Cousins Properties’ first completed building in the Terminus mixed-use complex in Atlanta. Once completed, the complex will have a total of five towers housing office, residential and retail space.

Tom Bell and Cousins Properties prove that taking risk has its rewards as the development-focused REIT builds better returns

By Charles Keenan

Cousins Properties, Inc. (NYSE: CUZ) announced in 2004 that it would break ground on a 10-acre plot of grass in Atlanta, to construct a 27-story office building, marking the start of an ambitious mixed-use development project. From the beginning, the project raised some doubts. Why would the company build a tower with 650,000 square feet of office space when the city's office vacancy rate was upwards of 20 percent?

However, Cousins had a few reasons for the development. It had already signed tenants Bain & Co. and CB Richard Ellis Group, Inc. Also, the site was attractive because it was the last large open space situated in Atlanta's Buckhead district, an area rated as one of America's top-10 affluent communities in 2007 by the luxury magazine Robb Report.

COUSINS PROPERTIES INC. 191 Peachtree Street NE, Suite 3600 Atlanta, Georgia 30303 PHONE: (404) 407-1000 WEB ADDRESS: www.cousinsproperties.com TICKER SYMBOL: NYSE: CUZ MANAGEMENT: Thomas D. Bell, Jr., chairman of the board and CEO; R. Dary Stone, vice chairman; James A. Fleming, executive vice president and CFO; Daniel M. DuPree, president and COO; Craig B. Jones, executive vice president and CIO •52-WEEK HIGH: $40.75 •52-WEEK LOW: $28.93

Meanwhile, Cousins also expected significant rollover of nearby class-A office leases by the time the building opened in the spring of 2007. Approximately 90 percent of the building, the first in a project dubbed "Terminus," had been leased in May 2007, and Cousins was confident enough to start construction in June on a second office tower.

In total, the project will have five towers: two holding office space, three housing residential, with all five towers housing retail space on the ground level. It will eventually total 1.1 million square feet of office space, more than 125,000 square feet of retail and restaurants and up to 800 residential units.

The project typifies Cousins, which is regarded as a development-focused REIT—50 percent of its asset base is devoted to construction projects, land held for future commercial development and residential land development. "We are an opportunistic developer," says Tom Bell, chairman and chief executive officer of Cousins. "As a development company, you take more risk, but you expect a better return."

Construction of the Terminus building in 2005.

Driving Development

Tom Cousins founded Cousins Properties in 1958. With $2,500 in the bank and one full-time employee—his father—Cousins started acquiring vacant residential lots and building homes for sale to the public. By the early 1960s, Cousins Properties had become the largest homebuilder and residential developer in Georgia. The company went public in 1962.

Today, the REIT defines itself as a capital recycler. Cousins looks for opportunities to sell assets after developing them, generally yielding a total return in the 20 percent to 30 percent range in its four main areas of business: office, retail, residential and industrial real estate.

Since 2003, Cousins has sold more than 30 buildings, generating $2.1 billion in gains—$894 million in 2006 alone. Of the $2.1 billion, the company distributed $632 million to shareholders in special dividends, or $12.62 a share. The rest—$1.5 billion—was used for investment and reducing debt.

"We go anywhere the sun shines and the population is growing," Bell says. That should bode well for the REIT over time with the REIT focusing on Sunbelt properties. According to the U.S. Census Bureau, approximately 60 percent of the nation's population growth through 2030 is predicted to occur in the Sunbelt, particularly in Florida, Georgia, North Carolina, Tennessee and Texas as well as California.

Tom Bell, chairman and CEO of Cousins Properties, stands in front of the second phase of the Terminus building complex in Atlanta.

Tackling Concerns

Despite the robust numbers, Cousins stock price had dropped 16 percent, as of July 31.

One thing concerning investors: office vacancy rates in Atlanta are among the highest in the country. "Atlanta's office market is one of the toughest places in the nation to operate," says Cedrik Lachance, a senior analyst at Green Street Advisors, Inc. "If anyone can do it, Cousins can. However, they are operating in a soft market."

