Form 10-Q March 31, 2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
OR
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-11312
COUSINS PROPERTIES INCORPORATED
(Exact name of registrant as specified in its charter)
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GEORGIA (State or other jurisdiction of incorporation or organization) | 58-0869052 (I.R.S. Employer Identification No.) |
191 Peachtree Street, Suite 500, Atlanta, Georgia (Address of principal executive offices) | 30303-1740 (Zip Code) |
(404) 407-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
| | (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class | | Outstanding at May 2, 2013 |
Common Stock, $1 par value per share | | 120,638,088 shares |
FORWARD-LOOKING STATEMENTS
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 the Company's Annual Report on Form 10-K for the year ended December 31, 2012. These forward-looking statements include information about possible or assumed future results of the Company's business and the Company's 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:
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• | the Company's business and financial strategy; |
•the Company's ability to obtain future financing arrangements;
•future acquisitions and future dispositions of operating assets;
•future development and redevelopment opportunities;
•future dispositions of land and other non-core assets;
•projected operating results;
•market and industry trends;
•future distributions;
•projected capital expenditures; and
•interest rates.
The forward-looking statements are based upon management's beliefs, assumptions and expectations of the Company's future performance, taking into account information currently available. These beliefs, assumptions and expectations may change as a result of possible events or factors, not all of which are known. If a change occurs, the Company's 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:
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• | the availability and terms of capital and financing; |
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• | the ability to refinance indebtedness as it matures; |
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• | the failure of purchase, sale or other contracts to ultimately close; |
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• | the potential dilutive effect of common stock offerings; |
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• | the availability of buyers and adequate pricing with respect to the disposition of assets; |
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• | risks and uncertainties related to national and local economic conditions, the real estate industry in general and the commercial real estate markets in particular; |
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• | changes to the Company's strategy with regard to land and other non-core holdings that require impairment losses to be recognized; |
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• | the effects of the sale of the Company's third party management business; |
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• | leasing risks, including the ability to obtain new tenants or renew expiring tenants, and the ability to lease newly developed and/or recently acquired space; |
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• | the financial condition of existing tenants; |
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• | volatility in interest rates and insurance rates; |
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• | the availability of sufficient investment opportunities; |
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• | competition from other developers or investors; |
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• | the risks associated with real estate developments and acquisitions (such as construction delays, cost overruns and leasing risk); |
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• | the loss of key personnel; |
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• | the potential liability for uninsured losses, condemnation or environmental issues; |
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• | the potential liability for a failure to meet regulatory requirements; |
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• | the financial condition and liquidity of, or disputes with, joint venture partners; |
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• | any failure to comply with debt covenants under credit agreements; and |
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• | any failure to continue to qualify for taxation as a real estate investment trust. |
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.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) |
| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
| (unaudited) | | |
ASSETS | | | |
PROPERTIES: | | | |
Operating properties, net of accumulated depreciation of $218,123 and $255,128 in 2013 and 2012, respectively | $ | 762,493 |
| | $ | 669,652 |
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Projects under development, net of accumulated depreciation of $359 and $183 in 2013 and 2012, respectively | 25,629 |
| | 25,209 |
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Land held | 41,019 |
| | 42,187 |
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Other | — |
| | 151 |
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Total properties | 829,141 |
| | 737,199 |
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OPERATING PROPERTY AND RELATED ASSETS HELD FOR SALE, net of accumulated depreciation of $2,947 in 2013 and 2012 | 1,866 |
| | 1,866 |
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CASH AND CASH EQUIVALENTS | 6,042 |
| | 176,892 |
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RESTRICTED CASH | 3,616 |
| | 2,852 |
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NOTES AND ACCOUNTS RECEIVABLE, net of allowance for doubtful accounts of $1,734 and $1,743 in 2013 and 2012, respectively | 7,967 |
| | 9,972 |
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DEFERRED RENTS RECEIVABLE | 33,856 |
| | 39,378 |
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INVESTMENT IN UNCONSOLIDATED JOINT VENTURES | 128,541 |
| | 97,868 |
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OTHER ASSETS | 85,415 |
| | 58,215 |
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TOTAL ASSETS | $ | 1,096,444 |
| | $ | 1,124,242 |
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LIABILITIES AND EQUITY | | | |
NOTES PAYABLE | $ | 344,832 |
| | $ | 425,410 |
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ACCOUNTS PAYABLE AND ACCRUED EXPENSES | 26,936 |
| | 34,751 |
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DEFERRED INCOME | 11,591 |
| | 11,888 |
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OTHER LIABILITIES | 22,446 |
| | 9,240 |
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TOTAL LIABILITIES | 405,805 |
| | 481,289 |
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STOCKHOLDERS’ INVESTMENT: | | | |
Preferred stock, 20,000,000 shares authorized, $1 par value: | | | |
7.75% Series A cumulative redeemable preferred stock, $25 liquidation preference; 2,993,090 shares issued and outstanding in 2013 and 2012 | 74,827 |
| | 74,827 |
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7.50% Series B cumulative redeemable preferred stock, $25 liquidation preference; 3,791,000 shares issued and outstanding in 2013 and 2012 | 94,775 |
| | 94,775 |
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Common stock, $1 par value, 250,000,000 shares authorized, 107,697,435 and 107,660,080 shares issued in 2013 and 2012, respectively | 107,697 |
| | 107,660 |
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Additional paid-in capital | 689,176 |
| | 690,024 |
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Treasury stock at cost, 3,570,082 shares in 2013 and 2012 | (86,840 | ) | | (86,840 | ) |
Distributions in excess of cumulative net income | (211,623 | ) | | (260,104 | ) |
TOTAL STOCKHOLDERS’ INVESTMENT | 668,012 |
| | 620,342 |
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Nonredeemable noncontrolling interests | 22,627 |
| | 22,611 |
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TOTAL EQUITY | 690,639 |
| | 642,953 |
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TOTAL LIABILITIES AND EQUITY | $ | 1,096,444 |
| | $ | 1,124,242 |
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See accompanying notes. | | | |
COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
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| | | | | | | |
| Three Months Ended |
| March 31, |
| 2013 | | 2012 |
REVENUES: | | | |
Rental property revenues | $ | 36,123 |
| | $ | 29,573 |
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Fee income | 3,579 |
| | 2,857 |
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Land sales | 963 |
| | 949 |
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Other | 603 |
| | 1,273 |
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| 41,268 |
| | 34,652 |
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COSTS AND EXPENSES: | | | |
Rental property operating expenses | 16,297 |
| | 12,225 |
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Reimbursed expenses | 1,910 |
| | 1,375 |
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Land cost of sales | 963 |
| | 564 |
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General and administrative expenses | 6,069 |
| | 6,625 |
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Interest expense | 4,935 |
| | 6,268 |
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Depreciation and amortization | 12,299 |
| | 10,515 |
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Separation expenses | — |
| | 213 |
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Other | 728 |
| | 680 |
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| 43,201 |
| | 38,465 |
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LOSS ON EXTINGUISHMENT OF DEBT | — |
| | (94 | ) |
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES, UNCONSOLIDATED JOINT VENTURES AND SALE OF INVESTMENT PROPERTIES | (1,933 | ) | | (3,907 | ) |
PROVISION FOR INCOME TAXES FROM OPERATIONS | (1 | ) | | (27 | ) |
INCOME FROM UNCONSOLIDATED JOINT VENTURES | 1,652 |
| | 2,186 |
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LOSS FROM CONTINUING OPERATIONS BEFORE GAIN ON SALE OF INVESTMENT PROPERTIES | (282 | ) | | (1,748 | ) |
GAIN ON SALE OF INVESTMENT PROPERTIES | 57,177 |
| | 57 |
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INCOME (LOSS) FROM CONTINUING OPERATIONS | 56,895 |
| | (1,691 | ) |
INCOME (LOSS) FROM DISCONTINUED OPERATIONS: | | | |
Loss from discontinued operations | (86 | ) | | (9,749 | ) |
Gain on sale of discontinued operations, net | 95 |
| | 86 |
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| 9 |
| | (9,663 | ) |
NET INCOME (LOSS) | 56,904 |
| | (11,354 | ) |
NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (507 | ) | | 1,469 |
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NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST | 56,397 |
| | (9,885 | ) |
DIVIDENDS TO PREFERRED STOCKHOLDERS | (3,227 | ) | | (3,227 | ) |
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS | $ | 53,170 |
| | $ | (13,112 | ) |
PER COMMON SHARE INFORMATION — BASIC AND DILUTED: | | | |
Income (loss) from continuing operations attributable to controlling interest | $ | 0.51 |
| | $ | (0.04 | ) |
Income from discontinued operations | — |
| | (0.09 | ) |
Net income (loss) available to common stockholders | $ | 0.51 |
| | $ | (0.13 | ) |
WEIGHTED AVERAGE SHARES — BASIC | 104,119 |
| | 104,000 |
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WEIGHTED AVERAGE SHARES — DILUTED | 104,252 |
| | 104,000 |
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DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.045 |
| | $ | 0.045 |
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See accompanying notes.
COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Three Months Ended March 31, 2013 and 2012
(unaudited, in thousands)
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| | Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Distributions in Excess of Net Income | | Stockholders’ Investment | | Nonredeemable Noncontrolling Interests | | Total Equity |
Balance December 31, 2012 | | $ | 169,602 |
| | $ | 107,660 |
| | $ | 690,024 |
| | $ | (86,840 | ) | | $ | (260,104 | ) | | $ | 620,342 |
| | $ | 22,611 |
| | $ | 642,953 |
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Net income | | — |
| | — |
| | — |
| | — |
| | 56,397 |
| | 56,397 |
| | 477 |
| | 56,874 |
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Common stock issued pursuant to: | | | | | | | | | | | | | | | |
|
Restricted stock grants, net of amounts withheld for income taxes | | — |
| | 30 |
| | (1,202 | ) | | — |
| | — |
| | (1,172 | ) | | — |
| | (1,172 | ) |
Amortization of stock options and restricted stock, net of forfeitures | | — |
| | 7 |
| | 354 |
| | — |
| | — |
| | 361 |
| | — |
| | 361 |
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Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (461 | ) | | (461 | ) |
Cash preferred dividends paid | | — |
| | — |
| | — |
| | — |
| | (3,227 | ) | | (3,227 | ) | | — |
| | (3,227 | ) |
Cash common dividends paid | | — |
| | — |
| | — |
| | — |
| | (4,689 | ) | | (4,689 | ) | | — |
| | (4,689 | ) |
Balance March 31, 2013 | | $ | 169,602 |
| | $ | 107,697 |
| | $ | 689,176 |
| | $ | (86,840 | ) | | $ | (211,623 | ) | | $ | 668,012 |
| | $ | 22,627 |
| | $ | 690,639 |
|
| | | | | | | | | | | | | | | | |
Balance December 31, 2011 | | $ | 169,602 |
| | $ | 107,272 |
| | $ | 687,835 |
| | $ | (86,840 | ) | | $ | (274,177 | ) | | $ | 603,692 |
| | $ | 33,703 |
| | $ | 637,395 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | (9,885 | ) | | (9,885 | ) | | 571 |
| | (9,314 | ) |
Common stock issued pursuant to: | | | | | | | | | | | | | | | | |
Restricted stock grants, net of amounts withheld for income taxes | | — |
| | 441 |
| | (612 | ) | | — |
| | — |
| | (171 | ) | | — |
| | (171 | ) |
Amortization of stock options and restricted stock, net of forfeitures | | — |
| | (3 | ) | | 586 |
| | — |
| | — |
| | 583 |
| | — |
| | 583 |
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Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (528 | ) | | (528 | ) |
Cash preferred dividends paid | | — |
| | — |
| | — |
| | — |
| | (3,227 | ) | | (3,227 | ) | | — |
| | (3,227 | ) |
Cash common dividends paid | | — |
| | — |
| | — |
| | — |
| | (4,687 | ) | | (4,687 | ) | | — |
| | (4,687 | ) |
Balance March 31, 2012 | | $ | 169,602 |
| | $ | 107,710 |
| | $ | 687,809 |
| | $ | (86,840 | ) | | $ | (291,976 | ) | | $ | 586,305 |
| | $ | 33,746 |
| | $ | 620,051 |
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See accompanying notes.
COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income (loss) | $ | 56,904 |
| | $ | (11,354 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Gain on sale of investment properties, including discontinued operations | (57,272 | ) | | (143 | ) |
Loss on extinguishment of debt | — |
| | 94 |
|
Impairment loss included in discontinued operations | — |
| | 12,233 |
|
Depreciation and amortization, including discontinued operations | 12,299 |
| | 14,256 |
|
Amortization of deferred financing costs | 279 |
| | 235 |
|
Amortization of stock options and restricted stock, net of forfeitures | 361 |
| | 583 |
|
Effect of certain non-cash adjustments to rental revenues | (1,806 | ) | | (1,482 | ) |
Income from unconsolidated joint ventures | (1,652 | ) | | (2,186 | ) |
Operating distributions from unconsolidated joint ventures | 1,417 |
| | 1,550 |
|
Land and multi-family cost of sales, net of closing costs paid | 904 |
| | 538 |
|
Changes in other operating assets and liabilities: | | | |
Change in other receivables and other assets, net | (1,581 | ) | | (306 | ) |
Change in operating liabilities | (8,083 | ) | | (3,796 | ) |
Net cash provided by operating activities | 1,770 |
| | 10,222 |
|
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Proceeds from investment property sales | 112,651 |
| | — |
|
Property acquisition, development and tenant asset expenditures | (295,789 | ) | | (8,039 | ) |
Investment in unconsolidated joint ventures | (19 | ) | | (4,483 | ) |
Distributions from unconsolidated joint ventures | 39,563 |
| | 24,098 |
|
Collection of notes receivable | 339 |
| | 212 |
|
Change in notes receivable and other assets | (1,221 | ) | | (1,176 | ) |
Change in restricted cash | (764 | ) | | 807 |
|
Net cash provided by (used in) investing activities | (145,240 | ) | | 11,419 |
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| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Proceeds from credit facility | 102,000 |
| | 239,500 |
|
Repayment of credit facility | (47,000 | ) | | (350,750 | ) |
Proceeds from other notes payable | 1,166 |
| | 102,191 |
|
Repayment of notes payable | (75,139 | ) | | (1,215 | ) |
Payment of loan issuance costs | — |
| | (3,353 | ) |
Common dividends paid | (4,689 | ) | | (4,687 | ) |
Preferred dividends paid | (3,227 | ) | | (3,227 | ) |
Distributions to noncontrolling interests | (491 | ) | | (956 | ) |
Net cash used in financing activities | (27,380 | ) | | (22,497 | ) |
| | | |
NET DECREASE IN CASH AND CASH EQUIVALENTS | (170,850 | ) | | (856 | ) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 176,892 |
| | 4,858 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 6,042 |
| | $ | 4,002 |
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| | | |
INTEREST PAID, NET OF AMOUNTS CAPITALIZED | $ | 5,470 |
| | $ | 6,606 |
|
See accompanying notes.
COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein include the accounts of Cousins Properties Incorporated (“Cousins”) and its consolidated subsidiaries, including Cousins Real Estate Corporation and its subsidiaries (“CREC”). All of the entities included in the consolidated financial statements are hereinafter referred to collectively as the “Company.”
