| COUSINS PROPERTIES INC Item 1A Risk Factors Set forth below are the risks we believe investors should consider carefully in evaluating an investment in the securities of Cousins Properties Incorporated |
| 6 _________________________________________________________________ [37]Table of Contents We face risks associated with the development of real estate, such as delay, cost overruns and the possibility that we are unable to lease a large portion of the space that we build, which could adversely affect our results |
| We generally undertake more commercial development activity relative to our size than other REITs |
| Development activities contain certain inherent risks |
| Although we seek to minimize risks from commercial development through various management controls and procedures, development risks cannot be eliminated |
| Some of the key factors affecting development of commercial property are as follows: • The availability of sufficient development opportunities |
| Absence of sufficient development opportunities could result in our experiencing slower growth in value creation and slower growth in earnings and results of operations |
| Development opportunities are dependent upon a wide variety of factors |
| From time to time, availability of these opportunities can be extremely volatile as a result of these factors, including economic conditions and product supply/demand characteristics in a particular market |
| • Abandoned predevelopment costs |
| The development process inherently requires that a large number of opportunities be pursued with only a few being developed and constructed |
| There can be significant costs incurred for predevelopment activity for projects that are abandoned that directly affect our results from operations |
| We have procedures and controls in place that are intended to minimize this risk, but it is likely that there will be predevelopment costs charged to expense on an ongoing basis |
| Construction and leasing of a project involves a variety of costs that cannot always be identified at the beginning of a project |
| Costs may arise that have not been anticipated or actual costs may exceed estimated costs |
| These additional costs can be significant and could adversely impact our return on a project, the amount of value created from the development effort on the project, and the expected results from operations upon completion of the project |
| Also, construction costs rose significantly in 2005 due to increased demand for building materials and are expected to increase further in the near term |
| We attempt to mitigate construction cost risks on our development projects through guaranteed maximum price contracts and pre-ordering of certain materials |
| The success of a commercial real estate development project is dependent upon, among other factors, entering into leases with acceptable terms within the predefined lease-up period |
| Although our policy is to achieve preleasing goals (which vary by market, product type and circumstances) before committing to a project, it is likely that not all the space in a project will be leased at the time we commit to the project |
| If the space is not leased on schedule and upon the expected terms and conditions, our returns, value creation, future earnings and results of operations from the project could be adversely impacted |
| Whether or not tenants are willing to enter into leases on the terms and conditions we project and on the timetable we expect will depend upon a large variety of factors, many of which are outside our control |
| These factors may include: • general business conditions in the economy or in the tenants’ or prospective tenants’ industries; • supply and demand conditions for space in the marketplace; and • level of competition in the marketplace |
| • Governmental approvals |
| All necessary zoning, land-use, building, occupancy and other required governmental permits and authorization may not be obtained or may not be obtained on a timely basis resulting in possible delays, decreased profitability and increased management time and attention |
| 7 _________________________________________________________________ [38]Table of Contents If interest rates or other market conditions for obtaining capital become unfavorable, we may be unable to raise capital needed to build our developments on a timely basis, or we may be forced to borrow money at higher interest rates or under adverse terms, which could adversely affect our cash flow and results of operations |
| We finance our projects primarily through our credit facility, permanent mortgages, proceeds from the sale of assets and joint venture equity |
| In addition, we have raised capital through the issuance of perpetual preferred stock to supplement our capital needs |
| Each of these sources may be constrained from time to time because of market conditions, and interest rates may be unfavorable at any given point in time |
| These sources of capital, and the risks associated with each, include the following: • Credit facilities |
| Terms and conditions available in the marketplace for credit facilities vary over time |
| We can provide no assurance that the amount we need from our credit facility will be available at any given time, or at all, or that the rates and fees charged by the lenders will be acceptable to us |
| We incur interest under our credit facility at a variable rate |
| Variable rate debt creates higher debt service requirements if market interest rates increase, which would adversely affect our cash flow and results of operations |
