Form 10-Q September 30, 2014
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 September 30, 2014
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 October 24, 2014 |
Common Stock, $1 par value per share | | 216,508,024 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, 2013. 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 acquisitions of land;
•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 failure to achieve anticipated benefits from acquisitions and investments or from dispositions; |
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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 related to the geographic concentration of our portfolio; |
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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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• | 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 adverse change in the financial condition of one or more of its major 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 (such as zoning approval, receipt of required permits, 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) |
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| (unaudited) | | |
Assets: | | | |
Real estate assets: | | | |
Operating properties, net of accumulated depreciation of $297,034 and $235,707 in 2014 and 2013, respectively | $ | 1,863,442 |
| | $ | 1,828,437 |
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Projects under development | 76,772 |
| | 21,681 |
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Land | 26,831 |
| | 35,053 |
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| 1,967,045 |
| | 1,885,171 |
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Operating properties and related assets held for sale, net of accumulated depreciation and amortization of $14,851 and $21,444 in 2014 and 2013, respectively | 181,116 |
| | 24,554 |
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Cash and cash equivalents | 7,210 |
| | 975 |
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Restricted cash | 4,652 |
| | 2,810 |
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Notes and accounts receivable, net of allowance for doubtful accounts of $1,635 and $1,827 in 2014 and 2013, respectively | 12,208 |
| | 11,778 |
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Deferred rents receivable | 52,985 |
| | 39,969 |
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Investment in unconsolidated joint ventures | 111,353 |
| | 107,082 |
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Intangible assets, net of accumulated amortization of $64,947 and $37,544 in 2014 and 2013, respectively | 141,610 |
| | 170,973 |
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Other assets | 55,481 |
| | 29,894 |
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Total assets | $ | 2,533,660 |
| | $ | 2,273,206 |
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Liabilities: | | | |
Notes payable | $ | 671,074 |
| | $ | 630,094 |
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Accounts payable and accrued expenses | 87,415 |
| | 76,668 |
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Deferred income | 24,156 |
| | 25,754 |
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Intangible liabilities, net of accumulated amortization of $14,514 and $6,323 in 2014 and 2013, respectively | 67,659 |
| | 66,476 |
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Other liabilities | 15,753 |
| | 15,242 |
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Total liabilities | 866,057 |
| | 814,234 |
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Commitments and contingencies | — |
| | — |
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Equity: | | | |
Stockholders' investment: | | | |
Preferred stock, 7.50% Series B cumulative redeemable preferred stock, $1 par value, $25 liquidation preference, 20,000,000 shares authorized, -0- and 3,791,000 shares issued and outstanding in 2014 and 2013, respectively | — |
| | 94,775 |
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Common stock, $1 par value, 350,000,000 and 250,000,000 shares authorized, 220,078,986 and 193,236,454 shares issued in 2014 and 2013, respectively | 220,079 |
| | 193,236 |
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Additional paid-in capital | 1,720,559 |
| | 1,420,951 |
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Treasury stock at cost, 3,570,082 shares in 2014 and 2013 | (86,840 | ) | | (86,840 | ) |
Distributions in excess of cumulative net income | (187,773 | ) | | (164,721 | ) |
| 1,666,025 |
| | 1,457,401 |
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Nonredeemable noncontrolling interests | 1,578 |
| | 1,571 |
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Total equity | 1,667,603 |
| | 1,458,972 |
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Total liabilities and equity | $ | 2,533,660 |
| | $ | 2,273,206 |
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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 | | Nine Months Ended |
| September 30, | | September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenues: | | | | | | | |
Rental property revenues | $ | 86,857 |
| | $ | 47,575 |
| | $ | 244,375 |
| | $ | 117,799 |
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Fee income | 1,802 |
| | 2,420 |
| | 6,165 |
| | 8,932 |
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Other | 439 |
| | 439 |
| | 4,786 |
| | 4,488 |
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| 89,098 |
| | 50,434 |
| | 255,326 |
| | 131,219 |
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Costs and expenses: | | | | | | | |
Rental property operating expenses | 38,685 |
| | 22,035 |
| | 109,501 |
| | 55,112 |
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Reimbursed expenses | 783 |
| | 1,097 |
| | 2,703 |
| | 4,365 |
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General and administrative expenses | 5,021 |
| | 6,635 |
| | 16,388 |
| | 17,257 |
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Interest expense | 6,817 |
| | 5,149 |
| | 20,954 |
| | 14,325 |
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Depreciation and amortization | 32,704 |
| | 18,511 |
| | 101,979 |
| | 44,686 |
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Separation expenses | — |
| | 520 |
| | 84 |
| | 520 |
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Acquisition and related costs | 644 |
| | 6,859 |
| | 815 |
| | 7,427 |
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Other | 481 |
| | 1,072 |
| | 1,852 |
| | 3,258 |
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| 85,135 |
| | 61,878 |
| | 254,276 |
| | 146,950 |
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Income (loss) from continuing operations before taxes, unconsolidated joint ventures, and sale of investment properties | 3,963 |
| | (11,444 | ) | | 1,050 |
| | (15,731 | ) |
Benefit (provision) for income taxes from operations | (1 | ) | | (1 | ) | | 20 |
| | (3 | ) |
Income from unconsolidated joint ventures | 2,030 |
| | 63,078 |
| | 5,343 |
| | 65,862 |
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Income from continuing operations before gain on sale of investment properties | 5,992 |
| | 51,633 |
| | 6,413 |
| | 50,128 |
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Gain on sale of investment properties | 81 |
| | 3,801 |
| | 1,569 |
| | 61,361 |
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Income from continuing operations | 6,073 |
| | 55,434 |
| | 7,982 |
| | 111,489 |
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Income from discontinued operations: | | | | | | | |
Income from discontinued operations | 348 |
| | 1,257 |
| | 1,806 |
| | 2,724 |
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Gain on sale from discontinued operations | 12,993 |
| | 8,346 |
| | 19,372 |
| | 8,550 |
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| 13,341 |
| | 9,603 |
| | 21,178 |
| | 11,274 |
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Net income | 19,414 |
| | 65,037 |
| | 29,160 |
| | 122,763 |
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Net income attributable to noncontrolling interests | (92 | ) | | (3,879 | ) | | (376 | ) | | (4,901 | ) |
Net income attributable to controlling interests | 19,322 |
| | 61,158 |
| | 28,784 |
| | 117,862 |
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Dividends to preferred stockholders | — |
| | (1,777 | ) | | (2,955 | ) | | (8,231 | ) |
Preferred share original issuance costs | — |
| | — |
| | (3,530 | ) | | (2,656 | ) |
Net income available to common stockholders | $ | 19,322 |
| | $ | 59,381 |
| | $ | 22,299 |
| | $ | 106,975 |
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Per common share information — basic and diluted: | | | | | | | |
Income from continuing operations attributable to controlling interest | $ | 0.03 |
| | $ | 0.30 |
| | $ | — |
| | $ | 0.74 |
|
Income from discontinued operations | 0.06 |
| | 0.06 |
| | 0.11 |
| | 0.09 |
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Net income available to common stockholders | $ | 0.09 |
| | $ | 0.36 |
| | $ | 0.11 |
| | $ | 0.83 |
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Weighted average shares — basic | 209,839 |
| | 163,426 |
| | 200,073 |
| | 128,953 |
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Weighted average shares — diluted | 210,111 |
| | 163,603 |
| | 200,325 |
| | 129,121 |
|
Dividends declared per common share | $ | 0.075 |
| | $ | 0.045 |
| | $ | 0.225 |
| | $ | 0.135 |
|
See accompanying notes.
COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Nine Months Ended September 30, 2014 and 2013
(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, 2013 | $ | 94,775 |
| | $ | 193,236 |
| | $ | 1,420,951 |
| | $ | (86,840 | ) | | $ | (164,721 | ) | | $ | 1,457,401 |
| | $ | 1,571 |
| | $ | 1,458,972 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 28,784 |
| | 28,784 |
| | 376 |
| | 29,160 |
|
Common stock issued pursuant to: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Director stock grants | — |
| | 55 |
| | 598 |
| | — |
| | — |
| | 653 |
| | — |
| | 653 |
|
Stock option exercises | — |
| | 40 |
| | (267 | ) | | — |
| | — |
| | (227 | ) | | — |
| | (227 | ) |
Common stock offering, net of issuance costs | — |
| | 26,700 |
| | 295,212 |
| | — |
| | — |
| | 321,912 |
| | — |
| | 321,912 |
|
Restricted stock grants, net of amounts withheld for income taxes | — |
| | 53 |
| | (978 | ) | | — |
| | — |
| | (925 | ) | | — |
| | (925 | ) |
Amortization of stock options and restricted stock, net of forfeitures | — |
| | (5 | ) | | 1,513 |
| | — |
| | — |
| | 1,508 |
| | — |
| | 1,508 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (369 | ) | | (369 | ) |
Redemption of preferred shares | (94,775 | ) | | — |
| | 3,530 |
| | — |
| | (3,530 | ) | | (94,775 | ) | | — |
| | (94,775 | ) |
Preferred dividends | — |
| | — |
| | — |
| | — |
| | (2,955 | ) | | (2,955 | ) | | — |
| | (2,955 | ) |
Common dividends | — |
| | — |
| | — |
| | — |
| | (45,351 | ) | | (45,351 | ) | | — |
| | (45,351 | ) |
Balance September 30, 2014 | $ | — |
| | $ | 220,079 |
| | $ | 1,720,559 |
| | $ | (86,840 | ) | | $ | (187,773 | ) | | $ | 1,666,025 |
| | $ | 1,578 |
| | $ | 1,667,603 |
|
| | | | | | | | | | | | | | | |
Balance December 31, 2012 | $ | 169,602 |
| | $ | 107,660 |
| | $ | 690,024 |
| | $ | (86,840 | ) | | $ | (260,104 | ) | | $ | 620,342 |
| | $ | 22,611 |
| | $ | 642,953 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 117,862 |
| | 117,862 |
| | 4,840 |
| | 122,702 |
|
Common stock issued pursuant to: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Director stock grants | — |
| | 50 |
| | 494 |
| | — |
| | — |
| | 544 |
| | — |
| | 544 |
|
Stock option exercises | — |
| | 25 |
| | (162 | ) | | — |
| | — |
| | (137 | ) | | — |
| | (137 | ) |
Common stock offering, net of issuance costs | — |
| | 85,507 |
| | 741,022 |
| | — |
| | — |
| | 826,529 |
| | — |
| | 826,529 |
|
Restricted stock grants, net of amounts withheld for income taxes | — |
| | 30 |
| | (1,209 | ) | | — |
| | — |
| | (1,179 | ) | | — |
| | (1,179 | ) |
Amortization of stock options and restricted stock, net of forfeitures | — |
| | (42 | ) | | 1,463 |
| | — |
| | — |
| | 1,421 |
| | — |
| | 1,421 |
|
Distributions to nonredeemable noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (25,888 | ) | | (25,888 | ) |
Redemption of preferred shares | (74,827 | ) | | — |
| | (10,822 | ) | | — |
| | 10,822 |
| | (74,827 | ) | | — |
| | (74,827 | ) |
Preferred dividends | — |
| | — |
| | — |
| | — |
| | (8,231 | ) | | (8,231 | ) | | — |
| | (8,231 | ) |
Common dividends | — |
| | — |
| | — |
| | — |
| | (18,657 | ) | | (18,657 | ) | | — |
| | (18,657 | ) |
Balance September 30, 2013 | $ | 94,775 |
| | $ | 193,230 |
| | $ | 1,420,810 |
| | $ | (86,840 | ) | | $ | (158,308 | ) | | $ | 1,463,667 |
| | $ | 1,563 |
| | $ | 1,465,230 |
|
See accompanying notes.
COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
Cash flows from operating activities: | | | |
Net income | $ | 29,160 |
| | $ | 122,763 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Gain on sale of investment properties, including discontinued operations | (20,941 | ) | | (69,911 | ) |
Depreciation and amortization, including discontinued operations | 102,481 |
| | 45,950 |
|
Amortization of deferred financing costs | 604 |
| | 778 |
|
Amortization of stock options and restricted stock, net of forfeitures | 1,508 |
| | 1,421 |
|
Effect of certain non-cash adjustments to rental revenues | (21,740 | ) | | (5,605 | ) |
Income from unconsolidated joint ventures | (5,343 | ) | | (65,862 | ) |
Operating distributions from unconsolidated joint ventures | 5,195 |
| | 65,563 |
|
Land and multi-family cost of sales, net of closing costs paid | 302 |
| | 904 |
|
Changes in other operating assets and liabilities: | | | |
Change in other receivables and other assets, net | (1,912 | ) | | (3,572 | ) |
Change in operating liabilities | 5,282 |
| | 6,247 |
|
Net cash provided by operating activities | 94,596 |
| | 98,676 |
|
Cash flows from investing activities: | | | |
Proceeds from investment property sales | 53,827 |
| | 171,779 |
|
Property acquisition, development, and tenant asset expenditures | (351,657 | ) | | (1,502,016 | ) |
Investment in unconsolidated joint ventures | (10,578 | ) | | (2,139 | ) |
Distributions from unconsolidated joint ventures | 7,433 |
| | 86,752 |
|
Collection of notes receivable | 1,020 |
| | 1,233 |
|
Change in notes receivable and other assets | (2,838 | ) | | (1,930 | ) |
Change in restricted cash | (1,834 | ) | | (101 | ) |
Net cash used in investing activities | (304,627 | ) | | (1,246,422 | ) |
Cash flows from financing activities: | | | |
Proceeds from credit facility | 395,175 |
| | 343,725 |
|
Repayment of credit facility | (347,550 | ) | | (292,650 | ) |
Proceeds from other notes payable | 68 |
| | 304,268 |
|
Repayment of notes payable | (6,713 | ) | | (76,314 | ) |
Payment of loan issuance costs | (3,176 | ) | | (1,693 | ) |
Common stock issued, net of expenses | 321,912 |
| | 826,529 |
|
Redemption of preferred shares | (94,775 | ) | | (74,827 | ) |
Common dividends paid | (45,351 | ) | | (18,657 | ) |
Preferred dividends paid | (2,955 | ) | | (8,231 | ) |
Distributions to noncontrolling interests | (369 | ) | | (25,888 | ) |
Net cash provided by financing activities | 216,266 |
| | 976,262 |
|
Net increase (decrease) in cash and cash equivalents | 6,235 |
| | (171,484 | ) |
Cash and cash equivalents at beginning of period | 975 |
| | 176,892 |
|
Cash and cash equivalents at end of period | $ | 7,210 |
| | $ | 5,408 |
|
| | | |
Interest paid, net of amounts capitalized | $ | 20,450 |
| | $ | 14,522 |
|
| | | |
Significant non-cash transactions: | | | |
|
Increase in accrued property acquisition, development, and tenant asset expenditures | $ | 3,055 |
| | $ | 14,764 |
|
Transfer from operating properties to operating properties and related assets held for sale | 181,116 |
| | 49,435 |
|
Transfer from projects under development to operating properties | — |
| | 25,629 |
|
Transfer from other assets to projects under development | — |
| | 3,062 |
|
See accompanying notes.
COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The condensed consolidated financial statements included herein include the accounts of Cousins Properties Incorporated (“Cousins”) and its consolidated subsidiaries, including Cousins Real Estate Corporation and its subsidiaries (“CREC”). All of the entities included in the condensed consolidated financial statements are hereinafter referred to collectively as the “Company.”
The Company develops, acquires, leases, manages, and owns primarily Class A office assets and opportunistic mixed-use properties in Sunbelt markets with a focus on Georgia, Texas, and North Carolina. 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 Company's 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 September 30, 2014 and the results of operations for the three and nine months ended September 30, 2014 and 2013. The results of operations for the three and nine months ended September 30, 2014 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, 2013. 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 and nine months ended September 30, 2014 and 2013, there were no items of other comprehensive income. Therefore, no presentation of comprehensive income is required.
The Company evaluates all partnerships, joint ventures and other arrangements with variable interests to determine if the entity or arrangement qualifies as a variable interest entity (“VIE”), as defined in the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC"). If the entity or arrangement qualifies as a VIE and the Company is determined to be the primary beneficiary, the Company is required to consolidate the assets, liabilities, and results of operations of the VIE.
In August 2014, the Company acquired a building and transferred it to a special purpose entity to facilitate a potential Section 1031 exchange under the Internal Revenue Code. To realize the tax deferral available under the Section 1031 exchange, the Company must complete the Section 1031 exchange, if any, and take title to the to-be-exchanged building within 180 days of the acquisition date. The Company has determined that this entity is a VIE, and the Company is the primary beneficiary. Therefore, the Company consolidates this entity. As of September 30, 2014, this VIE had total assets of $215.0 million, no significant liabilities, and no significant cash flows.
In April 2014, the FASB issued new guidance related to the presentation of discontinued operations. Prior to this new guidance, the Company included activity for all assets held for sale and disposals in discontinued operations on the statements of operations. Under the new guidance, only assets held for sale and disposals representing a major strategic shift in operations, such as the disposal of a line of business, a significant geographical area, or a major equity investment, will be presented as discontinued operations. Additionally, the new guidance requires expanded disclosures about discontinued operations that will provide more information about their assets, liabilities, income, and expenses. The guidance is effective for periods beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. The Company adopted this guidance in 2014.
In May 2014, the FASB issued new guidance related to the accounting for revenue from contracts with customers. Under the new guidance, companies will recognize revenue when the seller satisfies a performance obligation, which would be when the buyer takes control of the good or service. This new guidance could result in different amounts of revenue being recognized and could result in revenue being recognized in different reporting periods than it is under the current guidance. The new guidance specifically excludes revenue associated with lease contracts. The guidance is effective for periods beginning after December 15, 2016 and early adoption is prohibited.
