herein by reference. Copies of these documents (without exhibits, when applicable) are also available free of charge upon request to the Company at 191 Peachtree Street, Suite 500, Atlanta, Georgia 30303-1740, Attention: Cameron Golden, Investor Relations. Mr. Golden may also be reached by telephone at (404) 407-1984 or by facsimile at (404) 407-1002. In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC at www.sec.gov.
Item 1A. Risk Factors
Set forth below are the risks we believe investors should consider carefully in evaluating an investment in the securities of Cousins Properties Incorporated.
General Risks of Owning and Operating Real Estate
Our ownership of commercial real estate involves a number of risks, the effects of which could adversely affect our business.
General economic and market risks. In periods during or following a general economic decline or a recessionary climate, our assets may not generate sufficient cash to pay expenses, service debt or cover maintenance, and, as a result, our results of operations and cash flows may be adversely affected. Several factors may adversely affect the economic performance and value of our properties. These factors include, among other things:
While the trends in the real estate industry and the broader U. S. economy appear to be showing signs of stabilization, economic conditions within some of our markets, such as unemployment, consumer demand and housing starts, continue to be unfavorable and may, as a result, adversely affect our business, financial condition, results of operations and the ability of our tenants and other parties to satisfy their contractual obligations to us. As a result, defaults by our tenants and other contracting parties may increase, which would adversely affect our results of operations. Furthermore, our ability to sell or lease our properties at favorable rates, or at all, may be negatively impacted by general economic conditions.
Our ability to collect rent from tenants affects our ability to pay for adequate maintenance, insurance and other operating costs (including real estate taxes). Also, the expenses of owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property. If a property is mortgaged and we are unable to meet the mortgage payments, the lender could foreclose on the mortgage and take title to the property. In addition, interest rate levels, the availability of financing, changes in laws and governmental regulations (including those governing usage, zoning and taxes) may adversely affect our financial condition.
Impairment risks. We regularly review our real estate assets for impairment and based on these reviews, we may record impairment losses that have an adverse effect on our results of operations. Negative or uncertain market and economic conditions, as well as market volatility, increase the likelihood of incurring additional impairment losses. In addition, if management changes its intent from holding a real estate asset for long-term investment or development to holding it as a for-sale asset, or if managements estimates of future
cash flows decrease, the risk of impairment losses increases. For example, we recorded impairment losses in connection with our change in strategy to more aggressively liquidate our residential and land holdings. The magnitude of and frequency with which these charges occur could materially and adversely affect our business, financial condition and results of operations.
Leasing risk. Our operating revenues are dependent upon entering into leases with and collecting rents from our tenants. Uncertain economic conditions may adversely impact current tenants in our various markets and, accordingly, could affect their ability to pay rents and possibly to occupy their space. In periods of economic uncertainty, tenants are more likely to close less profitable locations and/or to declare bankruptcy; and, pursuant to various bankruptcy laws, leases may be rejected and thereby terminated. When leases expire or are terminated, replacement tenants may or may not be available upon acceptable terms and conditions. In addition, our cash flows and results of operations could be adversely impacted if existing leases expire or are terminated and, at such time, market rental rates are lower than the previous contractual rental rates. Also, during uncertain economic conditions, our tenants may approach us for additional concessions in order to remain open and operating. The granting of these concessions may adversely affect our results of operations and cash flows to the extent that they result in reduced rental rates or additional capital improvements or allowances paid to or on behalf of the tenants.
Tenant and property concentration risk. As of December 31, 2011, our top 20 tenants represented approximately 38% of our annualized base rental revenues. While no single tenant accounts for more than 5% of our annualized base rental revenues, the loss of one or more of these tenants could have a significant negative impact on our results of operations or financial condition if a suitable replacement tenant is not secured in a timely fashion.
In addition, for the year ending December 31, 2011, 44% of the Companys net operating income was derived from four properties in Atlanta, Georgia: Terminus 100, 191 Peachtree Tower and The American Cancer Society Center, all of which are office buildings, and The Avenue Forsyth, a retail center. A large percentage of our properties in addition to those listed above are also located in metropolitan Atlanta. Any adverse economic conditions that may impact the Atlanta area generally, or in its Downtown, Midtown or Buckhead submarkets specifically, could adversely affect the operations of one or all of these properties which, in turn, could adversely affect our overall results of operations and financial condition.
Uninsured losses and condemnation costs. Accidents, earthquakes, terrorism incidents and other losses at our properties could materially adversely affect our operating results. Casualties may occur that significantly damage an operating property, and insurance proceeds may be materially less than the total loss incurred by us. Although we maintain casualty insurance under policies we believe to be adequate and appropriate, some types of losses, such as lease and other contract claims, generally are not insured. Certain types of insurance may not be available or may be available on terms that could result in large uninsured losses. We own property in locations that are potentially subject to damage from earthquakes, as well as other natural catastrophes. We also own property that could be subject to loss due to terrorism incidents. The earthquake insurance and terrorism insurance markets, in particular, tend to be volatile and the availability and pricing of insurance to cover losses from earthquakes and terrorism incidents may be unfavorable from time to time. In addition, earthquakes and terrorism incidents could result in a significant loss that is uninsured due to the high level of deductibles or damage in excess of levels of coverage. Property ownership also involves potential liability to third parties for such matters as personal injuries occurring on the property. Such losses may not be fully insured. In addition to uninsured losses, various government authorities may condemn all or parts of operating properties. Such condemnations could adversely affect the viability of such projects.
Environmental issues. Environmental issues that arise at our properties could have an adverse effect on our financial condition and results of operations. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at a property. If determined to be liable, the owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination, or perform such investigation and clean-up itself. Although certain legal protections may be available to prospective purchasers of property, these laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the regulated substances. Even if more than
one person may have been responsible for the release of regulated substances at the property, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from regulated substances emanating from that site. We are not currently aware of any environmental liabilities at locations that we believe could have a material adverse effect on our business, assets, financial condition or results of operations. Unidentified environmental liabilities could arise, however, and could have an adverse effect on our financial condition and results of operations.
Joint venture structure risks. Similar to other real estate companies, we have interests in a number of joint ventures (including partnerships and limited liability companies) and may in the future invest in real estate through such structures. Our venture partners sometimes have rights to take some actions over which we have no control, or sometimes the right to withhold approval of actions that we propose, either of which could adversely affect our interests in the related joint ventures and in some cases our overall financial condition or results of operations. These structures involve participation by other parties whose interests and rights may not be the same as ours. For example, a venture partner might have economic and/or other business interests or goals which are unlike or incompatible with our business interests or goals and those venture partners may be in a position to take action contrary to our interests. In addition, such venture partners may become bankrupt and such proceedings could have an adverse impact on the operation of the partnership or joint venture. Furthermore, the success of a project may be dependent upon the expertise, business judgment, diligence and effectiveness of our venture partners in matters that are outside our control. Thus, the involvement of venture partners could adversely impact the development, operation, ownership or disposition of the underlying properties.
Liquidity risk. Real estate investments are relatively illiquid and can be difficult to sell and convert to cash quickly, especially if market conditions are not favorable. As a result, our ability to sell one or more of our properties, whether in response to any changes in economic or other conditions or in response to a change in strategy, may be limited. In the event we want to sell a property, we may not be able to do so in the desired time period, the sales price of the property may not meet our expectations or requirements, and we may be required to record an impairment loss on the property as a result.
Compliance or failure to comply with federal, state and local regulatory requirements could result in substantial costs.
Our properties are subject to various federal, state and local regulatory requirements, such as the Americans with Disabilities Act, state and local fire, health and life safety requirements. Compliance with these regulations generally involves upfront expenditures and/or ongoing costs. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with existing or future requirements will require significant unanticipated expenditures that will affect our cash flow and results of operations.
At certain times, interest rates and other market conditions for obtaining capital are unfavorable, and, as a result, we may be unable to raise the capital needed to invest in acquisition or development opportunities, maintain our properties or otherwise satisfy our commitments on a timely basis, or we may be forced to raise capital at a higher cost or under restrictive terms, which could adversely affect returns on our investments, our cash flows and results of operations.