| The availability of financing in the mortgage markets varies from time to time depending on various conditions, including the willingness of mortgage lenders to lend at any given point in time |
| Interest rates may also be volatile and we may from time to time elect not to proceed with mortgage financing due to unfavorable interest rates |
| This could adversely affect our ability to finance development activities |
| In addition, if a property is mortgaged to secure payment of indebtedness and we are unable to make the mortgage payments, the lender may foreclose, resulting in loss of income and asset value |
| Real estate markets tend to experience market cycles |
| Because of such cycles the potential terms and conditions of sales, including prices, may be unfavorable for extended periods of time |
| This could impair our ability to raise capital through property sales in order to fund our development projects or other cash needs |
| In addition, mortgage financing on a property may impose a prepayment penalty in the event the financing is prepaid, which may decrease the proceeds from a sale or refinancing or make the sale or refinancing impractical |
| Joint ventures tend to be complex arrangements, and there are only a limited number of parties willing to undertake such investment structures |
| There is no guarantee that we will be able to undertake these ventures at the times we need capital |
| • Preferred stock |
| The availability of preferred stock at favorable terms and conditions is dependent upon a number of factors including the general condition of the economy, the overall interest rate environment, the condition of the capital markets and the demand for this product by potential holders of the securities |
| We can provide no assurance that conditions will be favorable for future issuances of perpetual preferred stock (or other equity securities) when we need the capital which could have an adverse effect on our ability to fund development projects |
| Although we believe that in most economic and market environments we will be able to obtain necessary capital for our operations from the foregoing financing activities, we can make no assurances that the capital we need will be available when we need it |
| If we cannot obtain capital when we need it, we may not be able to develop and construct all the projects we could otherwise develop which could result in a reduction in value creation, as well as a reduction in the future earnings and results of operations and the growth rate of future earnings and results of operations |
| Lack of financing could also result in an inability to repay maturing debt which could result in defaults and, potentially, loss of properties, as well as an inability to make distributions to stockholders |
| Unfavorable interest rates could adversely impact both the cost of our projects (through capitalized interest) and our current earnings and funds from operations |
| 8 _________________________________________________________________ [39]Table of Contents Covenants contained in our credit facility and mortgages could restrict or hinder our operational flexibility, which could adversely affect our results of operations |
| Our credit facility imposes financial and operating covenants on us |
| These covenants may be modified from time to time, but covenants of this type typically include matters such as restrictions and limitations on our ability to incur debt and certain forms of equity capital, as well as limitations on the amount of our unsecured debt, limitations on payments to stockholders, and limitations on the amount of development and joint venture activity in which we may engage |
| These covenants may limit our flexibility in making business decisions |
| If we fail to meet those covenants, our ability to borrow may be impaired, which could potentially make it more difficult to fund our capital and operating needs |
| Additionally, some of our properties are subject to mortgages |
| These mortgages contain customary negative covenants, including limitations on our ability, without the lender’s prior consent, to further mortgage that property, to modify existing leases or to sell that property |
| Compliance with these covenants could harm our operational flexibility and financial condition |
| Our ownership of commercial real estate involves a number of risks, including general economic and market risks, leasing risk, uninsured losses and condemnation costs, environmental issues, joint venture structure risk and concentration of real estate, the effects of which could adversely affect our business |
| General economic and market risks |
| Our assets may not generate income sufficient to pay our expenses, service debt and maintain our properties, and, as a result, we may need to reduce our dividend in future periods |
| Several factors may adversely affect the economic performance and value of our properties |
| These factors include, among other things: • changes in the national, regional and local economic climate; • local conditions such as an oversupply of properties or a reduction in demand for properties; • the attractiveness of our properties to tenants; • competition from other available properties; • changes in market rental rates; and • the need to periodically repair, renovate and re-lease space |
| Our performance also depends on our ability to collect rent from tenants and to pay for adequate maintenance, insurance and other operating costs (including real estate taxes), which could increase over time |
| Also, the expenses of owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property |