The Company develops, acquires, leases, manages and owns primarily Class-A office and retail real estate properties. Cousins has elected to be taxed as a real estate investment trust (“REIT”) and intends to, among other things, distribute 90% of its net taxable income to stockholders, thereby eliminating any liability for federal income taxes under current law. Therefore, the results included herein do not include a federal income tax provision for Cousins. CREC operates as a taxable REIT subsidiary and is taxed separately from Cousins as a C-Corporation. Accordingly, if applicable, the statements of operations include a provision for, or benefit from, CREC's income taxes.
The condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these financial statements reflect all adjustments necessary (which adjustments are of a normal and recurring nature) for the fair presentation of the Company's financial position as of March 31, 2013 and the results of operations for the three months ended March 31, 2013 and 2012. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of results expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The accounting policies employed are substantially the same as those shown in note 2 to the consolidated financial statements included in such Form 10-K.
For the three months ended March 31, 2013 and 2012, there were no items of other comprehensive income. Therefore, no presentation of comprehensive income is required.
2. EARNINGS PER SHARE
Net income (loss) per share-basic is calculated as net income (loss) available to common stockholders divided by the weighted average number of common shares outstanding during the period, including nonvested restricted stock which has nonforfeitable dividend rights. Net income (loss) per share-diluted is calculated as net income (loss) available to common stockholders divided by the diluted weighted average number of common shares outstanding during the period. Diluted weighted average number of common shares uses the same weighted average share number as in the basic calculation and adds the potential dilution, if any, that would occur if stock options (or any other contracts to issue common stock) were exercised and resulted in additional common shares outstanding, calculated using the treasury stock method. The numerator is reduced for the effect of preferred dividends in both the basic and diluted net income (loss) per share calculations. Weighted average shares-basic and diluted for the three months ended March 31, 2013 and 2012 are as follows (in thousands):
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| | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Weighted average shares — basic | 104,119 |
| | 104,000 |
|
Dilutive potential common shares — stock options | 133 |
| | — |
|
Weighted average shares — diluted | 104,252 |
| | 104,000 |
|
Weighted average anti-dilutive stock options | 3,123 |
| | 5,026 |
|
Stock options are dilutive when the average market price of the Company's stock during the period exceeds the option exercise price. However, in periods where the Company is in a net loss position, the dilutive effect of stock options is not included in the diluted weighted average shares total.
Anti-dilutive stock options represent stock options which are outstanding but which are not exercisable during the period because the exercise price exceeded the average market value of the Company's stock. These anti-dilutive stock options are not included in the current calculation of dilutive weighted average shares, but could be dilutive in the future.
3. NOTES PAYABLE
The following table summarizes the terms and amounts of the Company’s notes payable at March 31, 2013 and December 31, 2012 ($ in thousands):
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| | | | | | | | | | | | | |
Description | | Interest Rate | | Maturity | | March 31, 2013 | | December 31, 2012 |
The American Cancer Society Center mortgage note | | 6.45 | % | | 2017 | | 133,840 |
| | 134,243 |
|
191 Peachtree Tower mortgage note (interest only until May 1, 2016) | | 3.35 | % | | 2018 | | 100,000 |
| | 100,000 |
|
Credit Facility, unsecured | | 1.70 | % | | 2016 | | 55,000 |
| | — |
|
Meridian Mark Plaza mortgage note | | 6.00 | % | | 2020 | | 26,101 |
| | 26,194 |
|
The Points at Waterview mortgage note | | 5.66 | % | | 2016 | | 15,526 |
| | 15,651 |
|
Mahan Village construction facility | | 1.85 | % | | 2014 | | 14,191 |
| | 13,027 |
|
Callaway Gardens | | 4.13 | % | | 2013 | | 174 |
| | 172 |
|
Terminus 100 mortgage note (see discussion below) | | 5.25 | % | | 2023 | | — |
| | 136,123 |
|
| | | | | | $ | 344,832 |
| | $ | 425,410 |
|
Other Debt Activity
In February 2013, the Company effectively sold 50% of its interest in Terminus 100 to a third party. Based upon the ownership and management structure of the joint venture that owns Terminus 100 after these transactions, the Company accounts for its investment in this entity under the equity method. Therefore, the Terminus 100 mortgage note is no longer consolidated. See note 7 for further details.
Fair Value
At March 31, 2013 and December 31, 2012, the aggregate estimated fair values of the Company's notes payable were $364.8 million and $456.0 million, respectively, calculated by discounting the debt's remaining contractual cash flows at estimated rates at which similar loans could have been obtained at those respective dates. The estimate of the current market rate, which is the most significant input in the discounted cash flow calculation, is intended to replicate debt of similar maturity and loan-to-value relationship. These fair value calculations are considered to be Level 2 under the guidelines as set forth in ASC 820 as the Company utilizes market rates for similar type loans from third party brokers.
Other Information
For the three months ended March 31, 2013 and 2012, interest expense was as follows (in thousands): |
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Total interest incurred | $ | 5,036 |
| | $ | 6,694 |
|
Interest capitalized | (101 | ) | | (426 | ) |
Total interest expense | $ | 4,935 |
| | $ | 6,268 |
|
The real estate and other assets of The American Cancer Society Center (the “ACS Center”) are restricted under the ACS Center loan agreement in that they are not available to settle debts of the Company. However, provided that the ACS Center loan has not incurred any uncured event of default, as defined in the loan agreement, the cash flows from the ACS Center, after payments of debt service, operating expenses and reserves, are available for distribution to the Company.
4. COMMITMENTS AND CONTIGENCIES
Commitments
At March 31, 2013, the Company had outstanding letters of credit and performance bonds totaling $2.3 million. As a lessor, the Company has $24.5 million in future obligations under leases to fund tenant improvements as of March 31, 2013. As a lessee, the Company has future obligations under ground and office leases of approximately $15.9 million at March 31, 2013.
Litigation
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 or where the estimated loss would not be material. 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.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company describes its investments in unconsolidated joint ventures in note 5 of notes to consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2012. The following table summarizes balance sheet data of the Company's unconsolidated joint ventures as of March 31, 2013 and December 31, 2012 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Assets | | Total Debt | | Total Equity | | Company’s Investment | |
SUMMARY OF FINANCIAL POSITION: | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | |
MSREF/ Cousins Terminus 200 LLC (1) | $ | — |
| | $ | 95,520 |
| | $ | — |
| | $ | 74,340 |
| | $ | — |
| | $ | 19,659 |
| | $ | — |
| | $ | 3,930 |
| |
EP I LLC | 87,844 |
| | 83,235 |
| | 49,500 |
| | 43,515 |
| | 32,078 |
| | 32,611 |
| | 27,446 |
| | 27,864 |
| |
Cousins Watkins LLC | 53,633 |
| | 54,285 |
| | 28,127 |
| | 28,244 |
| | 24,619 |
| | 25,259 |
| | 16,745 |
| | 16,692 |
| |
CF Murfreesboro Associates | 119,279 |
| | 121,451 |
| | 93,200 |
| | 94,540 |
| | 24,752 |
| | 25,411 |
| | 14,208 |
| | 14,571 |
| |
CP Venture Five LLC | 284,430 |
| | 286,647 |
| | 35,261 |
| | 35,417 |
| | 241,055 |
| | 243,563 |
| | 13,746 |
| | 13,884 |
| |
Charlotte Gateway Village, LLC | 139,030 |
| | 140,384 |
| | 64,378 |
| | 68,242 |
| | 73,195 |
| | 70,917 |
| | 10,291 |
| | 10,299 |
| |
Temco Associates, LLC | 8,432 |
| | 8,409 |
| | — |
| | — |
| | 8,206 |
| | 8,233 |
| | 4,088 |
| | 4,095 |
| |
CL Realty, L.L.C. | 7,506 |
| | 7,549 |
| | — |
| | — |
| | 7,382 |
| | 7,155 |
| | 3,697 |
| | 3,579 |
| |
CP Venture Two LLC | 95,508 |
| | 96,345 |
| | — |
| | — |
| | 93,942 |
| | 94,819 |
| | 2,716 |
| | 2,894 |
| |
Wildwood Associates | 21,166 |
| | 21,176 |
| | — |
| | — |
| | 21,130 |
| | 21,173 |
| | (1,685 | ) | * | (1,664 | ) | * |
Crawford Long - CPI, LLC | 33,167 |
| | 32,818 |
| | 46,202 |
| | 46,496 |
| | (14,404 | ) | | (15,129 | ) | | (6,049 | ) | * | (6,407 | ) | * |
Terminus Office Holdings LLC (1) | 299,742 |
| | — |
| | 217,589 |
| | — |
| | 68,613 |
| | — |
| | 35,533 |
|
| — |
| |
Other | 2,183 |
| | 2,194 |
| | — |
| | — |
| | 1,856 |
| | 1,844 |
| | 71 |
| | 60 |
| |
| $ | 1,151,920 |
| | $ | 950,013 |
| | $ | 534,257 |
| | $ | 390,794 |
| | $ | 582,424 |
| | $ | 535,515 |
| | $ | 120,807 |
| | $ | 89,797 |
| |
*Negative balances are included in deferred income on the balance sheets.
