Cousins Properties changing for a new era
By Maria Saporta and Doug Sams
Friday, September 25, 2009
Cousins Properties Inc., one of the largest real estate companies in the Southeast, is entering a new era — armed with a new CEO and a third of a billion dollars in new capital.
Larry Gellerstedt III, who became the CEO of Cousins (NYSE: CUZ) on July 1 after the accelerated departure of CEO Tom Bell, is demonstrating his understated style of leadership.
The change at the top is a major transition for one of Atlanta’s most-vested companies, which is now repositioning itself for when the economy begins to rebound.
In the past month, Gellerstedt has had to oversee a significant layoff of employees and a decrease in the firm’s expenses. He’s worked with the board to create a new strategic plan, implemented the issuance of 46 million shares (in addition to the existing 52 million shares) — a $333 million stock offering — nearly doubling the company’s financial firepower.
Cousins could use most of the proceeds to pay down debt.
The company had $944 million in consolidated debt at the end of the second quarter, including what it had drawn on a line of credit.
Its share of unconsolidated debt is $143 million.
Cousins also has a $500 million revolving line of credit that matures in 2011. The company can elect to extend the maturity for one year.
The new issuance also nearly halves the ownership share of founder Tom Cousins and his family. At one time, the family owned about half of the company’s shares.
Before this latest stock offering, the Cousins family and its various foundations owned about 25 percent of the company (about 14 million shares). Now, the Cousins family interests own about 15 percent of the real estate firm.
These are all major changes for Atlanta’s largest real estate company, which has developed several of the city’s signature office towers, including the One Ninety One Peachtree building, Bank of America Plaza and the Terminus complex in Buckhead.
It is a company that has experienced several down real estate cycles, the most difficult one being in the mid-1970s when Cousins was on the verge of bankruptcy.
Since then, Cousins — both the founder and the company — has been relatively conservative by not taking on too much debt.
And when there have been down real estate cycles, Cousins traditionally has cut its workforce and hunkered down waiting for the bad economy to pass.
Now it’s happening again.
“These are historically tough times in real estate,” Gellerstedt said in a recent interview. “A lot of the pain in commercial real estate is still ahead of us.”
Cousins’ stock was trading Sept. 23 at about $8.45 a share, near the low end of its 52-week trading range ($5.85 to $26.14).
Four years ago, Gellerstedt sold his condo development company to Cousins to head mixed-use projects for the firm.
“Tom Bell and I had talked about a potential of succession here,” Gellerstedt said, adding that there were other candidates in the mix. “My motivation to come here was not driven by that.”
As CEO of Cousins, Bell was a strong, decisive executive who enjoyed being an active developer, a key civic leader and a power player. Bell successfully helped Tom Cousins withdraw from the company’s day-to-day operations, and he emerged as the face of Cousins Properties.
In the last year or so, discussions about Bell’s successor became more serious, and it soon became clear that Gellerstedt had been tapped to eventually become the CEO of Cousins. The plan had been for Gellerstedt to serve as president for a year or so; then he would become CEO with Bell remaining as chairman to ensure a smooth transition.
But that timetable all changed in June. A specially called board meeting on June 6 led to the announcement that Bell was stepping down as both CEO and chairman by the end of the month.
“Transitions just never play out the way you planned them,” Gellerstedt said. “I certainly felt ready to do it, but the timing was a shock and abrupt.”
Bell said he decided to leave because he thought it would be a while before the company would begin developing again. Since he was approaching 60, he didn’t expect to be around for that next up cycle.
“I had done my thing,” Bell said. “I knew it was going to take another four to five years before we started developing. I knew I wasn’t going to be around for all that. I thought we ought to have the team that’s going to live with the investment make the investment.”
Gellerstedt said that he and Bell had traveled to New York a couple of times in the spring, and Bell began sharing those thoughts with him.
“I learned a lot from Tom Bell,” Gellerstedt said. “We are different, but I think the combination of him being burned out, not having fun and that the world was not going to come to an end, led him to say: ‘Let’s just go ahead and do it.’ ”
Given the abruptness of the transition, there may have been other factors at play. Bell is a deal-maker who likes making things happen and building projects. It is not his style to enjoy managing distressed real estate, cutting back expenses and downsizing a company.