| In addition, interest rate levels, the availability of financing, changes in laws and governmental regulations (including those governing usage, zoning and taxes) and financial distress or bankruptcies of tenants may adversely affect our financial condition |
| Our operating revenues are dependent upon entering into leases with and collecting rents from tenants |
| National, regional and local economic conditions may adversely impact tenants and potential tenants in the various marketplaces in which projects are located, and accordingly, could affect their ability to continue to pay rents and possibly to occupy their space |
| Tenants sometimes experience bankruptcies and pursuant to the various bankruptcy laws, leases may be rejected and thereby terminated |
| When leases expire or are terminated, replacement tenants may or may not be available upon acceptable terms and conditions |
| In addition, our cash flows and results of operations could be adversely impacted if existing leases expire or are terminated and at such time, market rental rates are lower than the previous contractual rental rates |
| As a result, our distributable cash flow and ability to make distributions to stockholders would be adversely affected if a significant number of our tenants fail to pay their rent due to bankruptcy, weakened financial condition or otherwise |
| Uninsured losses and condemnation costs |
| Accidents, earthquakes, terrorism incidents and other losses at our properties could materially adversely affect our operating results |
| Casualties may occur that significantly 9 _________________________________________________________________ [40]Table of Contents damage an operating property, and insurance proceeds may be materially less than the total loss incurred by us |
| Although we maintain casualty insurance under policies we believe to be adequate and appropriate, some types of losses, such as lease and other contract claims, generally are not insured |
| Certain types of insurance may not be available or may be available on terms that could result in large uninsured losses |
| We own property in California and other locations where property is subject to damage from earthquakes, as well as other natural catastrophes |
| We also own property that could be subject to loss due to terrorism incidents |
| The earthquake insurance and terrorism insurance markets, in particular, tend to be volatile and the availability and pricing of insurance to cover losses from earthquakes and terrorism incidents may be unfavorable from time to time |
| In addition, earthquakes and terrorism incidents could result in a significant loss that is uninsured due to the high level of deductibles or damage in excess of levels of coverage |
| Property ownership also involves potential liability to third parties for such matters as personal injuries occurring on the property |
| Such losses may not be fully insured |
| In addition to uninsured losses, various government authorities may condemn all or parts of operating properties |
| Such condemnations could adversely affect the viability of such projects |
| Environmental issues |
| Environmental issues that arise at our properties could have an adverse effect on our financial condition and results of operations |
| Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at a property |
| The owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination |
| These laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants |
| Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred |
| In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site |
| We are not currently aware of any environmental liabilities at locations that we believe would have a material adverse effect on our business, assets, financial condition or results of operations |
| Unidentified environmental liabilities could arise, however, and could have an adverse effect on our financial condition and results of operations |
| Joint venture and partnership structure risks |
| Our joint venture partners have rights to take some actions over which we have no control, which could aversely affect our interests in the related joint ventures and in some cases our overall financial condition or results of operations |
| We have interests in a number of joint ventures and partnerships and may in the future conduct our business through joint ventures and partnerships |
| These structures involve participation by other parties whose interests and rights may not be the same as ours |
| For example, a partner or co-investor might have economic and/or other business interests or goals which are unlike or incompatible with our business interests or goals and those partners or co-investors may be in a position to take action contrary to our interests |
| In addition, such partners or co-investors may become bankrupt and such proceedings could have an adverse impact on the operation of the partnership or joint venture |
| Furthermore, the success of a project may be dependent upon the expertise, business judgment, diligence and effectiveness of our partners in matters that are outside our control |
| Thus, the involvement of partners and co-investors could adversely impact both the operation and ownership of the underlying properties and the disposition of such underlying properties |
| Regional concentration of properties |
| Currently, a large percentage of our properties are located in metropolitan Atlanta, Georgia |
| In the future, there may be significant concentrations in metropolitan Atlanta, Georgia and/or other markets |
| If there is deterioration in any market in which we have significant holdings, our interests could be adversely affected, including, without limitation, loss in value of properties, decreased cash flows and decreased abilities to make or maintain distributions to stockholders |