We finance our acquisition and development projects through one or more of the following: our bank Credit Facility, permanent mortgages, proceeds from the sale of assets, construction loans, and joint venture equity. In addition, we have raised capital through the issuance of common stock and preferred stock to supplement our capital needs. Each of these sources may be constrained from time to time because of market conditions, and the related cost of raising this capital may be unfavorable at any given point in time. These sources of capital, and the risks associated with each, include the following:
We may not be able to refinance maturing debt secured by our properties on favorable terms which could have an adverse effect on our liquidity and financial position.
We may not be able to refinance debt secured by our properties at the same levels or on the same terms, which could adversely affect our business, financial condition and results of operations. Further, at the time a loan matures, the property may be worth less than the loan amount and, as a result, the Company may determine not to refinance the loan and permit foreclosure, generating a loss to the Company.
Covenants contained in our Credit Facility and mortgages could restrict or hinder our operational flexibility, which could adversely affect our results of operations.
Our Credit Facility imposes financial and operating covenants on us. These covenants may be modified from time to time, but covenants of this type typically include restrictions and limitations on our ability to incur debt, as well as limitations on the amount of our unsecured debt, limitations on distributions to stockholders, and limitations on the amount of joint venture activity in which we may engage. These covenants may limit our flexibility in making business decisions. In addition, our Credit Facility contains financial covenants that, among other things, require that our earnings, as defined, exceed our fixed charges, as defined, by a specified amount and a covenant that requires our net worth, as defined, to be above a specified dollar amount. If our earnings decline or if our fixed charges increase, we are at greater risk of violating the earnings to fixed charges covenant. If we incur significant losses, such as impairment losses, we are at greater risk of violating our net worth covenant. If we fail to comply with these covenants, our ability to borrow may be impaired, which could potentially make it more difficult to fund our capital and operating needs. In addition, our failure to comply with such covenants could cause a default, and we may then be required to repay our outstanding debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us or may be available only on unattractive terms, which could materially and adversely affect our financial condition and results of operations.
Additionally, some of our property mortgages contain customary negative covenants, including limitations on our ability, without the lenders prior consent, to further mortgage that property, to modify existing leases or to sell that property. Compliance with these covenants and requirements could harm our operational flexibility and financial condition.
Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our securities.
Total debt as a percentage of either total asset value or total market capitalization is often used by analysts to gauge the financial health of equity REITs such as us. If our degree of leverage is viewed unfavorably by lenders or potential joint venture partners, it could affect our ability to obtain additional financing. In general, our degree of leverage could also make us more vulnerable to a downturn in business or the economy. In addition, changes in our debt to market capitalization ratio, which is in part a function of our stock price, or to other measures of asset value used by financial analysts, may have an adverse effect on the market price of our equity securities.
Real Estate Development Risks
We face risks associated with the development of real estate, such as delay, cost overruns and the possibility that we are unable to lease a portion of the space that we build, which could adversely affect our results.
While our overall development activities are lower than in past years due to unfavorable market conditions, we have historically undertaken more commercial development activity relative to our size than most other public real estate companies. Development activities contain certain inherent risks. Although we seek to minimize risks from commercial development through various management controls and procedures, development risks cannot be eliminated. Some of the key factors affecting development of commercial property are as follows:
We may face risks associated with opportunistic property acquisitions.
In the current market environment, development opportunities may continue to be limited. Therefore, we may invest more heavily in property acquisitions, including the acquisition and redevelopment of operationally or financially distressed properties. The risks associated with property acquisitions are generally the same as those described above for real estate development. However, certain additional risks may be present for property acquisitions and redevelopment projects, including:
Any of these risks could have an adverse effect on our results of operations and financial condition. In addition, we may acquire properties subject to liabilities, including environmental, and without any recourse, or with only limited recourse, against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our business, results of operations and cash flow.
Risks Associated with our Land Developments and Investments
If we are unable to achieve the estimated sales prices and/or anticipated timing of sales of our residential lots and undeveloped residential land, or if there are further changes in our expectations and strategy for these property types, it could result in additional impairment charges and adversely affect our results of operations.
We have historically developed residential subdivisions, primarily in metropolitan Atlanta, Georgia. We have also participated in joint ventures that develop or plan to develop subdivisions in metropolitan Atlanta, as well as Texas and Florida. Residential lot sales are highly cyclical and can be affected by the availability of mortgage financing, interest rates and local issues, including the availability of jobs, transportation and the quality of public schools. Once a development is undertaken, no assurances can be given that we will be able to sell the various developed lots in a timely manner. Additionally, market conditions may change between the time we decide to develop a property and the time that all or some of the lots may be ready for sale. Failure to sell such lots in a timely manner could result in significantly increased carrying costs, erosion or elimination of profit with respect to any development and/or impairment losses. Similarly, we have historically held undeveloped residential land for long periods of time prior to development or sale. Any changes in market conditions between the time we acquire land and the time we develop and/or sell land could cause the Companys estimates of proceeds and related profits from such sales to be lower or result in an impairment charge.
We do not currently anticipate the commencement of development of any new residential projects. Our current strategy is to reduce our holdings of developed and undeveloped residential land. As a part of this strategy, we have decided to liquidate certain projects in bulk as opposed to selling developed lots over an extended period of time. Decisions such as this have increased the risk that we will not recover our investment in these projects, which required us to record impairment losses. Actual sales prices could be less than our current estimates of fair value, and the expected timing of these bulk sales could lengthen, leading to additional impairment losses.
Any failure to timely sell or lease other non-income producing land could result in additional impairment charges and adversely affect our results of operations.
We maintain significant holdings of commercial (non-residential) non-income producing land in the form of land tracts and outparcels. Our strategies with respect to these parcels of land have included (1) developing the land at a future date as an office, retail, mixed-use or multi-use income producing property; (2) ground leasing the land to third parties; and (3) selling the parcels to third parties. Before we develop, lease or sell these land parcels, we incur carrying costs, including interest and property tax expense. If we are unable to sell this land or convert it into income producing property in a timely manner, our results of operations and liquidity could be adversely affected.
Our current strategy includes a goal of aggressively reducing our holdings of commercial non-income producing land. As a part of this strategy, we expect to liquidate one or more parcels of land to generate capital in the short term as opposed to holding the land for future development or capital appreciation. Decisions such as this have increased the risk that we will sell the land for less than our basis requiring us to record impairment losses. Actual future sales prices could differ from our current estimates, which could lead to further impairments.
Risks Associated with our Third Party Management Business
Our third party management business may experience volatility based on a number of factors, including termination of contracts, which could adversely affect our results of operations.
We engage in third party development, leasing, property management, asset management and property services to unrelated property owners. In addition, 39% of our third party revenues are from one customer. Contracts for such services are generally short-term in nature and permit termination without extensive notice. Fees from such activities can be volatile due to unexpected terminations of such contracts. Termination of contracts with our most significant customer or other unexpected terminations could materially adversely affect our results of operations. Further, the timing of the generation of new contracts for services is difficult to predict.
General Business Risks
We may not adequately or accurately assess new opportunities, which could adversely impact our results of operations.
Our estimates and expectations with respect to new properties or lines of business and opportunities may differ substantially from actual results, and any losses from these endeavors could materially adversely affect our results of operations. We conduct business in an entrepreneurial manner. We seek opportunities in various sectors of real estate and in various geographical areas. Not all opportunities prove to be profitable. We expect from time to time that some of our business lines may have to be terminated because they do not meet our profit expectations. Termination of these business lines may result in the write off of certain related assets and/or the termination of personnel, which would adversely impact results of operations.
We are dependent upon the services of certain key personnel, the loss of any of whom could adversely impair our ability to execute our business.
One of our objectives is to develop and maintain a strong management group at all levels. At any given time, we could lose the services of key executives and other employees. None of our key executives or other employees is subject to employment contracts. Further, we do not carry key person insurance on any of our executive officers or other key employees. The loss of services of any of our key employees could have an adverse effect upon our results of operations, financial condition and our ability to execute our business strategy.
Our restated and amended articles of incorporation contain limitations on ownership of our stock, which may prevent a change in control that might otherwise be in the best interests of our stockholders.
Our restated and amended articles of incorporation impose limitations on the ownership of our stock. In general, except for certain individuals who owned stock at the time of adoption of these limitations, and except for persons that are granted waivers by our Board of Directors, no individual or entity may own more than 3.9% of the value of our outstanding stock. The ownership limitation may have the effect of delaying, inhibiting or preventing a transaction or a change in control that might involve a premium price for our stock or otherwise be in the best interest of our stockholders.