(1) See note 7 for further discussion of the transactions affecting these entities.
The following table summarizes statement of operations information of the Company's unconsolidated joint ventures for the three months ended March 31, 2013 and 2012 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Revenues | | Net Income (Loss) | | Company's Share of Income (Loss) |
SUMMARY OF OPERATIONS: | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
MSREF/ Cousins Terminus 200 LLC (1) | $ | 1,256 |
| | $ | 2,973 |
| | $ | (115 | ) | | $ | (362 | ) | | $ | (35 | ) | | $ | (73 | ) |
EP I LLC | 1,169 |
| | — |
| | (519 | ) | | 71 |
| | (389 | ) | | 53 |
|
Cousins Watkins LLC | 1,286 |
| | 1,235 |
| | (29 | ) | | 45 |
| | 580 |
| | 610 |
|
CF Murfreesboro Associates | 3,291 |
| | 3,327 |
| | (633 | ) | | (28 | ) | | (383 | ) | | (81 | ) |
CP Venture Five LLC | 7,843 |
| | 7,533 |
| | 1,435 |
| | 749 |
| | 315 |
| | 241 |
|
Charlotte Gateway Village, LLC | 8,294 |
| | 8,016 |
| | 2,581 |
| | 2,336 |
| | 294 |
| | 294 |
|
Temco Associates, LLC | 69 |
| | 440 |
| | (13 | ) | | (57 | ) | | (6 | ) | | (233 | ) |
CL Realty, L.L.C. | 428 |
| | 1,667 |
| | 236 |
| | 551 |
| | 118 |
| | (39 | ) |
CP Venture Two LLC | 4,926 |
| | 4,814 |
| | 2,724 |
| | 2,594 |
| | 281 |
| | 268 |
|
Wildwood Associates | — |
| | — |
| | (42 | ) | | (37 | ) | | (21 | ) | | (18 | ) |
Crawford Long - CPI, LLC | 2,958 |
| | 2,944 |
| | 725 |
| | 669 |
| | 360 |
| | 334 |
|
Terminus Office Holdings LLC (1) | 5,606 |
| | — |
| | 1,062 |
| | — |
| | 529 |
| | — |
|
Palisades West LLC | — |
| | 4,106 |
| | (27 | ) | | 1,497 |
| | — |
| | 717 |
|
Ten Peachtree Place Associates | — |
| | 1,713 |
| | — |
| | 392 |
| | — |
| | 199 |
|
Other | 1,261 |
| | 9 |
| | (122 | ) | | (57 | ) | | 9 |
| | (86 | ) |
| $ | 38,387 |
| | $ | 38,777 |
| | $ | 7,263 |
| | $ | 8,363 |
| | $ | 1,652 |
| | $ | 2,186 |
|
(1) See note 7 for further discussion of the transactions affecting these entities.
6. EQUITY AND STOCK-BASED COMPENSATION
The Company has several types of stock-based compensation - stock options, restricted stock, long-term incentive awards and restricted stock units (“RSUs”) - which are described in note 7 of notes to consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The expense related to certain stock-based compensation awards is fixed. The expense related to other awards fluctuates from period to period dependent, in part, on the Company's stock price. The Company recorded stock-based compensation expense, net of forfeitures, of $2.8 million and $1.4 million for the three months ended March 31, 2013 and 2012, respectively.
The Company made restricted stock grants in 2013 of 159,782 shares to key employees, which vest ratably over a three-year period. In addition, the Company awarded two types of RSUs to key employees based on the following market and performance metrics, respectively: (1) Total Stockholder Return of the Company, as defined, as compared to the companies in the SNL US REIT Office index (“SNL RSUs”), and (2) the ratio of cumulative funds from operations per share to targeted cumulative funds from operations per share (“FFO RSUs”) as defined in the plan. The performance period for both awards is January 1, 2013 to December 31, 2015, and the targeted units awarded of SNL RSUs and FFO RSUs is 124,992 and 65,347, respectively. The ultimate payout of these awards can range from 0% to 200% of the targeted number of units depending on the achievement of the market and performance metrics described above. Both of these types of RSUs cliff vest on January 30, 2016 and are dependent upon the attainment of required service, market and performance criteria. The number of RSUs vesting will be determined at that date, and the payout per unit will be equal to the average closing price on each trading day during the 30-day period ending on December 31, 2015. The SNL RSUs are expensed using a quarterly Monte Carlo valuation over the vesting period. The FFO RSUs are expensed over the vesting period using the fair market value of the Company's stock at the reporting date multiplied by the anticipated number of units to be paid based on the current estimate of what the ratio is expected to be upon vesting.
Subsequent Events
In April 2013, the Company issued 16.5 million shares of common stock resulting in net proceeds to the Company of $165.1 million. In connection with this offering, the Company notified holders of its 7 3/4% Series A Cumulative Redeemable Preferred Stock, par value $1.00 per share, that it will redeem all outstanding shares for $74.8 million on May 13, 2013.
7. PROPERTY TRANSACTIONS
Discontinued Operations
Accounting rules require that the historical operating results of held-for-sale or sold assets which meet certain accounting rules be included in a separate section, discontinued operations, in the statements of operations for all periods presented. If the asset is sold, the related gain or loss on sale is also included in discontinued operations. The following properties which were held-for-sale in 2013 or sold in 2012 met the criteria for discontinued operations presentation ($ in thousands):
|
| | | | | | | | | | |
Property | Property Type | | Location | | Square Feet | | Sales Price |
2013: | | | | | | | |
Inhibitex | Office | | Atlanta, GA | | 51,000 |
| | Held-for-sale |
|
2012: | | | | | | | |
The Avenue Forsyth | Retail | | Atlanta, GA | | 524,000 |
| | $ | 119,000 |
|
The Avenue Collierville | Retail | | Memphis, TN | | 511,000 |
| | 55,000 |
|
The Avenue Webb Gin | Retail | | Atlanta, GA | | 322,000 |
| | 59,600 |
|
Galleria 75 | Office | | Atlanta, GA | | 111,000 |
| | 9,200 |
|
Cosmopolitan Center | Office | | Atlanta, GA | | 51,000 |
| | 7,000 |
|
Inhibitex | Office | | Atlanta, GA | | 51,000 |
| | Held-for-sale |
|
In addition, the Company sold its third party management and leasing business in 2012. As a result, the operations of this business are presented as discontinued operations in the accompanying statements of operations.
