COUSINS PROPERTIES INC quarterly report, Q2 FY2018

Business Context and Reporting Period

Cousins Properties Incorporated is a self-managed REIT focused primarily on Class A office and mixed-use properties in Sunbelt markets, including Atlanta, Charlotte, Austin, Phoenix, Tampa and other markets. The company develops, acquires, leases and manages properties through Cousins Properties, LP, which it owns approximately 98% of.

This Form 10-Q covers the three and six months ended June 30, 2018. At quarter-end, the company reported interests in approximately 14.7 million square feet of office space and 310,000 square feet of mixed-use space; its broader operating portfolio consisted of 29 operating properties containing 15.1 million square feet and five projects under active development.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30, 2018	Three Months Ended June 30, 2017	Six Months Ended June 30, 2018	Six Months Ended June 30, 2017
Total revenues	$116.6 million	$119.0 million	$233.8 million	$238.9 million
Rental property revenues	$113.7 million	$114.0 million	$227.0 million	$226.5 million
Net operating income	$73.0 million	$72.5 million	$146.1 million	$143.5 million
Net income	$21.7 million	$170.9 million	$38.2 million	$175.8 million
Net income available to common stockholders	$21.3 million	$168.1 million	$37.3 million	$172.8 million
Diluted earnings per share	$0.05	$0.40	$0.09	$0.42
Funds from operations	$64.6 million	$66.4 million	$129.2 million	$133.4 million
Diluted FFO per share	$0.15	$0.16	$0.30	$0.32

Second-quarter rental property NOI margin was approximately 64.2%, compared with approximately 63.6% in the prior-year quarter. Six-month NOI margin was approximately 64.4%, compared with approximately 63.3% in 2017.
Same-property NOI increased 1.6% in the second quarter and 2.3% for the first six months. Same-property revenue increased 3.3% and 3.8%, respectively, while same-property operating expenses increased 6.2% and 6.5%.
The company leased or renewed 327,680 square feet of office space during the second quarter at a weighted average net effective rent of $24.41 per square foot. Leases previously occupied within the past year generated a 34.2% increase in net effective rent.
Net cash provided by operating activities was $104.7 million for the six months, compared with $92.6 million in 2017.
Property acquisition, development and tenant asset expenditures were $99.8 million, compared with $151.2 million in 2017. Investing cash flow was negative $134.4 million, versus positive $74.0 million in 2017.
Net cash used in financing activities was $65.5 million, compared with $193.4 million in 2017. Cash, cash equivalents and restricted cash totaled $110.6 million at June 30, 2018, down from $205.7 million at December 31, 2017.
Total assets were $4.17 billion and total liabilities were $1.33 billion at June 30, 2018. Notes payable totaled $1.09 billion, with a weighted average maturity of 6.2 years.
The company declared common dividends of $0.065 per share for the quarter and $0.13 per share for the six months, compared with $0.060 and $0.18, respectively, in the prior-year periods.

Material Changes Versus the Prior Comparable Period

Net income and earnings per share declined sharply because the prior-year periods included substantially larger gains on property sales, including the 2017 sale of American Cancer Society Center and gains recognized by unconsolidated joint ventures. The 2018 second-quarter and six-month property-sale gains were only $5.3 million and $4.9 million, respectively, compared with $119.8 million and $119.8 million in 2017.
Income from unconsolidated joint ventures decreased to $5.0 million in the second quarter and $7.9 million for the six months, compared with $40.3 million and $40.9 million, respectively. The decline primarily reflected 2017 property sales and related lease termination activity.
Rental property revenues were essentially stable, while same-property results improved. Non-same-property revenue and NOI declined primarily because of asset dispositions, partially offset by the commencement of operations at 8000 Avalon and 864 Spring Street.
Interest expense increased 14.0% in the second quarter and 6.7% for the six months, primarily because less interest was capitalized as construction activities concluded at certain projects.
Depreciation and amortization declined 8.7% in the second quarter and 13.5% for the six months, primarily due to properties sold in 2017.
The company amended and expanded its unsecured credit facility in January 2018 from $500 million to $1.0 billion and extended its maturity to January 2023. It also amended its term-loan covenants to align with the new facility.
The company adopted accounting guidance for derecognition of nonfinancial assets and recorded a $22.3 million cumulative-effect increase to distributions in excess of cumulative net income. Adoption of the new revenue recognition standard did not change previously reported amounts.

Guidance, Outlook, Risks and Unusual Items

The filing references 2018 guidance and other forward-looking matters, but the provided filing text does not provide a clear numerical 2018 guidance range. Management’s strategy remains focused on owning premier urban office assets, selectively pursuing acquisitions and development, disposing of non-core assets, and maintaining a flexible, relatively low-leveraged balance sheet.

The company had no borrowings under its $1.0 billion unsecured New Credit Facility and had approximately $998 million available, subject to borrowing conditions; $2 million was utilized by letters of credit.
Contractual obligations totaled $1.56 billion, including $1.09 billion of principal debt, $254.1 million of interest commitments, and $206.3 million of ground-lease obligations. The company also had $102.9 million of unfunded tenant-improvement and construction obligations.
Unconsolidated joint ventures had $344.4 million of third-party debt. The company guaranteed 12.5% of the Carolina Square construction loan; its guarantee exposure was $9.1 million at quarter-end. The loan maturity was extended to May 2019.
In July 2018, the company notified the lender that it intended to repay the $22.3 million The Pointe note during the third quarter without penalty.
The company expects to fund future dividends with operating cash flow, asset-sale proceeds, joint-venture distributions and, if necessary, borrowings. Dividend payments remain subject to REIT requirements and debt covenants.
Key risks include refinancing and interest-rate risk, access to capital, tenant leasing and renewal risk, construction delays and cost overruns, asset values and disposition pricing, joint-venture partner liquidity, debt-covenant compliance, concentration in Sunbelt markets, and continued qualification as a REIT.
Management stated that ordinary-course litigation is not expected to have a material adverse effect on liquidity, results of operations, business or financial condition. No material changes to previously disclosed risk factors were reported.

Most Important Facts for Investors to Verify

Reconcile reported earnings with recurring operating performance by separating property-sale gains and joint-venture gains from NOI and FFO.
Verify leasing momentum, occupancy trends and whether the 34.2% rent increase on recently occupied space is representative of the broader portfolio.
Review the maturity schedule for the $1.09 billion debt balance, including the 2019 maturities and the planned repayment of The Pointe note.
Assess liquidity after the $134.4 million first-half investing cash outflow, planned tenant-improvement obligations and development commitments.
Monitor the Carolina Square construction loan extension and the company’s $9.1 million guarantee exposure.
Confirm the impact of the 2019 lease-accounting adoption, including ground-lease right-of-use assets and liabilities.
Verify the company’s 2018 FFO and dividend outlook, since the filing text provided does not state a clear numerical guidance range.