by Barry Vinocur
Photography © Stan Kaady

Cousins Properties’ Tom Cousins may not be as well known in some circles as GE’s Jack Welch or The Washington Post’s Graham family. However, in Atlanta, where Cousins Properties is headquartered, Tom Cousins is a household name not only for his many "good works," but also for having built over the past roughly four decades what is without question one of the city’s most successful companies.

Just how good a job have Tom Cousins and the team at Cousins Properties done? To find out, we asked the Center for Research in Security Prices (CRSP) at The University of Chicago Graduate School of Business to run some numbers for us.

We wanted to know how Cousins Properties’ performance over the past quarter of a century stacked up alongside not only the broader market (measured by the performance of the Standard & Poor’s 500-Stock Index), but also a handful of companies that are among America’s most respected. (It just so happens they also are among legendary investor Warren Buffett’s long-time favorites.)

So how did Cousins fare over the past 25 years when measured against the likes of Coca-Cola, General Electric, and The Washington Post Co.? Cousins blew them away. The results were so astounding that the CRSP researcher who ran the data told us that he rechecked it several times. "This Cousins is pretty incredible." Incredible, indeed!

Had you invested $10,000 in Cousins Properties at the end of 1975 and held on to the stock for 25 years (reinvesting dividends), on December 29, 2000, your investment would have been worth just shy of $2.6 million (see graph and table on page 16).

Ahead of the Pack Again and Again

In mid-1995, when many market participants were just beginning to think about new office development in Atlanta, Cousins already had two projects underway. These projects, as well as three others, one major rehab and one medical office building, have long since been completed and fully leased. Compared with most other REITs, Cousins saw the opportunity sooner and pursued it aggressively. In mid-to-late 1998, as many REITs pushed their leverage over the 50 percent mark and began to think about joint ventures as a way to raise capital, Cousins was signing the documents on a deal with Prudential Insurance Company. Meeting tax minimization and other goals was complicated, but the deal recycled most of the capital invested in a number of recently completed office and power center developments at an attractive valuation from Cousins’ perspective. The deal values the properties contributed by Cousins - properties that are materially below the average quality of the Cousins portfolio - at an 8.8 percent average nominal cap rate on 1999 net operating income. Cousins will pull out about $230 million in cash. One small negative of the deal is that it effectively allows Prudential to invest roughly $25 million on an "almost side-by-side" basis in selected Cousins development projects. (Cousins gets to choose which ones.) That is, Prudential will share in a small portion of the upside of Cousins’ development pipeline. Cousins also takes a hit on accounting: The cash in the transaction needs to be used to fund development, and the minimum cost of the funds (Prudential’s 9.5 percent preferred return) cannot be fully capitalized to Cousins’ development projects. (Cousins can only capitalize the cost of its debt - about 7.3 percent.) These issues appear modest given the tax advantages and attractive valuation of the deal: Cousins’ gain on these properties, based on the valuation agreed to with Prudential, was 54 percent over fully loaded book value. - from Green Street’s March 1999 report on Cousins Properties

How would you have done had you made the same investment in General Electric or The Washington Post Co.? Very well, but not nearly as well as you would have fared with Cousins. Over the past 25 years, a $10,000 investment in GE would have grown to roughly $1.1 million; in The Washington Post Co., just north of $1.6 million. What about the S&P 500? CRSP reported that over the past 25 years, a $10,000 investment in that venerable index would have grown to just under $360,000.

Low Profile
If you’ve never heard of Cousins Properties and you’re wondering why, it’s probably for several reasons. First, Tom Cousins maintains a pretty low profile outside of Atlanta. Second, long before concepts such as self-funding or recycling capital were in vogue, Tom Cousins and his team were doing it. Using a variety of techniques including joint ventures (see sidebar on page 16), nonrecourse mortgage debt, and a willingness to capture value for shareholders by selling mature assets as well as properties it developed, Cousins has had to return to the equity market only rarely. Very rarely.