2. PROPERTY TRANSACTIONS
Held for Sale
Assets and significant liabilities, if any, of held for sale properties, as defined, are required to be separately categorized on the balance sheet.
The following properties were held for sale in 2014 or 2013, respectively:
|
| | | | | | | |
Property | | Property Type | | Location | | Square Feet |
2014 | | | | | | |
777 Main | | Office | | Fort Worth, TX | | 980,000 |
|
Mahan Village | | Retail | | Tallahassee, FL | | 147,000 |
|
2013 | | | | | | |
Lakeshore Park Plaza | | Office | | Birmingham, AL | | 197,000 |
|
600 University Park Place | | Office | | Birmingham, AL | | 123,000 |
|
Discontinued Operations
In April 2014, the FASB issued new guidance related to the presentation of discontinued operations, which changed the accounting criteria for discontinued operations. See footnote 1 for further information. The new guidance applies to assets that are sold or meet the criteria for held for sale after the date of adoption. The Company adopted the new standard in 2014. As a result, two of the Company’s properties that became held for sale in the third quarter of 2014 (777 Main and Mahan Village) that under the previous guidance would have been considered discontinued operations are not considered discontinued operations under the new guidance.
The following properties met the criteria for discontinued operations presentation prior to the adoption of the new guidance discussed above. Accordingly, the results of operations of these properties are included in a separate section, discontinued operations, in the statements of operations for all periods presented ($ in thousands):
|
| | | | | | | | | | | | | |
Property | | Property Type | | Location | | Square Feet | | Sales Price | | Quarter Sold |
2014 | | | | | | | | | | |
Lakeshore Park Plaza | | Office | | Birmingham, AL | | 197,000 |
| | $ | 25,000 |
| | 3Q 2014 |
600 University Park Place | | Office | | Birmingham, AL | | 123,000 |
| | $ | 19,700 |
| | 1Q 2014 |
2013 | | | | | | | | | | |
Tiffany Springs MarketCenter | | Retail | | Kansas City, MO | | 238,000 |
| | $ | 53,500 |
| | 3Q 2013 |
Lakeshore Park Plaza | | Office | | Birmingham, AL | | 197,000 |
| | Held for sale |
| | N/A |
600 University Park Place | | Office | | Birmingham, AL | | 123,000 |
| | Held for sale |
| | N/A |
Inhibitex | | Office | | Atlanta, GA | | 51,000 |
| | $ | 8,300 |
| | 4Q 2013 |
The components of discontinued operations and the gains and losses on property sales for the three and nine months ended September 30, 2014 and 2013 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Income from discontinued operations: | | | | | | | | |
Rental property revenues | | $ | 601 |
| | $ | 2,870 |
| | $ | 2,923 |
| | $ | 8,811 |
|
Fee income | | — |
| | — |
| | — |
| | 76 |
|
Other income | | 14 |
| | 18 |
| | 29 |
| | 33 |
|
Rental property operating expenses | | (260 | ) | | (1,118 | ) | | (1,125 | ) | | (3,493 | ) |
General and administrative expenses | | (1 | ) | | (15 | ) | | (2 | ) | | (94 | ) |
Depreciation and amortization | | — |
| | (492 | ) | | — |
| | (2,590 | ) |
Other expenses | | (6 | ) | | (6 | ) | | (19 | ) | | (19 | ) |
| | $ | 348 |
| | $ | 1,257 |
| | $ | 1,806 |
| | $ | 2,724 |
|
| |
| |
| | | | |
Gain on sale of discontinued operations: | | | | | | | | |
Lakeshore Park Plaza | | $ | 13,025 |
| | $ | — |
| | $ | 13,025 |
| | $ | — |
|
600 University Park Place | | (37 | ) | | — |
| | 6,334 |
| | — |
|
Third party management and leasing business | | — |
| | 4,531 |
| | — |
| | 4,531 |
|
Tiffany Springs MarketCenter | | — |
| | 3,715 |
| | — |
| | 3,715 |
|
King Mill | | — |
| | 38 |
| | — |
| | 246 |
|
Other | | 5 |
| | 62 |
| | 13 |
| | 58 |
|
| | $ | 12,993 |
| | $ | 8,346 |
| | $ | 19,372 |
| | $ | 8,550 |
|
Fifth Third Center Acquisition
In August 2014, the Company acquired Fifth Third Center, a 698,000 square foot Class-A office tower located in the Charlotte, North Carolina central business district. The gross purchase price for this property was $215.0 million, before adjustments for customary closing costs and other closing credits. As of September 30, 2014, the Company had incurred $328,000 in acquisition and related costs associated with this acquisition.
The following tables summarize preliminary allocations of the estimated fair values of the assets and liabilities of Fifth Third Center (in thousands):
|
| | | | |
Tangible assets: | | |
Land and improvements | | $ | 22,863 |
|
Building | | 163,649 |
|
Tenant improvements | | 16,781 |
|
Accounts receivable | | 1,014 |
|
Total tangible assets | | 204,307 |
|
| | |
Intangible assets: | | |
Above-market leases | | 632 |
|
In-place leases | | 17,096 |
|
Below-market ground leases | | 338 |
|
Total intangible assets | | 18,066 |
|
| | |
Tangible Liabilities: | | |
Accounts payable and accrued expenses | | (1,026 | ) |
Total tangible liabilities | | (1,026 | ) |
| | |
Intangible Liabilities: | | |
Below-market leases | | (9,374 | ) |
Total intangible liabilities | | (9,374 | ) |
| | |
Total net assets acquired | | $ | 211,973 |
|
Subsequent Event
In October 2014, the Company acquired Northpark Town Center, a 1.5 million square foot office asset located in Atlanta, Georgia. The gross purchase price for this property was $348.0 million, before adjustments for customary closing costs and other closing credits. The Company funded the purchase of Northpark Town Center with cash on hand and borrowings under its Credit Facility. As of September 30, 2014, the Company had incurred $385,000 in acquisition and related costs associated with this acquisition, and the Company expects to incur additional acquisition and related costs in the fourth quarter. Due to the limited time since the acquisition date, the initial accounting for this transaction is incomplete and, as such, the Company is unable to provide purchase price allocation disclosures.