Also of concern is the slowdown in the residential housing market. Cousins had 24 developments at the end of 2006, with the potential for 18,000 single-family home lots. Green Street estimates net income from the lots will decline to $12.6 million this year from $21.6 million in 2006.

In its land business, the REIT buys land and prepares the infrastructure—such as streets and sewer lines—for developers, who then buy the lots from Cousins. This is done through the company's taxable REIT subsidiary, Cousins Real Estate Corporation.

Terminus I has over 650,000 feet of office space in Atlanta.

However, Cousins says concern about the market is overblown, since it can forgo spending money on prepping land for buyers and redeploy the capital elsewhere.

While selling fewer lots will crimp funds from operations (FFO), the company will eventually recoup its money. "You have to carry the land until the market allows you to sell," says Dan Dupree, president and COO. "But you don't have to carry the incremental costs of developing the individual sites." Bell adds that the dip in the residential market will give it another opportunity down the road, with banks eventually eager to unload the land they have inherited from defaults. "The time will come when they will want to dispose of it," he says.

This flexibility gives Cousins a leg up, Bell notes. "We take what the market gives us," he says. "Right now it's giving us more office, retail and industrial opportunities than those available in residential."

		Becoming a Cousin Along the way, Cousins has developed or acquired the expertise to allow it to excel in vastly different areas of real estate with a seasoned team.

Opportunity Knocks

One big area of opportunity for Cousins is retail development, which represents 12 percent of the REIT's assets, according to Green Street. Cousins' "retail avenue" concept—retail complexes noted for their open air, landscaping and architecture—have been a hit nationwide. The REIT has leveraged its Atlanta success through projects in Long Beach, Calif., Los Angeles, Memphis, Nashville, Norfolk, Va., Orlando, San Diego and San Jose, Calif.

While the office market has been plagued by high vacancy rates in the Southeast, Cousins has demonstrated an ability to strike at the right time. "We see the office sector as a little slower and more opportunistic than others," Bell says. "We try to take advantage of what little cracks we can find."

Cousins did just that last year when it sold two prized buildings it had developed in the early 1990s. It sold the Bank of America Tower in Atlanta to BentleyForbes for $436 million ($350 a square foot—a record in Georgia). It also sold the Frost Bank Tower in Austin, Tex., to Equity Office Properties Trust for $188 million ($354 a square foot—a record in Texas).

By selling assets, Cousins also achieves another goal of its strategy: maintaining a mid-cap size for the company. "We are constantly going to recycle capital because our business model says by and large there is no real premium for size," Dupree says. "To maximize total return for shareholders, we need to find the ideal maximum size of the company and try and operate within its boundaries."

Best Deal for Investors

		Upside-Downside A sampling of what analysts are saying about Cousins Properties, Inc.

That recycling sometimes leads to low leverage. Due to the sales of the Bank of America Tower and the Frost Bank Tower last year, the company's debt to equity ratio at the end of 2006 was 16 percent. However, Cousins has plans for ramping up investment, with roughly $550 million committed to projects this year, up from $475 million in 2006.

Property sales make FFO an incomplete barometer of performance. For example, last year FFO nudged downward to $1.42 per share, from $1.43 in 2005. However, Cousins also paid a special dividend in 2006 of $3.40 per share as the result of the sale of the two properties in its office portfolio.

Investors should take note, says David Harris, an analyst at Lehman Brothers. "Investors have to look at total return over time," he says. "If a company is going to sell stabilized assets and distribute substantial special dividends, you have to take that into account. That is effectively harvesting the value creation and distributing that by way of a special dividend."

Cousins is also forging ahead with urban condominiums, targeting the trend of empty nesters returning to cities and downsizing their living space. Its 32-story tower at the Terminus site, due to open in mid-2008, targets the mid-range market, second time buyers and empty-nesters who will pay $450 to $750 a square foot. While Cousins believes the low-end and high-end markets are saturated, there's a gap in the mid-market sector waiting to be filled.

To be sure, all development projects carry risk, from construction problems to rising cap rates. Yet assuming the risk is what Cousins gets paid to do, executives say. "You are making a bet on the development process," Dupree says. "The big challenge is to be disciplined enough to not think that the way the markets are today reflects the way they are going to be when the projects you are developing are completed."