Operating as a real estate developer and taking on joint ventures is keeping Cousins Properties Inc. moving ahead.

When the dust settles, over two million man-hours, 19 million pounds of steel and 100 miles of conduit will have been toiled, erected and run to construct the Gateway Village in Charlotte, NC. At completion, the Village will feature a 1.5 million sq. ft. office complex, 5,300 parking spaces and 750 residential units, all paid for by Cousins Properties Inc. and its joint venture partner, Bank of America.

"They [Bank of America] invest shoulder-to-shoulder with us," said Daniel DuPree, president, Cousins Properties Inc., Atlanta, GA. "Every dollar we put up, they put up."

Strong Partners Make Strong Projects

Joint venturing with strong corporate partners and operating as a real estate developer are the policies that have allowed Cousins to maintain conservative debt levels—instead of financing the company, Cousins finances individual projects with non-recourse loans—while increasing its funds from operations, establish long-term tenant relationships, and building landmark office parks and retail centers in major cities. With a construction pipeline consisting of $711 million, this melding of venture partner and developer has proved to be a successful strategy for the firm, public since 1962, a REIT since 1986.

If success can be measured project-by-project, Gateway Village may be Cousin's Academy Award, to date. With nearly 34 acres under roof, it is the largest private mixed-use urban project under construction in the United States, according to the firm. Bank of America, the venture partner, has moved into the completed Phase I building and the entire project is scheduled to be complete by late 2002. As partner, Bank of America, besides participating in property appreciation, can either pay full rent or chose to reduce its rent instead of taking a return on its share of equity.

"In the first phase, Bank of America is the tenant," explained Tommy Shealy, senior vice president, Bank of America corporate real estate, Charlotte, NC. "It was around [our] requirements that we crafted a building that would satisfy our needs over the 15-year term of the lease. And, by the same token, we wanted to build a property that could be marketed to third party tenants at the end of our 15-year term if we didn't renew our lease commitment."

Cousins has met all of its partner's requirements. "There are very few companies based in the southeast who built more quality office space than Cousins Properties," said Shealy. "We certainly felt the benefit of that. They are an engaging development partner and they have done a nice job looking after our collective interests."

Over the years, Cousins Properties has joint ventured with IBM Corporation, Coca-Cola Company, American General Corporation and more, utilizing the architectural design talents of well-known firms such as I. M. Pei Associates, now Pei, Cobb, Freed & Partners.

"There is no company that I'm aware of that's done more institutions than Cousins Properties," said Shealy. "To paper a joint venture is quite daunting. It takes a patient, very detailed, and very professional development company to make transactions like Gateway Village happen. As a partner, Bank of America benefits two ways. Cousins' experience saves everyone a lot of time and a lot of energy and ultimately a lot of money. They could quickly look at our criteria for occupancy and meet our tenant needs as well as effectively wear a joint venture partner hat."

Cousins also guided Bank of America in their lease agreement. "When signing a long-term lease, there's a strong tendency to not worry about what's going to happen 15 years out," he said. "That's one of the things Cousins kept our eye on. They helped us look at an exit strategy so that if Bank of America chose not to extend its lease, we'll have an asset that will be marketable to third party tenants."

Long-Term Relationships

Joint ventures aren't just about raising capital, they're about forming long-term relationships. "The joint ventures we're in are not entered into for the sole purpose of finding capital," explained DuPree. "They really are more about creating relationships with our lead tenant on an equitable basis. One thing a tenant gets in a relationship like that is that they get considerably more flexibility for growth and contraction."

For instance, in the early 1990s, IBM Corporation, also a venture partner and tenant, was forced to cut their office space in the Wildwood Plaza by 50 percent. Cousins' staff worked with Big Blue to bring in new tenants to take the extra space. "[Their downsizing] allowed us to greatly diversify the park," explained DuPree, adding, "[Diversifying] was a silver lining [to their downsizing] for them and for us as landlord."

Robb Mayo, director, asset management and finance, IBM Corporation, Armonk, NY, noted, "They've kept the buildings fully leased. The tenant satisfaction is extremely high in the park."