3. 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, 2013. The following table summarizes balance sheet data of the Company's unconsolidated joint ventures as of September 30, 2014 and December 31, 2013 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Assets | | Total Debt | | Total Equity | | Company’s Investment | |
SUMMARY OF FINANCIAL POSITION: | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 | |
Terminus Office Holdings | $ | 291,415 |
| | $ | 297,815 |
| | $ | 214,228 |
| | $ | 215,942 |
| | $ | 62,481 |
| | $ | 69,867 |
| | $ | 32,157 |
| | $ | 35,885 |
| |
EP I LLC | 86,059 |
| | 88,130 |
| | 58,029 |
| | 57,092 |
| | 26,671 |
| | 29,229 |
| | 23,401 |
| | 25,319 |
| |
EP II LLC | 33,048 |
| | 12,644 |
| | 3,608 |
| | 1 |
| | 24,969 |
| | 11,695 |
| | 19,773 |
| | 9,566 |
| |
Cousins Watkins LLC | 50,226 |
| | 51,653 |
| | 27,278 |
| | 27,710 |
| | 21,775 |
| | 23,081 |
| | 17,522 |
| | 17,213 |
| |
Charlotte Gateway Village, LLC | 131,937 |
| | 135,966 |
| | 39,852 |
| | 52,408 |
| | 90,101 |
| | 82,373 |
| | 11,226 |
| | 11,252 |
| |
Temco Associates, LLC | 7,910 |
| | 8,474 |
| | — |
| | — |
| | 7,672 |
| | 8,315 |
| | 3,659 |
| | 4,083 |
| |
CL Realty, L.L.C. | 7,389 |
| | 7,602 |
| | — |
| | — |
| | 7,220 |
| | 7,374 |
| | 3,614 |
| | 3,704 |
| |
Wildwood Associates | 21,101 |
| | 21,127 |
| | — |
| | — |
| | 20,997 |
| | 21,121 |
| | (1,739 | ) | (1) | (1,689 | ) | (1) |
Crawford Long - CPI, LLC | 30,876 |
| | 32,042 |
| | 75,000 |
| | 75,000 |
| | (46,183 | ) | | (44,295 | ) | | (21,997 | ) | (1) | (21,071 | ) | (1) |
Other | 1,245 |
| | 1,931 |
| | — |
| | — |
| | 1,204 |
| | 1,700 |
| | 1 |
| | 60 |
| |
| $ | 661,206 |
| | $ | 657,384 |
| | $ | 417,995 |
| | $ | 428,153 |
| | $ | 216,907 |
| | $ | 210,460 |
| | $ | 87,617 |
| | $ | 84,322 |
| |
(1) Negative balances are included in deferred income on the balance sheets.
The following table summarizes statement of operations information of the Company's unconsolidated joint ventures for the nine months ended September 30, 2014 and 2013 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Revenues | | Net Income (Loss) | | Company's Share of Income (Loss) |
SUMMARY OF OPERATIONS: | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
Terminus Office Holdings | $ | 29,354 |
| | $ | 23,842 |
| | $ | 314 |
| | $ | (219 | ) | | $ | 134 |
| | $ | (110 | ) |
EP I LLC | 9,024 |
| | 5,499 |
| | 2,102 |
| | (348 | ) | | 1,577 |
| | (261 | ) |
Cousins Watkins LLC | 3,801 |
| | 4,297 |
| | 217 |
| | 16 |
| | 1,702 |
| | 1,738 |
|
Charlotte Gateway Village, LLC | 25,079 |
| | 25,079 |
| | 8,635 |
| | 7,931 |
| | 882 |
| | 882 |
|
Temco Associates, LLC | 793 |
| | 437 |
| | 157 |
| | 48 |
| | (24 | ) | | (12 | ) |
CL Realty, L.L.C. | 1,240 |
| | 1,246 |
| | 846 |
| | 801 |
| | 410 |
| | 392 |
|
Wildwood Associates | 29 |
| | — |
| | (125 | ) | | (126 | ) | | (50 | ) | | (63 | ) |
Crawford Long - CPI, LLC | 8,905 |
| | 8,826 |
| | 2,075 |
| | 2,134 |
| | 1,062 |
| | 1,028 |
|
CF Murfreesboro Associates | — |
| | 8,079 |
| | — |
| | 48,969 |
| | (390 | ) | | 23,562 |
|
CP Venture Five LLC | — |
| | 20,192 |
| | — |
| | 3,056 |
| | — |
| | 17,146 |
|
CP Venture Two LLC | — |
| | 12,965 |
| | — |
| | 7,035 |
| | — |
| | 21,592 |
|
MSREF/ Cousins Terminus 200 LLC | — |
| | 1,268 |
| | — |
| | (172 | ) | | — |
| | (28 | ) |
Other | 5 |
| | 1,273 |
| | (245 | ) | | (375 | ) | | 40 |
| | (4 | ) |
| $ | 78,230 |
| | $ | 113,003 |
| | $ | 13,976 |
| | $ | 68,750 |
| | $ | 5,343 |
| | $ | 65,862 |
|
4. INTANGIBLE ASSETS
Intangible assets on the balance sheets as of September 30, 2014 and December 31, 2013 included the following (in thousands):
|
| | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
In-place leases, net of accumulated amortization of $51,957 and $26,239 in 2014 and 2013, respectively | | $ | 127,624 |
| | $ | 152,830 |
|
Above-market tenant leases, net of accumulated amortization of $12,990 and $11,284 in 2014 and 2013, respectively | | 9,929 |
| | 12,332 |
|
Below-market ground lease, net of accumulated amortization of $0 and $21 in 2014 and 2013, respectively | | — |
| | 1,680 |
|
Goodwill | | 4,057 |
| | 4,131 |
|
| | $ | 141,610 |
| | $ | 170,973 |
|
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 nine months ended September 30, 2014 and 2013 (in thousands):
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
Beginning balance | $ | 4,131 |
| | $ | 4,751 |
|
Allocated to property sales | (74 | ) | | (604 | ) |
Ending balance | $ | 4,057 |
| | $ | 4,147 |
|
5. OTHER ASSETS
Other assets on the balance sheets as of September 30, 2014 and December 31, 2013 included the following (in thousands):
|
| | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
Lease inducements, net of accumulated amortization of $5,139 and $4,181 in 2014 and 2013, respectively | | $ | 12,189 |
| | $ | 12,548 |
|
FF&E and leasehold improvements, net of accumulated depreciation of $18,712 and $17,684 in 2014 and 2013, respectively | | 8,959 |
| | 8,743 |
|