We experience fluctuations and variability in our operating results on a quarterly basis and in the market price of our common stock and, as a result, our historical performance may not be a meaningful indicator of future results.
Our operating results have fluctuated greatly in the past, due to, among other things, volatility in land tract and outparcel sales, property sales, residential lot sales and impairment losses. We are currently engaged in a strategy to simplify our business and focus our resources on Class A office properties which we expect to make our operating results less volatile over time. However, in the near term, we continue to anticipate future fluctuations in our quarterly results, which does not allow for predictability in the market by analysts and investors. Therefore, our historical performance may not be a meaningful indicator of our future results.
The market prices of shares of our common stock have been, and may continue to be, subject to fluctuation due to many events and factors such as those described in this report including:
Many of the factors listed above are beyond our control. Those factors may cause market prices of shares of our common stock to decline, regardless of our financial performance, condition and prospects. The market price of shares of our common stock may fall significantly in the future, and it may be difficult for our stockholders to resell our common stock at prices they find attractive, or at all.
If our future operating performance does not meet projections of our analysts or investors, our stock price could decline.
Several independent securities analysts publish quarterly and annual projections of our financial performance. These projections are developed independently by third-party securities analysts based on their own analyses, and we undertake no obligation to monitor, and take no responsibility for, such projections. Such estimates are inherently subject to uncertainty and should not be relied upon as being indicative of the performance that we anticipate for any applicable period. Our actual revenues and net income may differ materially from what is projected by securities analysts. If our actual results do not meet analysts guidance, our stock price could decline significantly.
Federal Income Tax Risks
Any failure to continue to qualify as a REIT for federal income tax purposes could have a material adverse impact on us and our stockholders.
We intend to operate in a manner to qualify as a REIT for federal income tax purposes. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code (the Code), for which there are only limited judicial or administrative interpretations. Certain facts and circumstances not entirely within our control may affect our ability to qualify as a REIT. In addition, we can provide no assurance that legislation, new regulations, administrative interpretations or court decisions will not adversely affect our qualification as a REIT or the federal income tax consequences of our REIT status.
If we were to fail to qualify as a REIT, we would not be allowed a deduction for distributions to stockholders in computing our taxable income. In this case, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless entitled to relief under certain Code provisions, we also would be disqualified from operating as a REIT for the four taxable years following the year during which qualification was lost. As a result, we would be subject to federal and state income taxes which could adversely affect our results of operations and distributions to stockholders. Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause us to revoke the REIT election.
In order to qualify as a REIT, under current law, we generally are required each taxable year to distribute to our stockholders at least 90% of our net taxable income (excluding any net capital gain). To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100%, of our other taxable income, we are subject to tax on the undistributed amounts at regular corporate rates. In addition, we are subject to a 4% nondeductible excise tax to the extent that distributions paid by us during the calendar year are less than the sum of the following:
We generally intend to make distributions to our stockholders to comply with the 90% distribution requirement, to avoid corporate-level tax on undistributed taxable income and to avoid the nondeductible excise tax. Distributions could be made in cash, stock or in a combination of cash and stock. Differences in timing between taxable income and cash available for distribution could require us to borrow funds to meet the 90% distribution requirement, to avoid corporate-level tax on undistributed taxable income and to avoid the nondeductible excise tax. Satisfying the distribution requirements may also make it more difficult to fund new investment or development projects.
Certain property transfers may be characterized as prohibited transactions, resulting in a tax on any gain attributable to the transaction.
From time to time, we may transfer or otherwise dispose of some of our properties. Under the Code, any gains resulting from transfers or dispositions, from other than our taxable REIT subsidiary, that are deemed to be prohibited transactions would be subject to a 100% tax on any gain associated with the transaction. Prohibited transactions generally include sales of assets that constitute inventory or other property held for sale to customers in the ordinary course of business. Since we acquire properties primarily for investment purposes, we do not believe that our occasional transfers or disposals of property are deemed to be prohibited
transactions. However, whether or not a transfer or sale of property qualifies as a prohibited transaction depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or disposals of properties by us are prohibited transactions. While we believe that the Internal Revenue Service would not prevail in any such dispute, if the Internal Revenue Service were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, we would be required to pay a tax equal to 100% of any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT for federal income tax purposes.
Disclosure Controls and Internal Control over Financial Reporting Risks
Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting.
The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives at all times. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or otherwise materially adversely affect our business, reputation, results of operations, financial condition or liquidity.
Item 2. Properties
The following table sets forth certain information related to operating properties in which the Company has an ownership interest. Information presented in Note 4 to the Consolidated Financial Statements provides additional information related to the Companys joint ventures. Except as noted, all information presented is as of December 31, 2011 ($ in thousands):
As of December 31, 2011, the Companys office portfolio included 21 commercial office buildings. The weighted average remaining lease term of these office buildings was approximately seven years as of December 31, 2011. Most of the major tenant leases in these buildings provide for pass through of operating expenses and contractual rents which escalate over time. The leases expire as follows:
As of December 31, 2011, the Co mpany's retail portfolio included 17 retail properties. The weighted average remaining lease term of these retail properties was appro ximately eight years as of December 31, 2011. Most of the major tenant leases in these retail properties provide for pass through of operating expenses and contractual rents which escalate over time. The leases expire as follows:
As of December 31, 2011, the Company had the following projects under development ($ in thousands; see Note 4 of Notes to Consolidated Financial Statements for Emory Point joint venture information):
Inventory of Lots and Tracts in Residential Projects
As of December 31, 2011, the Company owned, directly or indirectly, the following residential projects (see Note 4 of Notes to Consolidated Financial Statements for joint venture information):
Inventory of Lots and Tracts in Residential Projects (contd)
Inventory of Commercial Land Held
As of December 31, 2011, the Company owned the following land holdings either directly or indirectly through venture arrangements (see Note 4 of Notes to Consolidated Financial Statements for further information related to investments in unconsolidated joint ventures).
Multi-Family Residential. The units remaining at 10 Terminus Place are under contract to sell, but were financed by the Company and therefore did not meet the accounting rule requirements for sales recognition. The Companys basis in these two units is $532,000, and the notes related to these contracts are due in 2012, at which time sales recognition should occur.
Air Rights Near the CNN Center. The Company owns a leasehold interest in the air rights over the approximately 365,000 square foot CNN Center parking facility in Atlanta, Georgia, adjoining the headquarters of Turner Broadcasting System, Inc. and Cable News Network. The air rights are developable for additional parking or for certain other uses. The Companys net carrying value of this interest is $0.
Item 3. Legal Proceedings
The Company is subject to various legal proceedings, claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. The Company records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, the Company accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, the Company discloses the nature and estimate of the possible loss of the litigation. The Company does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
Item X. Executive Officers of the Registrant
The Executive Officers of the Registrant as of the date hereof are as follows:
There are no family relationships among the Executive Officers or Directors.
Term of Office
The term of office for all officers expires at the annual stockholders meeting. The Board retains the power to remove any officer at any time.
Mr. Gellerstedt became President and Chief Executive Officer of the Company in July 2009. In addition, he was appointed as a Director of the Company in July 2009. In February 2009, Mr. Gellerstedt assumed the role of President and Chief Operating Officer. Mr. Gellerstedt joined the Company in July 2005 as Senior Vice President and President of the Office/Multi-Family Division. The Company changed its organizational structure in May 2008, and he became Executive Vice President and Chief Development Officer.
Mr. Adzema joined the Company in November 2010 as Executive Vice President and Chief Financial Officer. From October 2009 until November 2010, he served as the Chief Investment Officer of Hayden Harper Inc., an investment advisory and hedge fund group. From August 2005 to September 2008, Mr. Adzema was Executive Vice President Investments with Grubb Properties, Inc., a real estate development, construction and management company.
Mr. Cohn joined the Company in August 2010 as Executive Vice President Retail Investments, Leasing and Asset management. As a result of the Company changing its organizational structure, he assumed the new title of Executive Vice President in December 2011. From October 2002 to July 2010, Mr. Cohn was Senior Managing Director for Faison Southeast.
Mr. Jones joined the Company in November 1992. In December 2006, he assumed the role of Executive Vice President and Chief Investment Officer. As a result of the Company changing its organizational structure, Mr. Jones assumed the new title of Executive Vice President in December 2011.