| Any failure to timely sell the multi-family units developed by our office/multi-family division or an increase in development costs could adversely affect our results of operations |
| Our office/multi-family division develops for-sale multi-family residential projects mostly in urban markets |
| We presently are developing two condominium projects with joint venture partners |
| Multi-family 10 _________________________________________________________________ [41]Table of Contents unit sales can be highly cyclical and can be affected by interest rates and local issues |
| Once a project is undertaken, we can provide no assurance that we will be able to sell the units in a timely manner which could result in significantly increased carrying costs and erosion or elimination of profit with respect to any project |
| In addition, actual construction and development costs of the multi-family residential projects can exceed estimates for various reasons |
| As these projects are normally multi-year projects, the market may change between commencement of a project and its completion |
| Any estimates of sales and profits may differ substantially from our actual sales and profits and, as a result, our results of operations may differ substantially from any estimates |
| Any failure to receive cash corresponding to previously recognized revenues could adversely affect our future results of operations |
| In accordance with accounting principles generally accepted in the United States, we recognize revenues and profits from sales of multi-family residential units during the course of construction |
| Revenue is recorded when, among other factors, construction is beyond a preliminary stage, the buyer is committed to the extent of being unable to require a full refund, except for nondelivery of the residence, a substantial percentage of units are under non-cancelable contracts, collection of the sales price is reasonably assured and costs can be reasonably estimated |
| Due to various contingencies, like delayed construction and buyer defaults, we may receive less cash than the amount of revenue already recognized or the cash may be received at a later date than we expected, which could affect amounts previously recognized and our ultimate profitability of the multi-family project |
| Any failure to timely sell the lots developed by our land division could adversely affect our results of operations |
| Our land division develops residential subdivisions, primarily in metropolitan Atlanta, Georgia |
| Our land division also participates in joint ventures that develop or plan to develop subdivisions in metropolitan Atlanta, as well as Texas, Florida and other states |
| This division also from time to time supervises sales of unimproved properties owned or controlled by us |
| Residential lot sales can be highly cyclical and can be affected by interest rates and local issues, including the availability of jobs, transportation and the quality of public schools |
| Once a development is undertaken, no assurances can be given that we will be able to sell the various developed lots in a timely manner |
| Failure to sell such lots in a timely manner could result in significantly increased carrying costs and erosion or elimination of profit with respect to any development |
| In addition, actual construction and development costs with respect to subdivisions can exceed estimates for various reasons, including unknown site conditions |
| Subdivision lot sales and unimproved property sales generally arise and close fairly quickly and are, accordingly, difficult to predict with any precision |
| Additionally, some of our residential properties are multi-year projects, and market conditions may change between the time we decide to develop a property and the time that all or some of the lots or tracts may be ready for sale |
| Similarly, we often hold undeveloped land for long periods of time prior to sale |
| Any changes in market conditions between the time we acquire land and the time we desire to sell land, could cause the Company’s estimates of proceeds from such sales, and the related profits to be unreliable |
| Any estimates of sales and profits may differ substantially from actual sales and profits and as a result, our results of operations may differ substantially from these estimates |
| Any failure to timely sell or lease non-income producing land could adversely affect our results of operations |
| We maintain significant holdings of non-income producing land in the form of land tracts and outparcels |
| Our strategy with respect to the parcels of land include (1) developing the land at a future date as a retail, office, industrial or mixed-use income producing property or developing it for single-family or multi-family residential uses; (2) ground leasing the land to third parties; and (3) selling the parcels to third parties |
| Before we develop, lease or sell these land parcels, we incur carrying costs, including interest expense and property tax expense |
| 11 _________________________________________________________________ [42]Table of Contents If we are unable to sell this land or convert it into income producing property in a timely manner, our results of operations and liquidity could be adversely affected |
| Our third party business may experience volatility based on a number of factors, including termination of contracts, which could adversely affect our results of operations |
| We engage in third party development, leasing, property management, asset management and property services to unrelated property owners |