During the 1990s go-go years for REITs, Cousins sold equity only three times. In 1992, it issued almost 4.4 million shares. The next year, it sold 6.1 million shares. And in 1997, Cousins issued almost 2.2 million shares. Today, said one veteran money manager who focuses exclusively on property-linked securities, Cousins has reasonable coverage by the sell-side analyst community. "That wasn’t always the case, however. A lot of analysts don’t focus on companies that don’t issue equity very often." He added that even today, Cousins’ coverage isn’t as broad as it should be given the company’s track record. "There are a number of major firms that should be following the company but still haven’t picked up coverage," he emphasized.

Analysts’ Take on Cousins
What about analysts that do follow Cousins? James Kammert, who prior to joining Goldman, Sachs & Co. in the late 1990s, followed Cousins at Robinson-Humphrey, wrote recently, "Cousins differentiated itself years ahead of the REIT industry through capital recycling and [an] unrelenting focus on shareholder value creation."

Kammert added that since it elected REIT status in 1986, Cousins has emphasized return on capital. "During the third quarter of 2000, we estimate that Cousins generated an im-pressive 13 percent current re-turn on its operating real estate investments and exceeded our estimate of the company’s weighted-average cost of capital by 200 basis points. If third-party fee activity were included, which requires little to no capital, the operating return would exceed 14 percent."

In a March 1999 report on Cousins, Green Street Advisors, a buy-side research boutique based in Newport Beach, California, that focuses exclusively on property-linked stocks, wrote: "There are several unique aspects of Cousins’ game plan. First, management sets an unusually high hurdle rate for deploying capital. While all management teams give lip service to this concept, CUZ’s consistent adherence to a high hurdle rate for new investments is the key goal from which other aspects of the company’s strategy flow."

The Green Street analysts concluded their report with the following advice: "Given its long and successful history of value creation, Cousins should be regarded as a core holding for investors looking for exposure to the risks and rewards of development."

Underappreciated by Investors

In their late third quarter 2000 report on Cousins, Lehman Brothers analysts Stuart Axelrod and David Shulman explained that during the 1990s, Cousins focused on power center developments. It exited that business, however, as the returns were reduced. "Cousins pioneered the Avenue retail concept about two years ago, which features traditional mall shop tenants in upscale open-air centers located in densely populated, affluent suburban neighborhoods." The Lehman Brothers analysts added that Cousins had opened two Avenue centers in the past year, and, as of the date of their report, Cousins had three new projects in predevelopment. Targeted initial returns for the Avenue retail concept are 11 to 11.5 percent, at an average cost of $30 to $50 million. Axelrod and Shulman underscored that they believe Cousins should capitalize on its Avenue concept head start while the returns are still there. "The company is currently on track to deliver two Avenue projects a year, but we believe it has the capacity to accelerate the concept expansion. Beyond the current pipeline, shadow markets under consideration include North Florida, Virginia, Austin, Carolinas, Sacramento, and San Diego." In contrast to enclosed regional malls, they added, the Avenue concept appeals to time-pressed, destination- oriented shoppers, many of whom (for one reason or another) do not shop at malls. Tenants are attracted to the Avenue because of the cheaper rents and occupancy costs, as well as the broader consumer appeal. Average rents are considerably cheaper than mall shop space. There are, of course, risks associated with the concept. Axelrod and Shulman highlighted three: (1) shorter-term lease duration (typically five to 10 years) creates credit concerns for lenders relative to regional malls with longer-term anchors; (2) competition from traditional mall players could jeopardize returns, though the size of these projects may be too small for large regional mall developers, who typically focus on ground-up mall developments at $150 million to $200 million apiece; and (3) branding advantages may discourage Cousins from selling mature projects, undermining its hard-earned retained-earnings-driven financing model. That said, the Lehman Brothers analysts concluded that Cousins’ Avenue retail concept is underappreciated by investors. - from Lehman Brothers’ September 27, 2000 report on Cousins Properties

In a February 2000 report on Cousins, the Boston-based Penobscot Group (like Green Street a buy-side research boutique focused exclusively on REITs and other property-linked securities) answered the question "What makes Cousins different?" this way: "Cousins is different from its peers for reasons beyond the size of its development pipeline. Its perspective on opportunity spans multiple property types and an increasing number of markets."