Mr. McColl joined the Company in April 1996, serving initially as a Vice President and then a Senior Vice President, before being promoted to Executive Vice President Development, Office Leasing and Asset Management in February 2010. As a result of the Company changing its organizational structure, Mr. McColl assumed the new title of Executive Vice President in December 2011.
Mr. Ellis joined the Company in August 2006 as Senior Vice President Client Services. As a result of the Company changing its organizational structure, Mr. Ellis assumed the new title of Senior Vice President in December 2011.
Mr. Harris joined the Company in February 2005 as Senior Vice President and Chief Accounting Officer and was subsequently appointed Assistant Secretary.
Mr. Jackson joined the Company in December 2004 as Senior Vice President, General Counsel and Corporate Secretary.
Item 5. Market for Registrants Common Stock and Related Stockholder Matters
The high and low sales prices for the Companys common stock and dividends declared per common share (the 2010 dividends were paid in a combination of stock and cash) were as follows:
The Companys common stock trades on the New York Stock Exchange (ticker symbol CUZ). On February 14, 2012, there were 931 common stockholders of record.
Purchases of Equity Securities
For information on the Companys equity compensation plans, see Note 6 of the accompanying Consolidated Financial Statements, which is incorporated herein.
The Company purchased the following common shares during the fourth quarter of 2011:
The following graph compares the five-year cumulative total return of the Companys Common Stock with the S&P 500 Index, the NYSE Composite Index, the FTSE NAREIT Equity Index and the SNL US REIT Office Index. For years following 2011, the Company will no longer include the S&P 500 Index as a reference point, due to the fact that it uses the NYSE Composite Index as its broad market reference. The graph assumes a $100 investment in each of the indices on December 31, 2006 and the reinvestment of all dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE COMPANIES, PEER
GROUPS, INDUSTRY INDICES AND/OR BROAD MARKETS
Item 6. Selected Financial Data
The following selected financial data sets forth consolidated financial and operating information on a historical basis. This data has been derived from the Companys consolidated financial statements and should be read in conjunction with the Consolidated Financial Statements and notes thereto. The data below has been restated for discontinued operations detailed in Note 8 of the Consolidated Financial Statements. In addition, Note 5 of the Consolidated Financial Statements provides information on impairment losses recognized in 2011, 2010 and 2009. In all four quarters of 2010 and in the last three quarters of 2009, the common stock dividends were paid in a combination of cash and stock. The following table reflects the total dividend, both cash and stock, paid.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes.
Overview of 2011 Performance and Company and Industry Trends
The Company entered 2011 having stabilized its financial condition by reducing its leverage ratios and by beginning the process of simplifying its business platform through the sale of non-core holdings. Overall, the economies in the Companys core markets appeared to have stabilized but were not showing signs of any significant recovery. In light of these conditions, management set goals for 2011 that included leasing vacant space in the Companys operating properties, selling non-core assets and seeking investment opportunities where its leasing and development expertise could enhance value over time, including operationally and financially distressed assets. The Company was successful in meeting these goals and management believes that the Company is appropriately positioned for the future.
With respect to the Companys leasing activities, the Company began 2011 with 91% of its office portfolio leased, but with 9% of its square footage expiring in 2011. In spite of these expirations, the Company was able to maintain its current office percent leased at 90% at year-end (excluding the newly acquired Promenade). This result is a function of the Company leasing or renewing approximately 1.0 million square feet of office space in 2011 in its wholly-owned and joint venture properties in a still-challenged leasing environment.
The Company continues to show strong leasing performance in its markets relative to its size and market share. Immediately prior to the Companys acquisition of Promenade, the Companys average percent leased in its three core submarkets of Atlanta (Buckhead, Midtown and Downtown) was approximately 93% versus an average market rate of 83%. The Companys assets in Austin and Charlotte are close to 100% leased versus overall market percentages of between 88% and 89%, respectively. Of the new leases signed in Atlanta in 2011, the Company obtained a higher percentage than its relative market share.
While base rents for office space have deteriorated only marginally in the recent economic downturn, concessions in the form of free rent and tenant allowances have increased significantly. In the Atlanta market, rates and concessions have stabilized, but management does not believe that there will be significant improvement until employment in Atlanta, which is running below the national average, improves. The Companys North Carolina markets are mixed, as they are being negatively impacted by employment contraction in the banking sector, but positively impacted by the regions exposure to the education, technology and health services industries. The Companys Texas markets, by contrast, have experienced positive job growth and lease absorption, resulting in a decline in lease concessions and an increase in rental rates.
The Companys retail portfolio has increased from 86% percent leased at the beginning of 2011 to 89% at year-end. The Company has been able to maintain and increase the percent leased of its retail properties in spite of consumer spending on discretionary consumer services being at a low rate relative to previous recoveries. In addition to executing a new, 72,000 square foot lease with Academy Sports at The Avenue Forsyth, the Companys retail team renewed leases of a number of national tenants, including GAP, Chicos and Ann Taylor as well as Stein Mart at Greenbrier MarketCenter.
In the recent periods of economic downturn and uncertainty, the Companys retail portfolio experienced base rental rate erosion, an increase in the number of tenants paying percentage rent in lieu of base rent, and higher allowances for tenant construction. Recently, the Company has seen an improvement in tenant sales and a modest increase in expansion plans by some national retailers. As a result, terms for new leases executed in the last half of 2011 were generally more traditional in nature as they predominately included standard base rent clauses and tenant construction allowances more in line with the structure of those seen prior to the downturn, although at lower rental rates. Management expects this trend to carry forward provided consumer confidence and associated consumer spending in each of its submarkets improves.
While the Company had success with its leasing activities in 2011, it also made progress on its goal of simplifying its business structure by selling non-core assets thereby generating additional capital for investment. During the year, the Company exited the condominium business by selling the last five units at its 10 Terminus project. It substantially exited the industrial business by selling Jefferson Mill Business ParkBuilding A (Jefferson Mill), King Mill Distribution ParkBuilding 3 (King Mill) and Lakeside
Ranch Business ParkBuilding 20 (Lakeside), and the industrial land in Texas. The Company reduced its holdings of other land by selling 43 acres and continued to decrease its holdings of residential lots by selling 482 lots, the most since 2007. In addition, the Company sold One Georgia Center, a 43 year-old building in Downtown Atlanta, the majority of which was leased by the Georgia Department of Transportation. As a result of these activities, the Company generated $157.0 million in proceeds for reinvestment.
To further simplify its business model to focus on Class A office properties, the Company has changed its strategy on certain land and residential holdings, as well as several other non-core assets, to more aggressively liquidate these assets. Instead of holding these assets for long-term investment or future development, the Company intends to sell these assets in bulk over a shorter time frame than previously intended. As a result of this change, the Company recorded impairment losses of $133.0 million in the fourth quarter of 2011. In addition, after the end of 2011, the Company entered into a contract to sell the majority of the residential projects owned in two joint ventures to its joint venture partner. The Company also expects to sell in bulk the assets related to other residential projects, thereby effectively exiting the residential development business. From this strategy shift, the Company expects it will generate proceeds from asset sales over time. Also, its estimated future capital outlays for development and for holding costs on these assets will be significantly reduced or eliminated.
With the additional proceeds generated in 2011 from asset sales, the Company was able to achieve another of its goals for 2011to invest in assets in its core markets that management expects to add value over time. The most significant of these investments was the acquisition of Promenade, a 775,000 square foot Class A office building in the midtown submarket of Atlanta. Upon acquisition, the building was 59% leased and is, in managements judgment, well-located in one of the most desirable sub-markets in metropolitan Atlanta. The Company expects its relationships with top-tier Atlanta companies and its reputation for providing superior property management services will generate leasing momentum for the buildings vacant space. The Company has already capitalized on its strengths by leasing 32,000 square feet since acquisition, bringing the building to 63% leased.
The Company also commenced two development projects in 2011. The Emory Point Phase I project is a mixed-use development adjacent to Emory University and the Centers for Disease Control that is expected to contain 443 apartment units and 80,000 square feet of retail space. The Company obtained this opportunity through its relationship with Emory University and is constructing the project in a joint venture with apartment developer Gables Residential. The project is located in what management believes to be a high barrier-to-entry submarket with high demand for housing, restaurants and other retail from students and employees of Emory University and Centers for Disease Control.