The components of discontinued operations and the gains and losses on property sales for the three months ended March 31, 2013 and 2012 are as follows (in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Loss from discontinued operations: | | | |
Rental property revenues | $ | 2 |
| | $ | 7,919 |
|
Fee income | 74 |
| | 4,710 |
|
Other income | — |
| | 192 |
|
Rental property operating expenses | (105 | ) | | (2,279 | ) |
Reimbursed expenses | — |
| | (2,303 | ) |
General and administrative expenses | (53 | ) | | (1,997 | ) |
Depreciation and amortization | — |
| | (3,741 | ) |
Impairment losses | — |
| | (12,233 | ) |
Other expenses | (4 | ) | | (17 | ) |
Loss from discontinued operations | $ | (86 | ) | | $ | (9,749 | ) |
|
| |
|
Gain on sale of discontinued operations: | | | |
King Mill | $ | 119 |
| | $ | 87 |
|
Cosmopolitan Center | (23 | ) | | — |
|
Other | (1 | ) | | (1 | ) |
Gain on sale of discontinued operations | $ | 95 |
| | $ | 86 |
|
Post Oak Central/ Terminus Transactions
In February 2013, the Company purchased the remaining 80% interest in MSREF/ Cousins Terminus 200 LLC for $53.8 million and simultaneously repaid the mortgage loan secured by the Terminus 200 property in the amount of $74.6 million. The Company recognized a gain of $19.7 million on this acquisition achieved in stages. Immediately thereafter, the Company contributed its interest in the Terminus 200 property and its interest in the Terminus 100 property, together with the existing mortgage loan secured by the Terminus 100 property, to a newly-formed entity, Terminus Office Holdings LLC (“TOH”), and sold 50% of TOH to institutional investors advised by J.P. Morgan Asset Management for $112.2 million. The Company recognized a gain of $37.1 million on this transaction. The Company incurred $122,000 in acquisition costs related to these transactions, which were recorded in other expense on the statements of operations. In March 2013, Terminus Venture T200 LLC, an affiliate of TOH, closed a new mortgage loan on the Terminus 200 property in the amount of $82.0 million, and the Company received a distribution of $39.2 million from TOH as a result. The Company accounts for its interest in TOH under the equity method because both partners have the ability to participate in and approve major decisions of the venture and, therefore, have substantive participating rights in the venture.
Concurrently, the Company purchased Post Oak Central, a 1.3 million square foot, Class-A office complex in the Galleria district of Houston, Texas for $230.9 million, net of rent credits, from an affiliate of J.P. Morgan Asset Management. The Company incurred $373,000 in acquisition costs related to this purchase, which were recorded in other expense on the statements of operations.
The following tables summarize preliminary allocations of the estimated fair values of the assets and liabilities of Terminus 200 and Post Oak Central acquired in this series of transactions (in thousands):
|
| | | | | | | |
| Post Oak Central | | Terminus 200 |
Tangible assets: | | | |
Land and improvements | $ | 88,406 |
| | $ | 25,040 |
|
Building | 118,470 |
| | 101,472 |
|
Tenant improvements | 10,877 |
| | 17,600 |
|
Other assets | — |
| | 101 |
|
Deferred rents receivable | — |
| | 44 |
|
Tangible assets | 217,753 |
| | 144,257 |
|
| | | |
Intangible assets: | | | |
Above-market leases | 995 |
| | 1,512 |
|
In-place leases | 26,968 |
| | 14,355 |
|
Total intangible assets | 27,963 |
| | 15,867 |
|
| | | |
Intangible Liabilities: | | | |
Below-market leases | (14,792 | ) | | (9,273 | ) |
| | | |
Total net assets acquired | $ | 230,924 |
| | $ | 150,851 |
|
The following supplemental pro forma information is presented for the three months ended March 31, 2013 and March 31, 2012, respectively. The pro forma information is based upon the Company's historical consolidated statements of operations, adjusted as if the Post Oak Central and Terminus transactions discussed above had occurred at the beginning of each of the periods presented. The supplemental pro forma information is not necessarily indicative of future results or of actual results that would have been achieved had the transactions been consummated at the beginning of each period.
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
| (in thousands, except per share amounts) |
Revenues | $ | 42,479 |
| | $ | 37,001 |
|
Income (loss) from continuing operations | 57,585 |
| | (1,072 | ) |
Net income (loss) | 57,594 |
| | (10,735 | ) |
Net income (loss) available to common stockholders | 53,860 |
| | (12,493 | ) |
Per share information: | | | |
Basic | $ | 0.52 |
| | $ | (0.12 | ) |
Diluted | $ | 0.52 |
| | $ | (0.12 | ) |
Subsequent Event
In April 2013, consistent with the Company's strategy, the Company acquired 816 Congress Avenue, a 434,000 square feet Class-A office property located in the central business district of Austin, Texas. The purchase price for this property, net of rent credits, was $102.4 million.
8. OTHER ASSETS
Other assets on the balance sheets as of March 31, 2013 and December 31, 2012 included the following (in thousands):
|
| | | | | | | | |
| | March 31, 2013 | | December 31, 2012 |
Lease inducements, net of accumulated amortization of $3,373 and $4,718 in 2013 and 2012, respectively | | $ | 10,194 |
| | $ | 11,089 |
|
FF&E and leasehold improvements, net of accumulated depreciation of $19,070 and $18,877 in 2013 and 2012, respectively | | 4,912 |
| | 4,814 |
|
Prepaid expenses and other assets | | 4,460 |
| | 2,044 |
|
Predevelopment costs and earnest money | | 4,238 |
| | 3,284 |
|
Loan closing costs, net of accumulated amortization of $2,285 and $2,624 in 2013 and 2012, respectively | | 3,185 |
| | 3,704 |
|
Intangible Assets: | | | | |
In-place leases, net of accumulated amortization of $7,640 and $5,729 in 2013 and 2012, respectively | | 46,695 |
| | 21,637 |
|
Above market leases, net of accumulated amortization of $9,727 and $9,424 in 2013 and 2012, respectively | | 7,584 |
| | 6,892 |
|
Goodwill | | 4,147 |
| | 4,751 |
|
| | $ | 85,415 |
| | $ | 58,215 |
|
Goodwill relates entirely to the office reportable segment. As office assets are sold, either by the Company or by joint ventures in which the Company has an ownership interest, goodwill is reduced. The following is a summary of goodwill activity for the three months ended March 31, 2013 and March 31, 2012 (in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Beginning balance | $ | 4,751 |
| | $ | 5,155 |
|
Allocated to property sales | (604 | ) | | — |
|
Ending balance | $ | 4,147 |
| | $ | 5,155 |
|
9. NONCONTROLLING INTERESTS
The Company consolidates various joint ventures that are involved in the ownership and/or development of real estate. The following table details the components of redeemable noncontrolling interests in consolidated entities for the three months ended March 31, 2013 and 2012 (in thousands):
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2013 | | 2012 |
| | | | |
Beginning Balance | | $ | — |
| | $ | 2,763 |
|
Net income (loss) attributable to redeemable noncontrolling interests | | 30 |
| | (2,040 | ) |
Distributions to redeemable noncontrolling interests | | (30 | ) | | (428 | ) |
Ending Balance | | $ | — |
| | $ | 295 |
|
The following reconciles the net income or loss attributable to nonredeemable noncontrolling interests as shown in the statements of equity to the net income or loss attributable to noncontrolling interests as shown in the statements of operations, which includes both redeemable and nonredeemable interests, for the three months ended March 31, 2013 and 2012 (in thousands):
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2013 | | 2012 |
Net income attributable to nonredeemable noncontrolling interests | | $ | (477 | ) | | $ | (571 | ) |
Net (income) loss attributable to redeemable noncontrolling interests | | (30 | ) | | 2,040 |
|
Net (income) loss | | $ | (507 | ) | | $ | 1,469 |
|
10. REPORTABLE SEGMENTS
The Company has five reportable segments: Office, Retail, Land, CPS Third Party Management and Leasing, and Other. These reportable segments represent an aggregation of operating segments reported to the chief operating decision maker based on similar economic characteristics that include the type of product and the nature of service. Each segment includes both consolidated operations and joint ventures, where applicable. The Office and Retail segments show the results for that product
type. The Land segment includes results of operations for certain land holdings and single-family residential communities that are sold as developed lots to homebuilders. Fee income and related expenses for the third party-owned properties which are managed or leased by the Company are included in the Third Party Management and Leasing segment. In 2012, the Company sold its third party management and leasing business. The Other segment includes:
| |
• | fee income for third party owned and joint venture properties for which the Company performs management, development and leasing services; |
| |
• | compensation for corporate employees, other than those in the Third Party Management and Leasing segment; |
| |
• | general corporate overhead costs, interest expense for consolidated and unconsolidated entities; |
| |
• | income attributable to noncontrolling interests; |
Company management evaluates the performance of its reportable segments in part based on funds from operations available to common stockholders (“FFO”). FFO is a supplemental operating performance measure used in the real estate industry. The Company calculated FFO using the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition of FFO, which is net income (loss) 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.