While all downsizing may not have the same positive outcome, it is more likely if the tenant was also a part owner. "If a major company is having difficulty and they're contracting, they're going to be less likely to contract in a building they own rather than rent," he noted. "One of the things we've been successful in is looking to the future, anticipating rollover, and renewing leases in advance."

But, that's only one side of the joint venture coin that has caused Cousins' to return a 21.99 percent total return to its shareholders over the last 25 years. As a developer, the REIT creates nontaxable retained earnings in the value of the assets it builds.

DuPree explains: "If we are building an office property in San Francisco, CA, at a cost of $100 million that is, on completion, worth $130 million, (the company historically makes a 30 percent gross profit margin on its building assets), we have created earnings that aren't taxable at that point. We can then put debt on that building, take our money out, and have that $130 million worth of equity."

As a joint venture partner, The Prudential Insurance Company of America provided the financing for Cousins to harvest the value of its assets for additional development without triggering a tax payment.

"The Prudential deal was a retail valuation of the assets. It is a venture that values the assets at retail, instead of wholesale," said DuPree. "We'll use those funds to develop other projects. Because of that, and the value we create in those assets we are not really reliant on the public capital markets. The only reason we have had the equity offerings that we had—only three—was to create a little more size quicker so we could structure our balance sheet the way we were most comfortable doing it."

Last summer, Cousins acquired the Inforum Building in Atlanta, GA, in a tax-free exchange for its Haywood Mall joint venture with Simon Property Group. "We were able to work a deal with Simon where they bought us out of our interest and we swapped the proceeds into the purchase of the Inforum [for $71 million.] That enabled us to avoid paying tax on a $55 million dollar gain we had in the regional mall."

When purchased, the Inforum Building was 50 percent leased. Today it is 100 percent leased and, since it was constructed to add an additional six floors, it has the potential to produce more income for the REIT. Located in Centennial Park, site of the 1996 Olympics, this building was a recipient of an elaborate grid system for telecommunication companies as evidenced by clients Bell Atlantic and CO Space, a telecom provider.

A History of Diversity

Since Tom Cousins founded the company in 1958 with $2,500 as a single family homebuilder, the firm has grown dramatically. He eventually moved the company into shopping centers, apartments, suburban office buildings and regional malls. In the 1980s he redirected the firm's focus to office building development. In 1992 the firm acquired New Market Development Co. and diversified into retail. Four years later, Cousins acquired Lea Richmond Company and the Richmond Development Company and diversified into health care real estate.

"Cousins has always been, by and large, diversified by product and more recently by market," said DuPree. "By being diversified, if you can be disciplined, you can basically shut down segments—either region or product—of your business when they're not profitable."

For example, rather than force development in a slow market, Cousins would shutdown operations there and continue to develop in a faster market. Additionally, if office development were in distress on a national scale, they have the expertise to focus on retail and medical office space.

"Their balance sheet strategy has been very conservative," said Eric Hemel, analyst Merrill Lynch, New York, NY. "They've maintained a relative low leverage, low term secure debt."

In a recent report Merrill Lynch noted that once leased, Cousins' pipeline of 18 projects will add roughly $0.75 a share to the run-rate of its FFO over the course of the next two years. Since 1994, Cousins has increased its FFO to an estimated $2.43 a share in 1999 from $1.10 a share in 1994 and grown into a $1.5 billion company today from a $600 million company in 1994. The report also said, "we foresee that Cousins' FFO per share will grow 16 percent on average during 2000–01."

Local brokerage firm, Robinson Humphrey, Atlanta, GA, rates Cousins Properties Inc. a "Buy." "We think very highly of the management team," said Patrick Hickey, senior vice president and equity REIT analyst. "Investors are able to take advantage of the value creation that is undertaken by the management team. Cousins' management has produced very consistent growth over time and has done so in a very thoughtful and deliberate manner. They are a strong development REIT with a strong development pipeline that will drive their FFO growth into 2000 and beyond."

Cousins has no plans to alter its successful path. Instead, the company will stay focused on growing revenue and rewarding its investors. "One of the things that we're very proud of is our total return to our shareholder," said DuPree. "We have an internal target of 15 percent growth annually. Over the last five years, we're probably closer to 20 percent. We can do that because we're developers."