| Contracts for such services are generally short-term in nature and permit termination without extensive notice |
| Fees from such activity can be volatile due to unexpected terminations of such contracts |
| Extensive unexpected terminations could materially adversely affect our results of operations |
| Further, the timing of the generation of new contracts for services is very difficult to predict |
| As a result, any estimates of revenues from our third party business may be materially different from actual results |
| We may not adequately or accurately assess new opportunities, which could materially harm our results of operations |
| Our estimates and expectations with respect to new lines of business and opportunities may differ substantially from actual results, and any losses from these endeavors could materially adversely affect our results of operations |
| We conduct business in an entrepreneurial manner |
| We seek opportunities in various sectors of real estate and in various geographical areas and from time to time undertake new opportunities, including new lines of business |
| Not all opportunities or lines of business prove to be profitable |
| We expect from time to time that some of our business ventures may have to be terminated because they do not meet expectations |
| We are dependent upon key personnel, the loss of any of whom could adversely impair our ability to execute our business |
| One of our objectives is to develop and maintain a strong management group at all levels |
| At any given time we could lose the services of key executives and other employees |
| None of our key executives or other employees are subject to employment agreements or contracts |
| Further, we do not carry key person insurance on any of our executive officers or other key employees |
| The loss of services of any of our key employees could have an adverse impact upon our results of operations, financial condition and management ability to execute our business strategy |
| Our restated and amended articles of incorporation contain limitations on ownership of our stock, which may prevent a takeover which might otherwise be in the best interests of our stockholders |
| Our articles of incorporation impose limitations on the ownership of our stock |
| In general, except for certain individuals who owned stock at the time of adoption of these limitations, no individual or entity may own more than 3dtta9prca of the value of our outstanding stock |
| The ownership limitation may have the effect of delaying, inhibiting or preventing a transaction or a change in control that might involve a premium price for our stock or otherwise be in the best interest of our stockholders |
| Any failure to continue to qualify as a real estate investment trust for federal income tax purposes could have a material adverse impact on us and our stockholders |
| Cousins intends to operate in a manner to qualify as a REIT for federal income tax purposes |
| However, we can provide no assurance that Cousins has qualified or will remain qualified as a REIT Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code, for which there are only limited judicial or administrative interpretations |
| Certain facts and circumstances not entirely within our control may affect our ability to qualify as a REIT In addition, we can provide no assurance that legislation, new regulations, administrative interpretations or court decisions will not adversely affect Cousins’ qualification as a REIT or the federal income tax consequences of Cousins’ REIT status |
| 12 _________________________________________________________________ [43]Table of Contents If Cousins were to fail to qualify as a REIT, it would not be allowed a deduction for distributions to stockholders in computing its taxable income |
| In this case, it would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates |
| Unless entitled to relief under certain Code provisions, it also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost |
| As a result, the cash available for distribution to our stockholders would be reduced for each of the years involved |
| Although Cousins currently intends to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause us to revoke the REIT election |
| In order to qualify as a REIT, Cousins generally will be required each taxable year to distribute to its stockholders at least 90prca of its net taxable income (excluding any net capital gain) |
| To the extent that Cousins does not distribute all of its net capital gain or it distributes at least 90prca, but less than 100prca, of its other taxable income, Cousins will be subject to tax on the undistributed amounts at regular corporate rates |
| In addition, Cousins will be subject to a 4prca nondeductible excise tax to the extent that distributions paid by Cousins during the calendar year are less than the sum of the following: • 85prca of its ordinary income; • 95prca of its net capital gain income for that year, and • 100prca of its undistributed taxable income (including any net capital gains) from prior years |
| We intend to make distributions to our stockholders to comply with the 90prca distribution requirement, to avoid corporate-level tax on undistributed taxable income and to avoid the nondeductible excise tax |
| Differences in timing between taxable income and cash available for distribution could require Cousins to borrow funds to meet the 90prca distribution requirement, to avoid corporate-level tax on undistributed taxable income and to avoid the nondeductible excise tax |
| Satisfying the distribution requirements may also make it more difficult to fund new development projects |