During the fourth quarter of 2012, the Company changed the format of the information presented to the chief operating decision maker about its segments and revised its presentation of the segment information included in the following tables. These changes did not result in a change in the number of reportable segments. Prior years' amounts were changed to be consistent with the current year's presentation.
FFO is used by industry analysts, investors and the Company as a supplemental measure of a REIT’s operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of a REIT’s operating performance that excludes historical cost depreciation, among other items, from GAAP net income. Management believes 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.
Segment net income, the balance of the Company’s investment in joint ventures and the amount of capital expenditures are not presented in the following tables. Management does not utilize these measures when analyzing its segments or when making resource allocation decisions, and therefore this information is not provided. FFO is reconciled to net income (loss) on a total Company basis (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2013 | | Office | | Retail | | Land | | Third Party Management and Leasing | | Other | | Total |
Net operating income | | $ | 21,837 |
| | $ | 4,290 |
| | $ | — |
| | $ | — |
| | $ | 43 |
| | $ | 26,170 |
|
Sales less costs of sales | | — |
| | — |
| | 243 |
| | — |
| | 168 |
| | 411 |
|
Fee income | | — |
| | — |
| | — |
| | 74 |
| | 3,580 |
| | 3,654 |
|
Other income | | — |
| | — |
| | — |
| | — |
| | 282 |
| | 282 |
|
Third party management and leasing expenses | | — |
| | — |
| | — |
| | (53 | ) | | — |
| | (53 | ) |
General and administrative expenses | | — |
| | — |
| | — |
| | — |
| | (6,069 | ) | | (6,069 | ) |
Reimbursed expenses | | — |
| | — |
| | — |
| | — |
| | (1,910 | ) | | (1,910 | ) |
Interest expense | | — |
| | — |
| | — |
| | — |
| | (6,645 | ) | | (6,645 | ) |
Other expenses | | — |
| | — |
| | — |
| | — |
| | (1,152 | ) | | (1,152 | ) |
Preferred stock dividends | | — |
| | — |
| | — |
| | — |
| | (3,227 | ) | | (3,227 | ) |
Funds from operations available to common stockholders | | $ | 21,837 |
| | $ | 4,290 |
| | $ | 243 |
| | $ | 21 |
| | $ | (14,930 | ) | | 11,461 |
|
| | | | | | | | | | | | |
Real estate depreciation and amortization, including Company's share of joint ventures | | | | | | | | | | | | (15,320 | ) |
Gain on sale of depreciated investment properties, including Company's share of joint ventures | | | | | | | | | | | | 57,029 |
|
Net income available to common stockholders | | | | | | | | | | | | $ | 53,170 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2012 | | Office | | Retail | | Land | | Third Party Management and Leasing | | Other | | Total |
Net operating income | | $ | 20,598 |
| | $ | 8,658 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 29,257 |
|
Sales less costs of sales | | — |
| | — |
| | 385 |
| | — |
| | (1 | ) | | 384 |
|
Fee income | | — |
| | — |
| | — |
| | 4,711 |
| | 2,856 |
| | 7,567 |
|
Other income | | — |
| | — |
| | — |
| | — |
| | 1,507 |
| | 1,507 |
|
Third party management and leasing expenses | | — |
| | — |
| | — |
| | (4,301 | ) | | — |
| | (4,301 | ) |
Separation expenses | | — |
| | — |
| | — |
| | — |
| | (213 | ) | | (213 | ) |
General and administrative expenses | | — |
| | — |
| | — |
| | — |
| | (6,623 | ) | | (6,623 | ) |
Reimbursed expenses | | — |
| | — |
| | — |
| | — |
| | (1,375 | ) | | (1,375 | ) |
Interest expense | | — |
| | — |
| | — |
| | — |
| | (7,447 | ) | | (7,447 | ) |
Other expenses | | — |
| | — |
| | — |
| | — |
| | (2,041 | ) | | (2,041 | ) |
Preferred stock dividends | | — |
| | — |
| | — |
| | — |
| | (3,227 | ) | | (3,227 | ) |
Funds from operations available to common stockholders | | $ | 20,598 |
| | $ | 8,658 |
| | $ | 385 |
| | $ | 410 |
| | $ | (16,563 | ) | | 13,488 |
|
| | | | | | | | | | | | |
Real estate depreciation and amortization, including Company's share of joint ventures | | | | | | | | | | | | (16,553 | ) |
Impairment loss on depreciable investment property, net of amounts attributable to noncontrolling interests | | | | | | | | | | | | (10,190 | ) |
Gain on sale of depreciated investment properties, including Company's share of joint ventures | | | | | | | | | | | | 143 |
|
Net loss available to common stockholders | | | | | | | | | | | | $ | (13,112 | ) |
When reviewing the results of operations for the Company, management analyzes the following revenue and income items net of their related costs:
| |
• | Rental property operations; |
| |
• | Gains on sales of investment properties. |
These amounts are shown in the segment tables above in the same “net” manner as shown to management. In addition, management reviews the operations of discontinued operations and its share of the operations of its joint ventures in the same manner as the operations of its wholly-owned properties included in the continuing operations. Therefore, the information in the tables above includes the operations of discontinued operations and its share of joint ventures in the same categories as the operations of the properties included in continuing operations. Certain adjustments are required to reconcile the above segment information to the Company’s consolidated revenues. The following table reconciles information presented in the tables above to the Company’s consolidated revenues (in thousands):
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2013 | | 2012 |
Net operating income | | $ | 26,170 |
| | $ | 29,257 |
|
Sales less cost of sales | | 411 |
| | 384 |
|
Fee income | | 3,654 |
| | 7,567 |
|
Other income | | 282 |
| | 1,507 |
|
Rental property operating expenses | | 16,297 |
| | 12,225 |
|
Cost of sales | | 1,145 |
| | 564 |
|
Net operating income in joint ventures | | (6,448 | ) | | (6,269 | ) |
Sales less cost of sales in joint ventures | | (10 | ) | | 1 |
|
Net operating income in discontinued operations | | 103 |
| | (5,639 | ) |
Fee income in discontinued operations | | (74 | ) | | (4,711 | ) |
Other income in discontinued operations | | (19 | ) | | (234 | ) |
Gain on land sales (included in gain on investment properties) | | (243 | ) | | — |
|
Total consolidated revenues | | $ | 41,268 |
| | $ | 34,652 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview:
The Company is a self-administered and self-managed real estate investment trust, or REIT. The Company's core focus is on the acquisition, development, leasing, management and ownership of top-tier urban office assets in Sunbelt markets with a particular focus on Georgia, Texas, and North Carolina. As of March 31, 2013, the Company's portfolio of real estate assets consisted of interests in 13 operating office properties containing 9.0 million square feet of office space, 16 operating retail properties containing 3.7 million square feet of retail space, and two projects (one retail and one mixed use) under active development. The Company has a comprehensive strategy in place based on a simple platform, trophy assets and opportunistic investments. This streamlined approach enables the Company to maintain a targeted, asset specific approach to investing where it seeks to leverage its development skills, relationships, market knowledge and operational expertise. The Company intends to generate returns and create value for shareholders through the further lease up of its portfolio, the execution of its development pipeline and through opportunistic investments in office, retail and mixed use projects within its core markets.