The Company also began work on Mahan Village, a 147,000 square foot retail center, anchored by Publix and Academy Sports, in Tallahassee, Florida, which was 79% leased prior to commencement. The Company obtained this opportunity when the existing developer needed assistance with financing.
During 2011, the Company invested $170.1 million in these three acquisition and development projects and expects to invest an additional $7.5 million, net of construction loans, in Emory Point and Mahan Village in future years.
Beyond 2011, the Company plans to continue to simplify its business model and to move toward holding substantially all of its assets in Class A office properties. The Company expects most of these assets will be located in its core markets of Georgia, Texas and North Carolina. The Company will continue to prefer investment opportunities that are financially or operationally distressed, thereby creating opportunities to add value through its leasing, asset management and development teams. In addition, the Company could acquire stable operating office properties in order to achieve strategic objectives. There is no guarantee that management will be able to achieve its goals, which could have an adverse impact on its results of operations.
Critical Accounting Policies
The Companys financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) as outlined in the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC), and the Notes to Consolidated Financial Statements include a summary of the significant accounting policies for the Company. The preparation of financial statements in accordance with GAAP requires the use of certain estimates, a change in which could materially
affect revenues, expenses, assets or liabilities. Some of the Companys accounting policies are considered to be critical accounting policies, which are ones that are both important to the portrayal of a companys financial condition and results of operations, and ones that also require significant judgment or complex estimation processes. The Companys critical accounting policies are as follows:
Cost Capitalization. The Company is involved in all stages of real estate ownership, including development. Prior to the point a project becomes probable of being developed (defined as more likely than not), the Company expenses predevelopment costs. After management determines the project is probable, all subsequently incurred predevelopment costs, as well as interest, real estate taxes and certain internal personnel and associated costs directly related to the project under development, are capitalized in accordance with accounting rules. If the Company abandons development of a project that had earlier been deemed probable, the Company charges all previously capitalized costs to expense. If this occurs, the Companys predevelopment expenses could rise significantly in that period because all capitalized predevelopment costs associated with that project would be charged to expense in the period that this change occurs. The determination of whether a project is probable requires judgment by management. If management determines that a project is probable, interest, general and administrative and other expenses could be materially different than if management determines the project is not probable.
During both the predevelopment period and the period in which a project is under construction, the Company capitalizes all direct and indirect costs associated with planning, developing, leasing and constructing the project. Determination of what costs constitute direct and indirect project costs requires management, in some cases, to exercise judgment. If management determines certain costs to be direct or indirect project costs, amounts recorded in projects under development on the balance sheet and amounts recorded in general and administrative and other expenses on the statement of operations could be materially different than if management determines these costs are not directly or indirectly associated with the project.
Once a project is constructed and deemed substantially complete and held for occupancy, subsequent carrying costs, such as real estate taxes, interest, internal personnel and associated costs, are expensed as incurred. Determination of when construction of a project is substantially complete and held available for occupancy requires judgment. The Company considers projects and/or project phases substantially complete and held for occupancy at the earlier of the date on which the project or phase reached occupancy of 95% or one year from the issuance of a certificate of occupancy. The Companys judgment of the date the project is substantially complete has a direct impact on the Companys operating expenses and net income for the period.
Operating Property Acquisitions. From time to time, the Company acquires operating properties. The acquired tangible and intangible assets and assumed liabilities of operating property acquisitions are recorded at fair value at the acquisition date. Fair value is based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates as appropriate. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an acquired operating property generally include, but are not limited to: land, buildings, and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market leases, and acquired in-place lease values.
The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings, tenant improvements, and leasing costs are based upon current market replacement costs and other relevant market rate information.
The fair value of the above-market or below-market component of an acquired in-place lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term and (ii) managements estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remaining term of the lease. In-place leases at acquired properties are reviewed at the time of acquisition to determine if contractual rents are above or below current market rents for the acquired property, and an identifiable intangible asset or liability is recorded if there is an above or below-market lease.
The fair value of acquired in-place leases is derived based on managements assessment of lost revenue and costs incurred for the period required to lease the assumed vacant property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors considered in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, such as real estate taxes, insurance and other operating expenses, current market conditions, and costs to execute similar leases, such as leasing commissions, legal and other related expenses.
The amounts recorded for above-market and in-place leases are included in Other Assets on the Balance Sheets, and the amounts for below-market leases are included in Accounts Payable and Accrued Liabilities on the Balance Sheets. These amounts are amortized on a straight-line basis as an adjustment to rental income over the remaining term of the applicable leases.
The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of operating property acquisitions requires significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of the acquisition related assets and liabilities and the related amortization and depreciation expense recorded for such assets and liabilities. In addition, since the value of above- and below-market leases are amortized as either a reduction or increase to rental income, respectively, the judgments for these intangibles could have a significant impact on reported rental revenues and results of operations.
Depreciation and Amortization. The Company depreciates or amortizes operating real estate assets over their estimated useful lives using the straight-line method of depreciation. Management uses judgment when estimating the life of the real estate assets and when allocating certain indirect project costs to projects under development. Historical data, comparable properties and replacement costs are some of the factors considered in determining useful lives and cost allocations. If management incorrectly estimates the useful lives of the Companys real estate assets or if cost allocations are not appropriate, then depreciation and amortization may not be reflected properly in the Companys results of operations.
The Company generally amortizes tenant costs over the lease term. In certain situations, the tenant may not fulfill its commitments under its lease, and the estimated amortization period of those tenant assets could change, which would result in accelerated amortization of tenant costs or a change in the amortization period, thereby directly affecting the current years net income.
Impairment of Long-Lived Assets Real Estate Assets. On a quarterly basis, management reviews its real estate assets on a property-by-property basis for impairment. This review includes the Companys operating properties, the Companys holdings of undeveloped land and the Companys residential lot developments.
The first step in this process is for management to use judgment to determine whether an asset is considered to be held and used or held for sale, in accordance with applicable accounting standards. In order to be considered a long-lived asset held for sale, management must, among other things, have the authority to commit to a plan to sell the asset in its current condition, have commenced the plan to sell the asset and have determined that it is probable that the asset will sell within one year. If management determines that an asset is held for sale, it must record an impairment loss if the fair value less costs to sell is less than the carrying amount. All real estate assets not meeting the held for sale criteria are considered to be held and used.
In the impairment analysis for assets held and used, management must use judgment to determine whether there are indicators of impairment. For operating properties, these indicators could include a decline in a propertys leasing percentage, a current period operating loss or negative cash flows combined with a history of losses at the property, a decline on lease rates for that property or others in the propertys market, or an adverse change in the financial condition of significant tenants. For land holdings, indicators could include on overall decline in the market value of land in the region, a decline in development activity for the intended use of the land or other adverse economic and market conditions. For residential lot developments, indicators could include a decline in the selling price of completed lots, an increase in inventory of residential lots in a particular projects market area, or other general adverse market conditions with respect to new home development and sale.
If management determines that an asset that is held and used has indicators of impairment, it must determine whether the future estimated undiscounted net cash flows expected to be generated from that asset exceed the carrying amount of the asset. If the undiscounted net cash flows are less than the carrying amount of the asset, the Company must reduce the carrying amount of the asset to fair value.
In calculating the undiscounted net cash flows of an asset, management must estimate a number of inputs. For operating properties, management must estimate future rental rates, expenditures for future leases, future operating expenses, market capitalization rates for residual values, among other things. For land holdings, management must estimate future development costs as well as operating income, expenses and residual capitalization rates for land held for future development. Management also must estimate future sales prices for land that it intends to hold for sale to a developer or for sale in a build-to suit project. For residential lot developments, management must estimate future sales prices, costs to complete development, carrying costs and other costs to complete the development.
In determining the fair value of an asset, management may use a discounted cash flow calculation or utilize comparable market information. Management must determine an appropriate discount rate to apply to the cash flows in the discounted cash flow calculation. Management must use judgment in analyzing comparable market information because no two real estate assets are identical in location and price.