Loan closing costs, net of accumulated amortization of $1,927 and $2,621 in 2014 and 2013, respectively | | 6,418 |
| | 4,176 |
|
Prepaid expenses and other assets | | 3,793 |
| | 3,606 |
|
Predevelopment costs and earnest money | | 24,122 |
| | 821 |
|
| | $ | 55,481 |
| | $ | 29,894 |
|
6. NOTES PAYABLE
The following table summarizes the terms and amounts of the Company’s notes payable at September 30, 2014 and December 31, 2013 ($ in thousands):
|
| | | | | | | | | | | | | |
Description | | Interest Rate | | Maturity | | September 30, 2014 | | December 31, 2013 |
Post Oak Central mortgage note | | 4.26 | % | | 2020 | | $ | 185,922 |
| | $ | 188,310 |
|
The American Cancer Society Center mortgage note | | 6.45 | % | | 2017 | | 131,507 |
| | 132,714 |
|
Promenade mortgage note | | 4.27 | % | | 2022 | | 111,612 |
| | 113,573 |
|
191 Peachtree Tower mortgage note | | 3.35 | % | | 2018 | | 100,000 |
| | 100,000 |
|
Credit Facility, unsecured | | 1.25 | % | | 2019 | | 87,700 |
| | 40,075 |
|
Meridian Mark Plaza mortgage note | | 6.00 | % | | 2020 | | 25,512 |
| | 25,813 |
|
The Points at Waterview mortgage note | | 5.66 | % | | 2016 | | 14,736 |
| | 15,139 |
|
Mahan Village construction facility | | 1.80 | % | | 2015 | | 14,085 |
| | 14,470 |
|
| | | | | | $ | 671,074 |
| | $ | 630,094 |
|
In the third quarter of 2014, the Mahan Village construction facility's maturity date was extended from September 2014 to January 2015.
On May 28, 2014, the Company entered into a Third Amended and Restated Credit Agreement (the “New Facility”) under which the Company may borrow up to $500 million if certain conditions are satisfied. The New Facility recast the Company's existing $350 million senior unsecured revolving line of credit, dated February 28, 2012 (the “Existing Facility”) by:
| |
• | Increasing the size by $150 million to $500 million; |
| |
• | Extending the maturity date from February 28, 2016 to May 28, 2019; |
| |
• | Reducing the per annum variable interest rate spread and other fees; and |
| |
• | Providing for the expansion of the New Facility by an additional $250 million for a total available of $750 million, subject to receipt of additional commitments from lenders and other customary conditions. |
The New Facility contains certain financial covenants that require, among other things, the maintenance of an unencumbered interest coverage ratio of at least 2.00; a fixed charge coverage ratio of at least 1.50; an overall leverage ratio of no more than 60%; and a minimum shareholders’ equity in an amount equal to $1.0 billion, plus a portion of the net cash proceeds from certain equity issuances. The New Facility also contains customary representations and warranties and affirmative and negative covenants, as well as customary events of default. The amounts outstanding under the New Facility may be accelerated upon the occurrence of any events of default.
The interest rate applicable to the New Facility varies according to the Company’s leverage ratio, and may, at the election of the Company, be determined based on either (1) the current LIBOR plus the applicable spread detailed below, or (2) the greater of Bank of America’s prime rate, the federal funds rate plus 0.50% or the one-month LIBOR plus 1.0% (the “Base Rate”), plus the applicable spread detailed below. Fees on letters of credit issued under the New Facility are payable at an annual rate equal to the spread applicable to loans bearing interest based on LIBOR. The Company also pays an annual facility fee on the total commitments under the New Facility. The pricing spreads and the facility fee under the New Facility are as follows:
|
| | | | | | |
Leverage Ratio | | Applicable % Spread for LIBOR Loans | | Applicable % Spread for Base Rate Loans | | Annual Facility Fee % |
≤ 30% | | 1.10% | | 0.10% | | 0.15% |
> 30% but ≤ 35% | | 1.10% | | 0.10% | | 0.20% |
> 35% but ≤ 40% | | 1.15% | | 0.15% | | 0.20% |
> 40% but ≤ 45% | | 1.20% | | 0.20% | | 0.20% |
> 45% but ≤ 50% | | 1.20% | | 0.20% | | 0.25% |
> 50% | | 1.45% | | 0.45% | | 0.30% |
At September 30, 2014, the Company's spread over LIBOR was 1.10%. The New Facility also provides for alternative pricing spreads and facility fees, which would be available to the Company on any date after the Company obtains an investment grade credit rating.
Fair Value
At September 30, 2014 and December 31, 2013, the aggregate estimated fair values of the Company's notes payable were $711.3 million and $654.1 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, Fair Value Measurement, as the Company utilizes market rates for similar type loans from third party brokers.
Other Information
For the three and nine months ended September 30, 2014 and 2013, interest expense was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Total interest incurred | $ | 7,667 |
| | $ | 5,268 |
| | $ | 22,787 |
| | $ | 14,602 |
|
Interest capitalized | (850 | ) | | (119 | ) | | (1,833 | ) | | (277 | ) |
Total interest expense | $ | 6,817 |
| | $ | 5,149 |
| | $ | 20,954 |
| | $ | 14,325 |
|
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.