The Company made progress on its strategic goals during the first quarter of 2013 with the acquisition of a trophy asset in the Galleria submarket of Houston, Texas and the contribution of its interests in the assets at its Terminus project into a 50-50 joint venture. The Company first purchased the interest of its joint venture partner in Terminus 200, then contributed Terminus 100 and Terminus 200 to a new joint venture with institutional investors advised by J.P. Morgan Asset Management. In addition, the Company purchased Post Oak Central, a 1.3 million square foot Class-A office complex in Houston, from an affiliate of J.P. Morgan Asset Management. Post Oak Central was 92% leased upon closing of the transaction and provides the Company with a high quality asset with significant redevelopment potential in a desirable Houston sub-market, thereby increasing the Company's exposure to the Texas market.
The Company leased or renewed 567,000 square feet of office and retail space during the first quarter of 2013. The long term prospects for the Company's markets remain strong. Each of the Company's markets is projecting job growth over the next five years higher than the national average with the Texas markets projected to be the strongest. Current unemployment in the Atlanta and Charlotte markets is higher than the national average, but all other markets are lower than the nation overall. Office absorption was positive in each market with the Texas markets being the strongest. Rental rates have been stable over the past year within the Company's portfolio; the highest net rents are in Austin and the lowest are in the North Fulton sub-market of Atlanta.
Subsequent to the end of the quarter, the Company issued 16.5 million shares of common stock resulting in net proceeds to the Company of $165.1 million. The Company also purchased 816 Congress Avenue, a 434,000 square foot, Class-A office property located in the central business district of Austin, Texas. 816 Congress Avenue was 78% leased upon closing. The Company also notified holders of its 7 ¾% Series A Cumulative Redeemable Preferred Stock that it will redeem all outstanding shares in May 2013. The Company expects these subsequent events to improve the portfolio with a quality asset in Texas and to improve the financial condition of the Company by reducing leverage, fixed charges and the level of preferred stock in its capital structure.
Results of Operations
Rental Property Revenues
Rental property revenues increased $6.6 million (22%) in the three month 2013 period compared to the 2012 period due to:
| |
• | Increase of $4.9 million due to the acquisition of Post Oak Central in 2013; |
| |
• | Decrease of $3.4 million due to the sale of 50% of the Company's interest in Terminus 100 in the first quarter of 2013; |
| |
• | Increase of $2.9 million due to the acquisition of 2100 Ross in the third quarter of 2012; |
| |
• | Increase of $759,000 and $544,000 at 191 Peachtree Tower and Promenade, respectively, as a result of increases in weighted average occupancy and, at 191 Peachtree Tower, an increase in recovery income due to higher operating expenses; and |
| |
• | Increase of $502,000 at Mahan Village as a result of the commencement of operations in the third quarter of 2012. |
Fee Income
Fee income increased $722,000 (25%) between the three month 2013 and 2012 periods. This increase is primarily due to an increase in reimbursed expenses on a third party development project in 2013.
Other Income
Other income decreased $670,000 between the three month 2013 and 2012 periods. During the first quarter of 2012, the Company received, and recorded as revenue, a $1.0 million settlement payment from a former joint venture partner. In the first quarter of 2013, the Company recorded revenue from the sale of the last condominium units at 10 Terminus Place.
Rental Property Operating Expenses
Rental property operating expenses increased $4.1 million (33%) between the three month 2013 and 2012 periods primarily due to the following:
| |
• | Increase of $2.5 million due to the acquisition of Post Oak Central in 2013; |
| |
• | Increase of $1.8 million due to the acquisition of 2100 Ross in the third quarter of 2012; |
| |
• | Decrease of $967,000 due to the sale of 50% of the Company's interest in Terminus 100 in the first quarter of 2013; and |
| |
• | Increase of $484,000 as a result of higher maintenance, security and property tax expenses at 191 Peachtree Tower. |
General and Administrative Expense
General and administrative expense decreased $556,000 (8%) between the three month 2013 and 2012 periods due to the following:
| |
• | Increase of $1.2 million in stock-based compensation expense primarily due to an increase in the Company's stock price between years; |
| |
• | Decrease of $1.1 million caused by an increase in capitalized salaries due to an increase in development activity between the periods; and |
| |
• | Decrease of $812,000 in salaries and benefits expense, excluding stock compensation expense, from a decrease in the number of employees between the periods. |
Interest Expense
Interest expense decreased $1.3 million (21%) in the three month 2013 and 2012 periods due to the following:
| |
• | Decrease of $1.1 million due to a decrease in average borrowings on the Company's Credit Facility, accompanied by a lower average interest rate; |
| |
• | Decrease of $1.1 million due to sale of 50% of the Company's interest in Terminus 100 in the first quarter of 2013; and |
| |
• | Increase of $862,000 from the mortgage note at 191 Peachtree Tower which was entered into in the first quarter of 2012. |
Depreciation and Amortization
Depreciation and amortization increased $1.8 million (17%) between the three month 2013 and 2012 periods mainly due to the acquisitions of Post Oak Central in the first quarter of 2013 and 2100 Ross in the third quarter of 2012. These were partially offset by the sale of 50% of the Company's interest in Terminus 100 in the first quarter of 2013.
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures decreased $534,000 (24%) between the three month 2013 period compared to the same 2012 period primarily due to the Company's sale of its interest in Palisades West LLC in the fourth quarter of 2012.
Gain on Sale of Investment Properties
Gain on sale of investment properties increased $57.1 million between the three month 2013 and 2012 periods mainly due to the sale of 50% of the Company's interest in Terminus 100 and the step acquisition of Terminus 200 in the first quarter of 2013.
Discontinued Operations
Loss from discontinued operations decreased $9.7 million between the three month 2013 and 2012 periods. Included in the 2012 period was a $12.2 million impairment loss on the Avenue Collierville, a property that was sold in the second quarter of 2012. Also, the 2012 amount includes net income of $410,000 from the Company's third party management and leasing business, which it sold in the third quarter of 2012. The remainder represents operations of the other properties that the Company sold in 2012: The Avenue Forsyth, The Avenue Webb Gin, Galleria 75 and Cosmopolitan Center. Included in the 2013 amount are the operations of Inhibitex, which is held for sale at March 31, 2013.
Net Loss (Income) Attributable to Noncontrolling Interests
The Company consolidates certain entities and allocates the partner's share of those entities' results to net income or loss attributable to noncontrolling interests on the statement of operations. The noncontrolling interests' share of the Company's net income for the three month periods increased $2.0 million between the three month 2013 and 2012 periods, mainly attributable to the noncontrolling partner's share of an impairment loss taken at The Avenue Collierville in the first quarter of 2012.