The estimates and judgments used in the impairment process are highly subjective and susceptible to frequent change. If management determines that an asset is held and used, the results of operations could be materially different than if it determines that an asset is held for sale. Different assumptions management uses in the calculation of undiscounted net cash flows of a project could cause a material impairment loss to be recognized when no impairment is otherwise warranted. Managements assumptions about the discount rate used in a discounted cash flow estimate of fair value and managements judgment with respect to market information could materially affect the decision to record impairment losses or, if required, the amount of the impairment losses.
Impairment of Long-Lived AssetsInvestments in Joint Ventures. On a quarterly basis, management performs an impairment analysis of the recoverability of its investments in joint ventures in accordance with accounting rules. This review includes management analyzing its investments in joint ventures for indicators of impairment. If indicators of impairment are present for any of the Companys investments in joint ventures, management calculates the fair value of the investment. If the fair value of the investment is less than the carrying value of the investment, management must determine whether the impairment is temporary or other than temporary, as defined. If management assesses the impairment to be temporary, the Company does not record an impairment charge. If management concludes that the impairment is other than temporary, the Company records an impairment charge.
Management uses considerable judgment in determining whether there are indicators of impairment present and in the assumptions, estimations and inputs used in calculating the fair value of the investment. Management also uses judgment in making the determination as to whether the impairment is temporary or other than temporary. The Company utilizes guidance provided by the SEC in making the determination of whether the impairment is temporary. The guidance indicates that companies consider the length of time that the impairment has existed, the financial condition of the joint venture and the ability and intent of the holder to retain the investment long enough for a recovery in market value. Managements judgment as to the fair value of the investment or on the conclusion of the nature of the impairment could have a material impact on the results of operations and financial condition of the Company.
Residential Lot and Certain Land Tract Sales. When selling lots or certain land tracts contained in an integrated residential development project, management records cost of sales based on a profit percentage. This profit percentage is calculated based on the aggregate estimated sales prices for the overall development and the aggregate estimated costs for the overall development. Management must use significant judgment in determining the future estimated sales prices and costs. Markets for residential lots and land can change over time, and therefore, historical sales prices may not be indicative of a projects prices over its lifetime. In
addition, sales may not occur at a consistent or predictable rate. This has been particularly true over the past several years in the residential real estate markets in which the Company operates. Costs of a project may change over time, particularly if timing of sales changes and becomes extended. Managements judgment on the estimated selling prices, the estimated costs and the timing of projects could materially affect the amount the Company records as its cost of sales on residential lots and certain land tracts.
Valuation of Receivables. The Company generates a significant percentage of its revenues from base rentals and expense reimbursements from tenant leases in office and retail properties. In some cases, receivables are recognized for amounts due under leases or other contracts and agreements, which ultimately may not be collected. The Notes and Other Receivables line item on the Balance Sheet includes current tenant rent receivables and amounts deferred for tenant leases under the straight-line method of accounting, and the balance is shown net of an allowance for doubtful accounts. The Company reviews its receivables regularly for potential collection problems in computing the allowance to record against its receivables. This review process requires management to make certain judgments regarding collectibility, notwithstanding the fact that ultimate collections are inherently difficult to predict. Economic conditions fluctuate over time, and the Company has tenants in various different industries which experience frequent changes in economic health, which makes historical information often not useful in predicting collectibility. Therefore certain receivables currently deemed collectible could become uncollectible, and those reserved could be ultimately collected. A change in judgments made could result in an adjustment to the allowance for doubtful accounts with a corresponding effect on net income.
Income Taxes Valuation Allowance
In accordance with accounting rules, a valuation allowance is established against a deferred tax asset if, based on the available evidence, it is more likely than not that such assets will not be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under tax law. The Company periodically assesses the need for valuation allowances for deferred tax assets based on the more-likely-than-not realization threshold criterion. In the assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment requires considerable judgment by management and includes, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, its experience with operating loss and tax credit carryforwards and tax planning alternatives. If management determines that the Company requires a valuation allowance on its deferred tax assets, income tax expense or benefit could be materially different than if management determines no such valuation allowance is necessary.
Accounting for Non-Wholly Owned Entities
The Company holds ownership interests in a number of joint ventures with varying structures. Management evaluates all of its joint ventures and other variable interests to determine if the entity is a variable interest entity (VIE), as defined in accounting rules. If the venture is a VIE, and if management determines that the Company is the primary beneficiary, the Company consolidates the assets, liabilities and results of operations of the VIE. The Company reassesses its conclusions as to whether the entity is a VIE and whether consolidation is appropriate as required under the rules. For entities that are not determined to be VIEs, management evaluates whether or not the Company has control or significant influence over the joint venture to determine the appropriate consolidation and presentation. Generally, entities under the Companys control are consolidated, and entities over which the Company can exert significant influence, but does not control, are accounted for under the equity method of accounting.
Management uses judgment to determine whether an entity is a VIE, whether the Company is the primary beneficiary of a VIE and whether the Company exercises control over the entity. If management determines that an entity is a VIE with the Company as primary beneficiary or if management concludes that the Company exercises control over the entity, the balance sheet and statement of operations would be significantly different than if management concludes otherwise. In addition, VIEs require different disclosures in the notes to the financial statements than entities that are not VIEs. Management may also change its conclusions, and thereby change its balance sheet, statement of operations and notes to the financial statements, based on facts and circumstances that arise after the original consolidation determination is made. These changes could include additional equity contributed to entities, changes in the allocation of cash flow to entity partners and changes in the expected results within the entity.
Discussion of New Accounting Pronouncements
In June 2011, the FASB issued new guidance related to the presentation of other comprehensive income (OCI). Currently, the Company includes components of OCI in the Statements of Equity. The new guidance requires, among other items, the presentation of the components of net income and OCI in one continuous statement or in two separate but consecutive statements. The guidance is effective for periods beginning after December 15, 2011. The Company does not expect adoption of this guidance to have a material effect on results of operations or financial condition.
Results of Operations For The Three Years Ended December 31, 2011
General. The Companys financial results have historically been significantly affected by sale transactions and the fees generated by, and start-up operations of, real estate developments. These types of transactions and developments do not necessarily recur. Accordingly, the Companys historical financial statements may not be indicative of future operating results.
Rental Property Revenues. Overall, rental property revenues increased $5.1 million (4%) between 2011 and 2010, and increased approximately $2.3 million (2%) between 2010 and 2009.
Comparison of Year Ended December 31, 2011 to 2010.
Office Rental property revenues from the office portfolio increased $3.7 million (4%) between 2011 and 2010 as a result of the following:
Retail Rental property revenues from the retail portfolio increased $1.4 million (4%) between 2011 and 2010 as a result of the following:
Comparison of Year Ended December 31, 2010 to 2009.
Office Rental property revenues from the office portfolio increased $956,000 (1%) between 2010 and 2009 as a result of the following:
RetailRental property revenues from the retail portfolio increased $1.3 million (4%) between 2010 and 2009 as a result of the following:
Rental Property Operating Expenses. Rental property operating expenses increased approximately $2.2 million (4%) in 2011 compared to 2010 as a result of the following:
Rental property operating expenses decreased approximately $4.2 million (7%) in 2010 compared to 2009 as a result of the following:
Fee Income. The Company generates fee income through the leasing, management and development of properties owned by joint ventures in which the Company has an ownership interest and from certain other third party owners outside of its Cousins Properties Services (CPS) subsidiary. These amounts vary by years due to the development and leasing needs at the underlying properties and the mix of contracts with third parties. Amounts are expected to continue to vary in future years based on volume and composition.
Fee income decreased approximately $623,000 (4%) between 2011 and 2010. This decrease is the result of a decrease in leasing fees of $515,000 mainly due to higher levels of leasing occurring at the Palisades West LLC and MSREF/Cousins Terminus 200 LLC (MSREF/T200) ventures during 2010, partially offset by fees received from the Ten Peachtree Place Associates and Crawford Long CPI, LLC ventures in 2011.
Fee income increased $2.6 million (22%) between 2009 and 2010. This increase is the result of an increase in leasing fees of approximately $1.9 million, primarily due to leasing fees of approximately $1.6 million recognized from the MSREF/T200 venture formed in 2010.
Third Party Management and Leasing Revenues. Third party management and leasing revenues represent amounts recognized from contracts with the CPS subsidiary, which performs management and leasing for certain third party-owned office and retail properties. Management fees fluctuate based on the number and size of the properties within the CPS portfolio. Leasing fees fluctuate based on the rollover activity at the underlying properties and the overall supply and demand for leased space within the individual markets. These revenues, including expense reimbursements, did not change significantly between 2011 and 2010. Between 2010 and 2009, these revenues decreased approximately $3.0 million (14%), due to a drop in the average square feet managed between the years.