Subsequent Events
On October 1, 2014, the Company acquired Northpark Town Center as discussed in note 2 and funded the acquisition with cash on hand and with borrowings under its Credit Facility. On October 14, 2014, the Company entered into an $85.0 million mortgage note secured by 816 Congress. This mortgage note has a fixed rate of 3.75% and matures in November 2024. The Company used the proceeds from this mortgage note to reduce amounts outstanding under its Credit Facility. As of October 24, 2014, the amount outstanding under the Company's Credit Facility was $318.2 million.
7. COMMITMENTS AND CONTINGENCIES
Commitments
At September 30, 2014, the Company had outstanding letters of credit and performance bonds totaling $2.4 million. As a lessor, the Company had $103.6 million in future obligations under leases to fund tenant improvements as of September 30, 2014. As a lessee, the Company had future obligations under ground and office leases of $150.0 million as of September 30, 2014. At September 30, 2014, the Company had a commitment to purchase land for an anticipated future development in the amount of $7.4 million.
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.
8. 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 nine months ended September 30, 2014 and 2013 (in thousands):
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
Beginning Balance | $ | — |
| | $ | — |
|
Net income attributable to redeemable noncontrolling interests | — |
| | 61 |
|
Distributions to redeemable noncontrolling interests | — |
| | (61 | ) |
Ending Balance | $ | — |
| | $ | — |
|
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 nine months ended September 30, 2014 and 2013 (in thousands):
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
Net income attributable to nonredeemable noncontrolling interests | $ | 376 |
| | $ | 4,840 |
|
Net income attributable to redeemable noncontrolling interests | — |
| | 61 |
|
Net income attributable to noncontrolling interests | $ | 376 |
| | $ | 4,901 |
|
9. STOCKHOLDERS' EQUITY
In August 2014, the Company issued 18.0 million shares of common stock, resulting in net proceeds to the Company of $223.4 million, which includes customary legal, accounting, and other expenses. The Company used the proceeds from this offering to acquire Fifth Third Center, a 698,000 square foot Class-A office tower located in the Charlotte, North Carolina central business district.
In March 2014, the Company issued 8.7 million shares of common stock, resulting in net proceeds to the Company of $98.5 million, which includes customary legal, accounting, and other expenses. The Company used the proceeds from this offering to paydown the Credit Facility in preparation for the redemption of all outstanding shares of its 7.5% Series B Cumulative Redeemable Preferred Stock. In April 2014, the Company redeemed all outstanding shares of its 7.5% Series B Cumulative Redeemable Preferred Stock, par value $1.00 per share, for $25.00 per share or $94.8 million, excluding accrued dividends. In connection with the redemption of Preferred Stock, the Company decreased net income available for common shareholders by $3.5 million (non-cash), which represents the original issuance costs applicable to the shares redeemed.
In April 2013, the Company issued 16.5 million shares of common stock resulting in net proceeds to the Company of $165.1 million, which includes customary legal, accounting, and other expenses. The Company used the proceeds from this offering to paydown the Credit Facility in preparation for the redemption of all outstanding shares of its 7.75% Series A Cumulative Redeemable Preferred Stock. In May 2013, the Company redeemed all outstanding shares of its 7.75% Series A Cumulative Redeemable Preferred Stock, par value $1.00 per share, for $25.00 per share or $74.8 million, excluding accrued dividends. In connection with the redemption of Preferred Stock, the Company increased net loss available for common shareholders by $2.7 million (non-cash), which represents the original issuance costs applicable to the shares redeemed.
10. STOCK-BASED COMPENSATION
The Company has several types of stock-based compensation - stock options, restricted stock, and restricted stock units (“RSUs”) - which are described in note 13 of notes to consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. The expense related to a portion of the stock-based compensation awards is fixed. The expense related to other stock-based compensation awards fluctuates from period to period dependent, in part, on the Company's stock price and stock performance relative to its peers. The Company recorded stock-based compensation expense, net of forfeitures, of $2.3 million for each of the three months ended September 30, 2014 and 2013 and $7.2 million and $5.9 million for the nine months ended September 30, 2014 and 2013, respectively.
The Company maintains the 2005 Restricted Stock Unit Plan (the “RSU Plan”), which is described in note 13 of notes to consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Under the RSU Plan, the Company made restricted stock grants in 2014 of 137,591 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 metrics: (1) Total Stockholder Return of the Company, as defined in the RSU Plan, 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 RSU Plan. The performance period for both awards is January 1, 2014 to December 31, 2016, and the targeted units awarded of SNL RSUs and FFO RSUs is 108,751 and 56,405, 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 RSUs cliff vest on January 30, 2017 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, 2016. The SNL RSUs are valued using a quarterly Monte Carlo valuation and are expensed 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.
11. 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 and nine months ended September 30, 2014 and 2013, respectively, are as follows (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Weighted average shares — basic | 209,839 |
| | 163,426 |
| | 200,073 |
| | 128,953 |
|
Dilutive potential common shares — stock options | 272 |
| | 177 |
| | 252 |
| | 168 |
|
Weighted average shares — diluted | 210,111 |
| | 163,603 |
| | 200,325 |
| | 129,121 |
|
Weighted average anti-dilutive stock options | 2,200 |
| | 2,784 |
| | 2,200 |
| | 2,908 |
|
Stock options are dilutive when the average market price of the Company's stock during the period exceeds the option exercise price. 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.
12. REPORTABLE SEGMENTS
The Company has four reportable segments: Office, Retail, Land, 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. The Other segment includes:
| |
• | fee income and related expenses for third party owned properties and joint venture properties for which the Company performs management, development and leasing services; |
| |
• | compensation for corporate employees; |
| |
• | 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.