The Penobscot report continued by saying that Cousins’ broad expertise makes it an innovator of new property sub-types, as evidenced by its Avenue retail initiative. "Underlying all of this," the Penobscot analysts added, "is an understanding that there are far more effective ways of making money in real estate than simply by holding it."

Stuart Axelrod and David Shulman, who late last year initiated coverage of Cousins at Lehman Brothers, had this to say: "Cousins Properties is one of the most respected and profitable public real estate developers in the United States." They added, "… in many ways, Cousins has set the standard for public real estate companies." Cousins, the Lehman Brothers analysts stressed, is known not only for continually recycling capital and pursuing profitability instead of size, but also for its goal to grow earnings (funds from operations) at a 15 percent annual rate. Though challenging, Axelrod and Shulman said, Cousins’ development model should be up to the task.

Looking Ahead
There’s no question that Cousins’ long-term track record is enviable. The question for investors looking at the company today is whether Cousins can continue to deliver stellar returns for investors.

Though there are some unanswered questions, including whether Dan DuPree, Tom Cousins’ hand-picked successor, can fill his mentor’s shoes, DuPree is a formidable presence in his own right. He founded New Market Development Co., Ltd. and developed nearly six million square feet of retail space across the Eastern United States before selling that company to Cousins Properties in 1992. From 1992 until 1995, DuPree served as president of Cousins’ retail division. Over that time frame, Cousins developed an additional two million square feet of retail space. In 1995, DuPree was elected Cousins Properties’ president and chief operating officer.

Investors and analysts don’t discount Tom Cousins’ role in the company today, though they underscore that DuPree runs the operation day-to-day. "Tom’s role is principally that of visionary and rainmaker, though he rolls up his sleeves if it’s necessary," commented one analyst who follows the company for a Wall Street firm. "Tom casts a considerable shadow, but he believes in Dan, and so, I think, do investors." There’s no question that DuPree is leaving his mark. For the past several years, institutional investors have singled him out as one of the industry’s top executives (see page 32).

Building on Portfolio Power

Since its founding in 1958 by Tom Cousins, Cousins Properties has developed more than 20 million square feet of office space, more than 12 million square feet of retail space, including seven regional malls, in excess of 3,000 multifamily residential units, and more than 30 high-quality, single-family subdivisions, ranging in size from 100 acres to 1,500 acres. The company’s current portfolio consists of interests in 12.8 million square feet of office space, 3.5 million square feet of retail space, just under one million square feet of medical office space, and more than 300 acres of land for future commercial development. Cousins Properties’ notable Atlanta developments include North Point, Wildwood Office Park, Wildwood Plaza, One Ninety One Peachtree Tower, Bank of America Plaza, The Pinnacle, Inforum, and The Avenue East Cobb. - from Cousins Properties’ Website: www.cousinsproperties.com

As for Cousins’ ability to deliver on its goal of 15 percent annual growth in funds from operations per share, investors and analysts give Cousins credit for setting such a high goal, but acknowledge that it’s not a slam-dunk. "It’s achievable," the Wall Street analyst commented. Others suggest that with the economy slowing, and real estate markets in equilibrium, Cousins may have to settle for something less stunning, though still impressive. "We’re looking for growth in the 10 percent to 12 percent range over the next couple of years," remarked the veteran money manager. "Of course, we long ago learned never to underestimate Cousins," he was quick to add. "We wouldn’t be surprised if they surprised us to the upside, but we’re not counting on it."

One testament to Cousins’ abilities came late last year, when Goldman Sachs included the company in its recession-resistant portfolio of real estate companies. In his note reporting on Cousins’ inclusion in the portfolio, Kammert conceded that "intuitively, it might appear illogical to include a development-focused company in a portfolio designed to deliver outperformance in a slowing economic environment." Nevertheless, he added, assuming that any slowdown lasts for less than two years, "Cousins represents an attractive investment opportunity."