Multi-Family Residential Sales and Cost of Sales. Multi-family residential unit sales and cost of sales decreased $29.8 million and $24.5 million 2011 and 2010, respectively. The Company had closed all but seven units at 10 Terminus Place as of December 31, 2010. Five of these units closed in 2011 compared to 75 in 2010. At 60 North Market, all the multi-family residential units closed in 2010, and a small amount of commercial space was sold during 2011, with a small amount remaining to be sold at December 31, 2011.
Multi-family residential sales and cost of sales increased $3.6 million and $1.4 million between 2010 and 2009, respectively, due to the following:
Residential Lot and Outparcel Sales and Cost of Sales. Combined residential lot and outparcel sales decreased $12.9 million between 2011 and 2010, and increased $8.5 million between 2010 and 2009. Combined residential lot and outparcel cost of sales decreased $7.8 million between 2011 and 2010 and increased $5.7 million between 2010 and 2009.
Residential Lot Sales and Cost of Sales Sales less cost of sales from consolidated residential lot sales decreased $500,000 between 2011 and 2010. The Company sold 26 lots in 2011 compared to 39 lots in 2010.
Sales less cost of sales from consolidated residential lot sales increased $93,000 between 2010 and 2009. The increase is the result of a bulk sale of 25 lots in the fourth quarter of 2010 at the Companys Cedar Grove project in Atlanta, Georgia.
Outparcel Sales and Cost of Sales Outparcel sales less cost of sales, decreased $4.6 million between 2011 and 2010 and increased $2.8 million between 2010 and 2009. There were no outparcel sales in 2011, and eight and three outparcel sales in 2010 and 2009, respectively.
General and Administrative (G&A) Expenses. G&A expense decreased approximately $4.4 million (15%) between 2011 and 2010 as a result of the following:
G&A expense increased approximately $2.3 million (9%) between 2010 and 2009 as a result of the following:
Separation Expenses. Separation expenses decreased approximately $848,000 between 2011 and 2010 and $2.2 million between 2010 and 2009. The Company had reductions in force in each of the years presented, which varied by number of employees and positions between years. Approximately $2.0 million of the decrease between 2010 and 2009 was due to expense recognized in 2009 for the lump sum cash payment and for the modification of stock compensation awards related to the retirement of the Companys former chief executive officer.
Interest Expense. Interest expense decreased $9.4 million (25%) between 2011 and 2010 due to the following:
Interest expense decreased $2.6 million (6%) between 2010 and 2009 due to the following:
Depreciation and Amortization. Depreciation and amortization decreased approximately $3.1 million (6%) between 2011 and 2010 due to following:
Depreciation and amortization increased approximately $5.5 million (12%) between 2010 and 2009 primarily as a result of the following:
Impairment Losses. During 2011, management began a strategic review and analysis of its residential and land businesses, as well as certain of its operating properties, in an attempt to determine the most effective way to maximize the value of its holdings. As a result of this review, in February 2012, the Company determined that it would liquidate its holdings of certain non-core assets in bulk on a more accelerated timeline and at lower prices than initially planned and re-deploy this capital, primarily into office properties within its core markets. Consequently, the Company recorded impairment losses on certain residential projects, land holdings and operating properties during the quarter ended December 31, 2011. These impairment losses, which are included in costs and expenses on the accompanying Statements of Operations, are detailed below, along with those recorded in 2010 and 2009 (in thousands):
2011 Impairment Losses. In the fourth quarter of 2011, the Company revised the cash flow projections in light of the strategic review and analysis discussed above for its land and residential holdings as well as two operating properties that were being held for long term investment opportunities. The cash flow revisions reflected a higher probability that the Company would sell the assets in the short term than holding them for long term investment and development opportunities. As a result of these revisions, the undiscounted cash flows of 12 residential and land projects, as well as two operating properties, were less than their carrying amounts, and the Company recorded impairment losses to adjust these carrying amounts to fair value.
In the first quarter of 2011, the Company recorded an other-than-temporary impairment on its investment in Verde Realty (Verde), a cost method investment in a non-public real estate investment trust, to adjust the carrying amount of the Companys investment to fair value, as a result of an analysis performed in connection with Verdes withdrawal of its proposed public offering.
2010 Impairment Losses. Handy Road was an encumbered, undeveloped parcel of land in suburban Atlanta, Georgia, that the Company was holding for future development or sale. In 2010, the Company determined that it would convey the land to the bank through foreclosure. As a result, the Company recognized an impairment loss to record the land at its fair value. 60 North Market is a multi-family residential project in Asheville, North Carolina that was acquired by the Company in 2009. In 2010, the Company recorded an impairment loss on the project as it determined the fair value of the project had declined since its acquisition (see 2009 section below).
2009 Impairment Losses. 10 Terminus Place is a multi-family residential project in Atlanta, Georgia. In 2009, market conditions for for-sale multi-family residential projects deteriorated, and the Company recorded an impairment loss to record the project at estimated fair value. 60 North Market (see 2010 section above) was acquired by the Company in satisfaction of a note receivable, and the Company recorded an impairment loss upon acquisition. In addition, the Company sold its corporate airplane at an amount lower than its cost basis, which resulted in an impairment loss.
Additional Information Related to Impairment Losses. Most of the Companys real estate assets are considered to be held for use pursuant to the accounting rules. If managements strategy changes on any of these assets, the Company may be required to record significant impairment charges in future periods. Changes that could cause these impairment losses include: (1) a decision by the Company to sell the asset rather than hold for long-term investment or development purposes, or (2) changes in managements estimates of future cash flows from the assets that cause the future undiscounted cash flows to be less than the assets carrying amount. Given the uncertainties with the economic environment and the amount of the Companys land and residential lot holdings, management cannot predict whether or not the Company will incur impairment losses in the future, and if impairment losses are recorded, management cannot predict the magnitude of such losses.
Other Expense. Other expense did not change significantly between 2011 and 2010 and decreased $8.7 million (66%) between 2010 and 2009. Other expense includes predevelopment costs that the Company incurs prior to the stage where a project is considered probable of being developed. Once a project is determined to be probable, the Company capitalizes all predevelopment costs associated with the project. If the Company subsequently abandons a project that had been considered probable, the Company writes the previously capitalized costs off and records them in Other Expense. In 2011, 2010 and 2009, the Company abandoned one, one and three predevelopment projects, respectively, and recorded predevelopment expense associated with these abandoned projects of $937,000, $829,000 and $7.7 million in such years, respectively. Other Expense also includes funding costs such as real estate taxes, insurance and homeowners association expenses for completed development projects and property taxes and other costs for undeveloped land holdings. These holding costs decreased by $1.1 million between 2011 and 2010 and $1.4 million between 2010 and 2009 due to corresponding changes in the number of projects the Company was funding. In addition, acquisition costs increased approximately $468,000 between 2011 and 2010, primarily due to the acquisition of the Promenade office building in 2011.
Loss on Extinguishment of Debt and Interest Rate Swaps. In 2011, the Company prepaid the Lakeshore Park Plaza mortgage note and as a result, charged $74,000 of unamortized loan closing costs to expense. In 2010, the Company incurred a fee of $9.2 million to terminate an interest rate swap on a term loan. In addition, in 2010, the Company restructured its Credit Facility and wrote off $592,000 in unamortized loan closing costs related to the previous credit facility. In 2009, the Company paid fees of $2.8 million for the termination of one $75 million interest rate swap and the reduction of the notional amount of another interest rate swap from $75 million to $40 million. (See Notes 2 and 3 of Notes to Consolidated Financial Statements for additional information regarding the interest rate swaps.)
Benefit (Provision) for Income Taxes from Operations. Income taxes from operations was a benefit of $186,000 and $1.1 million in 2011 and 2010, respectively, and was a provision of $4.3 million in 2009. In 2009, the Company recorded a valuation allowance against the net deferred tax asset of its taxable REIT subsidiary, CREC. The Company was unable to predict with enough certainty whether the deferred tax asset and the current year benefits would ultimately be realized. Although CREC has operating losses, the Company is continuing to recognize no current income tax benefit due to the ongoing uncertainty of realization of these benefits. This uncertainty is the result of the continued decline in the housing market which directly impacts CRECs residential lot and land business. In the fourth quarter of 2009, Congress changed certain tax laws which allowed the Company to carry back 2009 operating losses to profitable years. As a result, the Company recognized a benefit of $3.1 million in the fourth quarter of 2009, and an additional $1.1 million benefit in the first quarter of 2010.