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 September 30, 2014 | | Office | | Retail | | Land | | Other | | Total |
Net operating income | $ | 52,691 |
| | $ | 1,221 |
| | $ | — |
| | $ | 1,200 |
| | $ | 55,112 |
|
Sales less costs of sales | — |
| | — |
| | 82 |
| | — |
| | 82 |
|
Fee income | — |
| | — |
| | — |
| | 1,802 |
| | 1,802 |
|
Other income | — |
| | — |
| | — |
| | 399 |
| | 399 |
|
General and administrative expenses | — |
| | — |
| | — |
| | (5,021 | ) | | (5,021 | ) |
Reimbursed expenses | — |
| | — |
| | — |
| | (783 | ) | | (783 | ) |
Interest expense | — |
| | — |
| | — |
| | (8,660 | ) | | (8,660 | ) |
Other expenses | — |
| | — |
| | — |
| | (1,255 | ) | | (1,255 | ) |
Preferred stock dividends and original issuance costs | — |
| | — |
| | — |
| | — |
| | — |
|
Funds from operations available to common stockholders | | $ | 52,691 |
| | $ | 1,221 |
| | $ | 82 |
| | $ | (12,318 | ) | | 41,676 |
|
Real estate depreciation and amortization, including Company's share of joint ventures | | | | | | | | | | (35,347 | ) |
Gain on sale of depreciated investment properties, including Company's share of joint ventures | | | | | | | | | | 12,993 |
|
Net income available to common stockholders | | | | | | | | | | $ | 19,322 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2013 | | Office | | Retail | | Land | | Other | | Total |
Net operating income | | $ | 30,308 |
| | $ | 3,663 |
| | $ | — |
| | $ | 861 |
| | $ | 34,832 |
|
Sales less costs of sales | | — |
| | — |
| | 725 |
| | (6 | ) | | 719 |
|
Fee income | | — |
| | — |
| | — |
| | 2,420 |
| | 2,420 |
|
Other income | | — |
| | — |
| | — |
| | 303 |
| | 303 |
|
Gain on sale of third party management and leasing business | | — |
| | — |
| | — |
| | 4,531 |
| | 4,531 |
|
Separation expenses | | — |
| | — |
| | — |
| | (520 | ) | | (520 | ) |
General and administrative expenses | | — |
| | — |
| | — |
| | (6,635 | ) | | (6,635 | ) |
Reimbursed expenses | | — |
| | — |
| | — |
| | (1,097 | ) | | (1,097 | ) |
Interest expense | | — |
| | — |
| | — |
| | (7,224 | ) | | (7,224 | ) |
Other expenses | | — |
| | — |
| | — |
| | (8,326 | ) | | (8,326 | ) |
Preferred stock dividends and original issuance costs | | — |
| | — |
| | — |
| | (1,777 | ) | | (1,777 | ) |
Funds from operations available to common stockholders | | $ | 30,308 |
| | $ | 3,663 |
| | $ | 725 |
| | $ | (17,470 | ) | | 17,226 |
|
Real estate depreciation and amortization, including Company's share of joint ventures | | | | | | | | | | (21,890 | ) |
Gain on sale of depreciated investment properties including the Company's share of joint ventures | | | | | | | | | | 67,435 |
|
Noncontrolling interest related to sale of depreciated properties | | | | | | | | | | (3,390 | ) |
Net income available to common stockholders | | | | | | | | | | $ | 59,381 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2014 | | Office | | Retail | | Land | | Other | | Total |
Net operating income | | $ | 149,110 |
| | $ | 3,813 |
| | $ | — |
| | $ | 3,496 |
| | $ | 156,419 |
|
Sales less costs of sales | | — |
| | — |
| | 1,573 |
| | 42 |
| | 1,615 |
|
Fee income | | — |
| | — |
| | — |
| | 6,165 |
| | 6,165 |
|
Other income | | — |
| | — |
| | — |
| | 4,563 |
| | 4,563 |
|
Separation expenses | | — |
| | — |
| | — |
| | (84 | ) | | (84 | ) |
General and administrative expenses | | — |
| | — |
| | — |
| | (16,388 | ) | | (16,388 | ) |
Reimbursed expenses | | — |
| | — |
| | — |
| | (2,703 | ) | | (2,703 | ) |
Interest expense | | — |
| | — |
| | — |
| | (26,485 | ) | | (26,485 | ) |
Other expenses | | — |
| | — |
| | — |
| | (2,974 | ) | | (2,974 | ) |
Preferred stock dividends and original issuance costs | | — |
| | — |
| | — |
| | (6,485 | ) | | (6,485 | ) |
Funds from operations available to common stockholders | | $ | 149,110 |
| | $ | 3,813 |
| | $ | 1,573 |
| | $ | (40,853 | ) | | 113,643 |
|
Real estate depreciation and amortization, including Company's share of joint ventures | | | | | | | | | | (110,319 | ) |
Gain on sale of depreciated investment properties, including Company's share of joint ventures | | | | | | | | | | 18,975 |
|
Net income available to common stockholders | | | | | | | | | | $ | 22,299 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2013 | | Office | | Retail | | Land | | Other | | Total |
Net operating income | | $ | 76,039 |
| | $ | 12,255 |
| | $ | — |
| | $ | 1,280 |
| | $ | 89,574 |
|
Sales less costs of sales | | — |
| | — |
| | 1,244 |
| | 154 |
| | 1,398 |
|
Fee income | | — |
| | — |
| | — |
| | 9,007 |
| | 9,007 |
|
Other income | | — |
| | — |
| | — |
| | 2,649 |
| | 2,649 |
|
Gain on sale of third party management and leasing business | | — |
| | — |
| | — |
| | 4,531 |
| | 4,531 |
|
Separation expenses | | — |
| | — |
| | — |
| | (520 | ) | | (520 | ) |
General and administrative expenses | | — |
| | — |
| | — |
| | (17,257 | ) | | (17,257 | ) |
Reimbursed expenses | | — |
| | — |
| | — |
| | (4,365 | ) | | (4,365 | ) |
Interest expense | | — |
| | — |
| | — |
| | (20,442 | ) | | (20,442 | ) |
Other expenses | | — |
| | — |
| | — |
| | (10,843 | ) | | (10,843 | ) |
Preferred stock dividends and original issuance costs | | — |
| | — |
| | — |
| | (10,887 | ) | | |