Cousins Properties Incorporated: Q1 2019 Form 10-Q Summary
Business context and reporting period
Cousins Properties Incorporated is a self-managed REIT focused on Class A office and mixed-use properties in Sunbelt markets, principally Georgia, Texas, North Carolina, Arizona, and Florida. This filing covers the three months ended March 31, 2019. At quarter-end, the portfolio included 29 operating properties totaling approximately 16.0 million square feet and three projects under active development.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues | $132.7 million | $117.2 million | 13.2% |
| Rental property revenues | $123.3 million | $113.3 million | 8.8% |
| Fee income | $8.7 million | $2.9 million | 202% |
| Net operating income, consolidated | $79.9 million | $73.2 million | 9.2% |
| Net income | $36.0 million | $16.4 million | 119.5% |
| Net income available to common stockholders | $35.3 million | $16.0 million | 120.5% |
| Diluted EPS | $0.08 | $0.04 | 100% |
| FFO | $84.5 million | $64.6 million | 30.8% |
| Diluted FFO per share | $0.20 | $0.15 | 33.3% |
| Net cash from operating activities | $44.5 million | $20.9 million | 112.9% |
Reported net margin was approximately 27.1%, compared with 14.0% in the prior-year quarter, benefiting materially from a $13.1 million gain on the sale of Atlanta air rights and higher fee income. Consolidated NOI margin on rental property revenue was approximately 64.7%. Same-property NOI increased 4.6%, while total same-property NOI including the company’s share of unconsolidated joint ventures increased 4.3%.
The company leased or renewed 682,129 square feet during the quarter at a weighted average net effective rent of $24.50 per square foot. Leases that had been occupied within the prior year achieved a 22.8% increase in net effective rent.
Balance sheet, debt, liquidity, and cash flow
- Total assets were $4.25 billion at March 31, 2019, up from $4.15 billion at December 31, 2018.
- Notes payable were $1.12 billion, compared with $1.06 billion at year-end 2018. More than 75% of debt carries fixed interest rates, and the weighted average maturity was 5.4 years.
- Cash and cash equivalents were $3.5 million; cash, cash equivalents, and restricted cash totaled $3.6 million.
- The $1.0 billion unsecured credit facility had $56.4 million drawn and $943.6 million of available borrowing capacity at quarter-end.
- Operating cash flow was $44.5 million. Investing cash flow was negative $70.7 million, including $122.8 million of acquisition, development, and tenant asset expenditures, partially offset by $57.7 million of property-sale proceeds.
- Financing cash flow was positive $27.1 million, primarily reflecting net credit-facility borrowings. Common dividends paid were $27.3 million, and the quarterly dividend was increased to $0.0725 per share from $0.065.
- Future contractual obligations totaled $1.57 billion, including debt, interest, ground leases, and other operating leases. Unfunded tenant improvement and construction commitments totaled $95.1 million.
Material changes and unusual items
- The company entered into transactions with Norfolk Southern Railway Company, including the $82 million purchase of the 1200 Peachtree office building, which is fully leased to Norfolk Southern through December 31, 2021. The company also entered into development and consulting agreements with total expected fees of $37 million and recognized $6.6 million of related fee income in Q1.
- The company sold Atlanta air rights for $13.25 million and recorded a $13.1 million gain.
- Capital expenditures increased to $122.8 million from $60.2 million, primarily due to the 1200 Peachtree acquisition and land purchases.
- General and administrative expense increased 68% to $11.5 million, primarily due to higher long-term compensation expense related to changes in the company’s stock price relative to office REIT peers.
- Interest expense increased 11% to $10.8 million due to higher LIBOR and greater average credit-facility borrowings.
- The company adopted ASC 842 on January 1, 2019 and recorded $56.3 million of ground-lease right-of-use assets and lease liabilities at adoption. Ground-lease right-of-use assets and lease liabilities were $68.1 million and $68.0 million, respectively, at March 31, 2019.
Outlook, transactions, risks, and contingencies
The filing does not provide a clear numerical 2019 earnings or FFO guidance range. Management’s stated strategy is to maintain a flexible, low-leverage balance sheet while pursuing selective acquisitions, development, dispositions, and capital recycling.
Cousins agreed to merge with TIER REIT. Upon closing, each TIER share is expected to convert into 2.98 Cousins shares; legacy Cousins stockholders are expected to own approximately 72% of the combined company and legacy TIER stockholders approximately 28%. The transaction was anticipated to close in the second quarter of 2019, subject to stockholder, regulatory, listing, legal, tax, and other conditions. The merger is intended to strengthen the company’s Austin and Charlotte positions, provide entry into Dallas, and expand the portfolio to more than 21 million square feet.
Two putative stockholder class actions were filed challenging merger-related disclosures. The company believes the allegations lack merit but cannot currently determine whether the litigation will have a material adverse effect. Failure to complete the merger could result in transaction costs, management distraction, business disruption, dilution-related effects, and reputational harm. If specified termination events occur, TIER may owe Cousins a $45.5 million termination fee, subject to REIT-related limitations.
Key ongoing risks include tenant leasing and renewal risk, concentration in Atlanta, Charlotte, Austin, Phoenix, and Tampa, interest-rate and LIBOR transition risk, refinancing and debt-covenant compliance, development costs and delays, capital availability, joint-venture obligations, REIT qualification, cybersecurity, and merger execution and integration.
Investor verification checklist
- Verify the closing status, final consideration, financing, dilution, and expected synergies of the TIER merger.
- Assess whether the $6.6 million of Norfolk Southern-related fee income is recurring and review the remaining timing and profitability of the fee agreements.
- Reconcile reported net income and FFO for the effects of the $13.1 million air-rights gain and other nonrecurring items.
- Monitor same-property occupancy, leasing spreads, tenant improvement costs, and exposure to major tenants and Sunbelt markets.
- Review leverage, credit-facility availability, debt maturities, variable-rate exposure, and compliance with financial covenants.
- Evaluate funding needs for the $95.1 million of unfunded tenant and construction commitments and ongoing development expenditures.
- Follow the merger-related lawsuits and any potential effect on transaction timing, costs, or completion.