Income (Loss) from Unconsolidated Joint Ventures.
Equity in net income (loss) from unconsolidated joint ventures. Income from unconsolidated joint ventures decreased $27.2 million between 2011 and 2010 and increased $27.1 million between 2010 and 2009. These changes were primarily due to impairment losses taken at four joint ventures. These impairment losses were recorded on specific assets held by the joint ventures, discussed below, in accordance with accounting standards for long-lived assets. A summary of the Companys share of the impairment losses recorded at these ventures is as follows (in thousands):
During 2011, CL Realty and Temco updated its cash flow projections for its projects and determined the cash flows to be generated by certain projects were less than their carrying amounts. Consequently, Temco and CL Realty recorded impairment losses in 2011 to record these assets at fair value, the Companys share of which was $14.6 million and $13.6 million, respectively. In February 2012, CL Realty and Temco entered into a contract with its 50% partner, Forestar Realty Inc., to sell the majority of the ventures residential projects and land acreage for $23.5 million. The contract price approximates the adjusted carrying value of the applicable assets, and the ventures do not expect a significant gain or loss on this transaction.
The impairment loss at CL Realty in 2010 relates primarily to a decision to sell rather than develop a parcel of land in Padre Island, Texas, which required CL Realty to reduce the carrying cost of the parcel to fair value. The impairment loss at Pine Mountain Builders in 2010 relates primarily to a decision to sell six model homes held by this entity at amounts below their carrying cost.
The impairment loss at Temco in 2009 relates to a change in cash flow assumptions at one if its projects resulting in an adjustment to record the project at fair value. The impairment loss at CL Realty in 2009 relates to an adjustment to record an underlying investment CL Realty held in an unconsolidated joint venture to zero. The impairment loss at Terminus 200 LLC (T200) in 2009 represents the Companys share of an adjustment to reduce the carrying amount of the building owned by T200 to fair value as a result of a change in estimates of future cash flows from operations and ultimate disposition of the building.
Additional joint venture results 2011 to 2010:
Additional joint venture results 2010 to 2009:
Impairment Loss on Investment in Unconsolidated Joint Ventures. The Company also may recognize an impairment loss on its investment in joint venture balance, regardless of whether the underlying venture records an impairment, and these impairments in the Companys basis are calculated in accordance with accounting standards for impairment of equity method investments. During 2011, 2010 and 2009, the Company recorded the following impairment losses on its investments in unconsolidated joint ventures in the accompanying Statements of Operations (in thousands):
In 2011, CL Realty and Temco recorded impairment losses (see previous section for discussion). In addition, the Company recorded an other than temporary impairment on its investment in Temco, due to basis differences between the venture level and owner level. There was not an other than temporary impairment on the Companys investment in CL Realty.
In 2009, the Company recorded an other-than-temporary impairment loss on its investments in CL Realty and Temco as a result of an extended market decline in the residential lot business. The Company also recorded an other-than-temporary impairment loss on its investment in T200 when it determined that it was probable that it would be required to fund a guarantee of the ventures construction loan and other commitments to the venture (see Note 4 for discussion of venture level impairment losses taken at T200 in 2009). In addition, prior to and upon consolidation of Glenmore Garden Villas (Glenmore), a townhome project in Charlotte, North Carolina originally owned in a joint venture, the Company recorded an impairment loss on its investment in Glenmore to record its assets and related debt at fair value.
Gain on Sale of Investment Properties. Gain on sale of investment properties was $3.5 million, $1.9 million and $168.6 million in 2011, 2010 and 2009, respectively.
The 2011 gain included the following:
The 2010 gain included the following:
The 2009 gain included the following:
Discontinued Operations. Accounting rules require that certain properties that were sold or plan to be sold be treated as discontinued operations and that the results of their operations and any gains on sales from these properties are shown as a separate component of income in the Statements of Operations for all periods presented. Therefore, prior year results change as a result of the reclassification of the operations of these properties into a separate section of the Statements of Operations entitled Discontinued Operations. The differences between the years are due to the number and type of properties included, and not all property sales meet the qualifications for treatment as a discontinued operation.
In 2011, the Company sold One Georgia Center, a 376,000 square foot office building in Atlanta, Georgia, for a sales price of $48.6 million, which corresponded to a capitalization rate of approximately 8%. Also in 2011, the Company sold Jefferson Mill, a 459,000 square foot industrial property in suburban Atlanta, Georgia for a sales price of $22.0 million, and King Mill, a 796,000 square foot industrial property in suburban Atlanta, Georgia for a sales price of $28.3 million. The weighted average capitalization rate for these two industrial projects combined was 7.6%. The Company also sold Lakeside in 2011, a 749,000 square foot industrial property in Dallas, Texas for a sales price of $28.4 million. The capitalization rate of this property was not a significant determinant of the sales price, partly due to the fact that the transaction included related tracts of undeveloped land.
In 2010, the Company sold San Jose MarketCenter, a 213,000 square foot retail center in San Jose, California, for a sales price of $85.0 million and a capitalization rate of approximately 8%. Gain on extinguishment of debt recognized in 2009 related to the prepayment at a discount of the mortgage note payable secured by San Jose MarketCenter. The Company sold 8995 Westside Parkway, a 51,000 square foot office building in suburban Atlanta, Georgia for $3.2 million. The capitalization rate of 8995 Westside Parkway was not a significant determinant of the sales price because this building had no leases at the time of sale. Capitalization rates are generally calculated by dividing projected annualized cash flows by the sales price. No properties qualifying as Discontinued Operations were sold in 2009.
Net Income Attributable to Noncontrolling Interest. The Company consolidates certain entities and allocates the partners share of those entities results to Net Income Attributable to Noncontrolling Interests on the Statements of Operations. The noncontrolling interests share of the Companys net income increased $2.4 million between 2011 and 2010, and did not change significantly between 2010 and 2009. In 2011, $1.6 million of the gain on sale of One Georgia Center was allocated to the noncontrolling partner in the entity which owned the property. Also in 2011, $1.4 million of the gain on sale of King Mill was allocated to the noncontrolling partner in the entity which owned the property.
Funds from Operations. The table below shows Funds from Operations Available to Common Stockholders (FFO) and the related reconciliation to net income (loss) available to common stockholders for the Company. The Company calculates 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 GAAP), excluding extraordinary items, cumulative effect of change in accounting principle and gains on sale or impairment losses on 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 a REITs 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 operating performance in part based on FFO. Additionally, the Company uses FFO, along with other measures, to assess performance in connection with evaluating and granting incentive compensation to its officers and other key employees. The reconciliation of net income (loss) available to common stockholders to FFO is as follows for the years ended December 31, 2011, 2010 and 2009 (in thousands, except per share information):
Liquidity and Capital Resources.
The Companys primary liquidity sources are:
The Companys primary liquidity uses are:
During 2011 and 2010, the Company improved its financial position by reducing leverage, extending maturities, replacing higher cost mortgage notes with lower cost financing and modifying credit agreements, all of which increased overall financial flexibility. The Company expects to fund its current commitments over the next 12 months with cash flows from operations, borrowings under its Credit Facility, a new or amended credit facility, borrowings under new or renewed mortgage loans and proceeds from the sale of assets. The Company has a $24 million fixed-rate mortgage loan maturing in 2012, and negotiations are underway to replace its Credit Facility, which currently matures in August 2012.
The Company may also seek additional capital to fund its activities that may include joint venture equity from third parties and the issuance of common or preferred equity. Relative to prior years, the Companys new investment commitments have decreased. The Company commenced two new development projects and acquired an operating office building in 2011. Additional acquisitions or developments could occur in 2012 if opportunities arise. The Company also has commitments under current leases to fund tenant assets and anticipates incurring additional tenant costs in 2012 based on lease-up expectations.
Contractual Obligations and Commitments.
At December 31, 2011, the Company was subject to the following contractual obligations and commitments (in thousands):