Cousins Properties Incorporated — Q1 2020 Form 10-Q Summary
Business context and reporting period
Cousins Properties is a self-managed REIT focused on Class A office and mixed-use properties in Sun Belt markets, including Atlanta, Austin, Charlotte, Dallas, Phoenix, Tampa and other locations. The filing covers the three months ended March 31, 2020, with comparative results for the three months ended March 31, 2019. At quarter-end, the portfolio included interests in 35 operating properties totaling 19.4 million square feet and six projects under active development.
Results were materially affected by the June 2019 merger with TIER REIT, which added operating properties, development projects and land. The filing also reflects the consolidation of Terminus in October 2019 and the March 2019 acquisition of 1200 Peachtree.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Rental property revenues | $189.1 million | $123.9 million | Up 52.7% |
| Total revenues | $193.9 million | $132.7 million | Up 46.1% |
| Net operating income, consolidated properties | $121.7 million | $79.9 million | Up 52.5% |
| Net income | $175.3 million | $36.0 million | Up $139.3 million |
| Net income available to common stockholders | $174.9 million | $35.3 million | Up $139.6 million |
| Diluted earnings per share | $1.18 | $0.34 | Up $0.84 |
| Funds from operations | $112.7 million, or $0.76 per diluted share | $84.5 million, or $0.79 per diluted share | Dollars up; per-share amount down |
| Net cash provided by operating activities | $13.0 million | $44.5 million | Down $31.5 million |
Net income included a $90.9 million gain on the sale of Hearst Tower and a $46.2 million gain on sales of interests in unconsolidated joint ventures. These items substantially increased GAAP earnings and make net income less representative of recurring operating performance. Approximate consolidated rental-property NOI margin was 64.4%; net margin was approximately 90.4%, but both measures were affected by disposition gains.
Same-property NOI increased 2.9% on a consolidated basis and 3.2% including the Company’s share of unconsolidated properties. The Company leased or renewed 476,000 square feet during the quarter at a weighted average net effective rent of $25.01 per square foot; leases previously occupied within the prior year showed a 26.9% increase in net effective rent.
Balance sheet, debt and liquidity
- Total assets were $6.90 billion at March 31, 2020, compared with $7.15 billion at December 31, 2019.
- Total notes payable were $1.94 billion, down from $2.22 billion at year-end 2019. Approximately 85% of debt carried fixed interest rates, and the weighted average debt maturity was 5.7 years.
- Cash and cash equivalents were $124.6 million; cash, cash equivalents and restricted cash totaled $126.6 million.
- The entire $1.0 billion senior unsecured credit facility was available at quarter-end, with no outstanding balance.
- The Company prepaid the $23.0 million Meridian Mark Plaza mortgage in February 2020 without penalty.
- The Company paid $42.6 million of common dividends during the quarter and declared a $0.30-per-share common dividend.
- Debt covenants include maximum overall leverage of 60%, maximum secured leverage of 40%, minimum unencumbered interest coverage of 1.75x and minimum fixed-charge coverage of 1.50x.
Cash flow, capital allocation and unusual items
- Investing activities generated $417.8 million, primarily from $433.9 million of investment property sale proceeds and $53.1 million from sales of joint venture interests.
- Financing activities used $321.8 million, including $532.0 million of credit facility repayments, $26.8 million of other debt repayments and $42.6 million of common dividends, partially offset by $280.5 million of credit facility borrowings.
- Property acquisition, development and tenant asset expenditures were $67.0 million, down from $122.8 million in the prior-year quarter.
- The Company sold Hearst Tower for $455.5 million and recognized a $90.9 million gain; sold its Charlotte Gateway Village joint venture interest for $52.2 million and recognized a $44.9 million gain; and sold Woodcrest for $25.3 million with no gain or loss.
- Unfunded tenant improvement and construction obligations totaled $237.1 million at March 31, 2020. Total contractual obligations were $2.58 billion, including debt, interest commitments and ground leases.
Material changes versus the prior comparable period
- Revenue and consolidated NOI increased primarily because of the TIER merger, the addition of 1200 Peachtree and consolidation of Terminus.
- General and administrative expense declined 51% to $5.7 million, primarily because of lower liability-classified compensation expense.
- Interest expense increased 47% to $15.9 million because of additional senior notes issued in 2019 and higher average credit facility borrowings.
- Depreciation and amortization increased 56.2% to $71.6 million, primarily from properties acquired in the TIER merger and other newly consolidated properties.
- Fee income declined 46% to $4.7 million, principally because of lower revenue from the Norfolk Southern development and consulting arrangements.
- Operating cash flow declined despite higher earnings, primarily because of changes in operating liabilities, including accrued property taxes and interest.
- FFO per diluted share declined to $0.76 from $0.79, reflecting the increase in the diluted share count following the TIER merger and other equity activity.
Guidance, outlook, risks and contingencies
The filing does not provide a clear quantitative earnings, FFO or same-property NOI guidance figure. Management stated that it expected available liquidity to be sufficient for obligations for the foreseeable future, but cautioned that COVID-19 could adversely affect future cash flows and financial condition.
COVID-19 had not materially affected rental obligations as of the filing date, and no impairments or material tenant receivable valuation adjustments were recorded at March 31, 2020. However, management warned that future periods could include impairments, valuation adjustments, rent reductions, lease modifications, increased operating costs, delayed leasing decisions and reduced demand for office space. The filing specifically identifies risks from tenant financial distress, shelter-in-place orders, remote work, reduced office utilization, development delays and economic recession in the Company’s concentrated Sun Belt markets.
The Company has a $237.1 million obligation to fund tenant improvements and other construction commitments, and guarantees $9.5 million of outstanding debt related to the Carolina Square joint venture. Litigation matters arising in the ordinary course were not expected to have a material adverse effect based on current expectations. The Carolina Square construction loan maturity was extended in April 2020 from May 2020 to May 2021, after quarter-end.
Facts investors should verify
- Whether disposition gains and proceeds can be replaced with recurring operating cash flow after the 2020 asset sales.
- COVID-19 effects on rent collections, tenant credit quality, occupancy, leasing spreads and office-space demand.
- Compliance with leverage and coverage covenants, particularly if NOI or rent collections decline.
- The timing and funding sources for $237.1 million of tenant improvement and construction obligations.
- Debt maturities, refinancing conditions and the availability and pricing of capital as markets change.
- Whether FFO per share stabilizes after the merger-related increase in the share count.
- Progress, costs and leasing status of the six development projects and other capital projects.