Although Gellerstedt doesn’t necessarily enjoy doing those tasks, he is a consensus leader who is known to work behind the scenes to resolve issues. He prefers a more low-key lifestyle than Bell.
Given the economic situation, the Cousins board might have felt that Gellerstedt’s leadership and management style were a better fit to run the company at this time.
“Yes, we have got different styles,” Gellerstedt said. “A key part of the plan was cutting back the cost structure and deleveraging the company. It’s a lot harder to do it when you have created it.”
Asked whether there were disagreements on the board on selling equity in the company or cutting expenses, Bell said that “anytime you have got markets like today’s market, you are going to have lively discussions.” But he said there was no disagreement on the need to issue equity.
For Bell, leaving Cousins Properties when he did was right for him and right for the company.
“I couldn’t really leave Cousins until it was okey-dokey,” Bell said about the timing of his departure. “I didn’t see the market improving. And I didn’t see it getting any worse. I knew the company was going to be fine.”
Although the transition happened sooner than planned, Gellerstedt has immersed himself in being Cousins’ CEO.
“The last 90 days have been pretty busy,” Gellerstedt said, adding that his summer turned out differently than he had planned.
He quickly got to work in figuring out how to reduce expenses. The company’s airplane is now for sale because Gellerstedt couldn’t see having a plane while having to lay off employees. He also had to work with the board and the top management team on how to position the company for its next chapter.
Gellerstedt hopes the company won’t have to do any more layoffs. The company has cut about 80 jobs since the peak of the market in 2007.
“It was very painful to do the downsizing that we did a few weeks ago. My hope is that this will work for the next two years,” he said adding that the development group “took a higher percentage hit” than the rest of the company. He also intends to use the development team to scout distressed assets and redevelop those properties.
During the transition, Bell was the “consummate gentleman.” Bell gave him his support and expressed his confidence in Gellerstedt to investors, analysts and employees. Gellerstedt said that if he were a new CEO landing from Mars, he would find Cousins an exciting place to be.
“This company still has great assets, great people, it’s been able to recapitalize itself. We have taken this leverage way down,” Gellerstedt said. “The long-term dynamics are very positive.”
SIDEBAR: ACCESS TO MONEY WILL BOOST REITS
By Doug Sams
The ability to raise money stands to give publicly traded real estate investment trusts an upper hand over private developers.
That advantage could put REITs in position to become some of the most active buyers of Atlanta commercial real estate in the coming months as prices continue to fall.
Cousins Properties Inc. closed on a nearly $333 million stock offering Sept. 21 — the largest offering in the Atlanta developer’s 51-year history (as a percentage of its market cap).
It will use the proceeds to pay off debt and the rest to target distressed properties.
Cousins joined a growing number of publicly traded REITs that successfully tapped the marketplace in 2009, raising about $19 billion in equity, according to a benchmark Equity REIT Index.
Most REITs are using stock sales to reduce debt.
But, they are also putting themselves in position to buy distressed assets.
Private developers, meanwhile, have been unable to tap the pool of private equity with the same level of success. They are also hampered by the ongoing lockdown in the lending market.
“It’s a huge advantage right now to be a public company,” Cousins CEO Larry Gellerstedt said. “The private developers basically don’t have a market they can go to.”
Cousins will remain a sharpshooter, not a company eyeing 14-building portfolios, he said.
It isn’t the only REIT with a major presence in Atlanta that tapped the stock market this year.
Simon Property Group Inc., which owns several malls in Atlanta, raised almost $1.7 billion.
Duke Realty Corp., another big Atlanta landlord, raised $575 million.
Highwoods Properties Inc., which owns 6.5 million square feet of Atlanta real estate, raised $150 million.
For the first time in at least six years, Highwoods has zero drawn on its $450 million credit line.
“We now have the capacity to make sizable acquisitions,” said Chief Financial Officer Terry Stevens.
REITs suffered huge devaluations of their portfolios earlier in the commercial real estate downturn. But, since March 6, the returns are up nearly 111 percent, said Ron Kuykendall, a spokesman with the National Association of Real Estate Investment Trusts.
While REITs have felt the pain of a major revaluation, private owners have felt comparatively little, said Dorsey Farr, principal with the investment advisory firm French Wolf & Farr.
In fact, private real estate valuations through the first quarter had suffered only a fraction of the decline that REITs experienced, he said. Investors think private market values have further room to fall.