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 REIT’s operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. Company management evaluates 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 three months ended March 31, 2013 and 2012 (in thousands, except per share information):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Net Income (Loss) Available to Common Stockholders | $ | 53,170 |
| | $ | (13,112 | ) |
Depreciation and amortization of real estate assets: | | | |
Consolidated properties | 12,116 |
| | 10,151 |
|
Discontinued properties | — |
| | 3,741 |
|
Share of unconsolidated joint ventures | 3,204 |
| | 2,661 |
|
Impairment loss on depreciable investment property, net of amounts attributable to noncontrolling interests | — |
| | 10,190 |
|
Gain on sale of depreciated properties: | | | |
Consolidated properties | (56,934 | ) | | (57 | ) |
Discontinued properties | (95 | ) | | (86 | ) |
Funds From Operations Available to Common Stockholders | $ | 11,461 |
| | $ | 13,488 |
|
| | | |
Per Common Share — Basic and Diluted: | | | |
Net Income (Loss) Available | $ | 0.51 |
| | $ | (0.13 | ) |
Funds From Operations | $ | 0.11 |
| | $ | 0.13 |
|
| | | |
Weighted Average Shares — Basic | 104,119 |
| | 104,000 |
|
Weighted Average Shares — Diluted | 104,252 |
| | 104,000 |
|
Liquidity and Capital Resources
The Company’s primary liquidity sources are:
| |
• | Net cash from operations; |
| |
• | Borrowings under its Credit Facility; |
| |
• | Proceeds from mortgage notes payable; |
| |
• | Proceeds from equity offerings; and |
| |
• | Joint venture formations. |
The Company’s primary liquidity uses are:
| |
• | Payments of tenant improvements and other leasing costs; |
| |
• | Principal and interest payments on debt obligations; |
| |
• | Dividends to common and preferred stockholders; |
| |
• | Property acquisitions; and |
| |
• | Expenditures on predevelopment and development projects. |
Financial Condition
At the beginning of 2013, the Company had $176.9 million in cash on hand as a result of the sale of non-core assets in the fourth quarter of 2012 and had no amounts outstanding under its Credit Facility. In February 2013, the Company purchased the remaining 80% interest in MSREF/ Cousins Terminus 200 LLC, repaid the mortgage loan on Terminus 200, sold 50% of Terminus 100 and Terminus 200, and purchased Post Oak Central. In March 2013, the entity formed to own Terminus 200 closed a new mortgage loan on the Terminus 200 property.
As a result of these activities, at March 31, 2013, the Company had reduced its cash on hand to $6.0 million and the amount outstanding under its Credit Facility increased to $55.0 million. In addition, the mortgage loan on Terminus 100 is no longer included in consolidated notes payable on the balance sheet since it is now a part of an unconsolidated joint venture.
Subsequent to the end of the quarter, the Company issued 16.5 million shares of common stock resulting in net proceeds to the Company of $165.1 million. The Company also purchased 816 Congress Avenue, a 434,000 square foot, Class-A office property located in the central business district of Austin, Texas. The purchase price for this building, net of rent credits, was $102.4 million. As a result of these activities and the Company's ongoing operations, as of April 30, 2013, the Company had cash on hand of $19.8 million and no amounts outstanding under its Credit Facility. On May 3, 2013, Crawford Long - CPI, LLC refinanced the mortgage note secured by the Emory University Hospital Midtown Medical Office Tower, resulting in net proceeds of $14.3 million to the Company. The Company also notified holders of its 7 ¾% Series A Cumulative Redeemable Preferred Stock that it will redeem all outstanding shares in May 2013. The Company expects to redeem this preferred stock with cash on hand and with proceeds from its Credit Facility.
Management believes that the activities discussed above will improve the overall quality and geographic diversity of its portfolio of operating properties, reduce the preferred stock component of its capital base, and increase its fixed charges coverage ratio with the reduction of preferred stock dividends.
The Company may seek additional acquisitions and opportunistic investments in 2013 and beyond and expects to fund these activities with one or more of the following: sale of additional non-core assets, additional borrowings under its Credit Facility, mortgage loans on existing and newly acquired properties, the issuance of common or preferred equity and joint venture formation with third parties.
Contractual Obligations and Commitments
At March 31, 2013, the Company was subject to the following contractual obligations and commitments (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 years |
Contractual Obligations: | | | | | | | | | | |
Company debt: | | | | | | | | | | |
Unsecured Credit Facility and construction facility | | $ | 69,191 |
| | $ | — |
| | $ | 14,191 |
| | $ | 55,000 |
| | $ | — |
|
Mortgage notes payable | | 275,641 |
| | 2,633 |
| | 19,258 |
| | 133,585 |
| | 120,165 |
|
Interest commitments (1) | | 73,561 |
| | 15,741 |
| | 30,386 |
| | 22,150 |
| | 5,284 |
|
Ground leases | | 15,371 |
| | 117 |
| | 242 |
| | 257 |
| | 14,755 |
|
Other operating leases | | 525 |
| | 121 |
| | 284 |
| | 92 |
| | 28 |
|
Total contractual obligations | | $ | 434,289 |
| | $ | 18,612 |
| | $ | 64,361 |
| | $ | 211,084 |
| | $ | 140,232 |
|
Commitments: | | | | | | | | | | |
Unfunded tenant improvements and other | | 24,468 |
| | 24,468 |
| | — |
| | — |
| | — |
|
Letters of credit | | 1,000 |
| | 1,000 |
| | — |
| | — |
| | — |
|
Performance bonds | | 1,250 |
| | 914 |
| | 336 |
| | — |
| | — |
|
Total commitments | | $ | 26,718 |
| | $ | 26,382 |
| | $ | 336 |
| | $ | — |
| | $ | — |
|
| |
(1) | Interest on variable rate obligations is based on rates effective as of March 31, 2013. |
In addition, the Company has several standing or renewable service contracts mainly related to the operation of buildings. These contracts are in the ordinary course of business and are generally one year or less. These contracts are not included in the above table and are usually reimbursed in whole or in part by tenants.
Other Debt Information
The real estate and other assets of The American Cancer Society Center (the “ACS Center”) are restricted under the ACS Center loan agreement in that they are not available to settle debts of the Company. However, provided that the ACS Center loan
has not incurred any uncured event of default, as defined in the loan agreement, the cash flows from the ACS Center, after payments of debt service, operating expenses and reserves, are available for distribution to the Company.
The Company's existing mortgage debt is primarily non-recourse, fixed-rate mortgage notes secured by various real estate assets. Many of the Company's non-recourse mortgages contain covenants which, if not satisfied, could result in acceleration of the maturity of the debt. The Company expects that it will either refinance the non-recourse mortgages at maturity or repay the mortgages with proceeds from asset sales or other financings. As of March 31, 2013, the weighted average interest rate on the Company's consolidated debt was 4.53%, excluding loan amortization, and the Company's consolidated debt to undepreciated assets ratio was 26%.
Future Capital Requirements
Over the long term, management intends to actively manage its portfolio of properties and strategically sell assets to exit its non-core holdings, reposition its portfolio of income-producing assets geographically and by product type, and generate capital for future investment activities. The Company expects to continue to utilize indebtedness to fund future commitments and expects to place long-term mortgages on selected assets as well as to utilize construction facilities for some development assets, if available and under appropriate terms.
The Company may also generate capital through the issuance of securities that include common or preferred stock, warrants, debt securities or depositary shares. In March 2013, the Company filed a shelf registration statement to allow for the issuance of such securities through March 2016. In April 2013, the Company completed a common stock offering of 16.5 million shares as discussed in note 6 to consolidated financial statements. The net proceeds of the offering were $165.1 million. Management will continue to evaluate all public equity sources and select the most appropriate options as capital is required.
The Company’s business model is dependent upon raising or recycling capital to meet obligations. If one or more sources of capital are not available when required, the Company may be forced to reduce the number of projects it acquires or develops and/or raise capital on potentially unfavorable terms, or may be unable to raise capital, which could have an adverse effect on the Company’s financial position or results of operations.
Cash Flows
The reasons for significant increases and decreases in cash flows between the periods are as follows:
Cash Flows from Operating Activities. Cash provided by operating activities decreased $8.5 million between the three month 2013 and 2012 periods due to the following:
| |
• | Cash flows decreased $6.2 million as a result of discontinued operations; |
| |
• | Cash flows decreased $1.4 million from the payment of previously accrued severance amounts; |
| |
• | Cash flows increased $1.1 million due to a reduction in interest paid between periods; and |