Cousins Properties Incorporated — Q3 2017 Form 10-Q Summary
Business context and reporting period
Cousins Properties is a self-managed REIT focused on developing, acquiring, leasing, managing, and owning Class A office and mixed-use properties in Sunbelt markets. The filing covers the quarter and nine months ended September 30, 2017. At quarter-end, the portfolio included 32 operating properties totaling 15.9 million square feet and four projects under active development.
Year-over-year comparisons are significantly affected by the October 2016 Parkway merger and related Houston-property spin-off. Houston operations are presented as discontinued operations in the 2016 comparative periods.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenues | $113.2 million | $48.7 million | $352.1 million | $144.9 million |
| Rental property revenues | $109.6 million | $46.6 million | $336.1 million | $138.4 million |
| Net operating income | $68.9 million | $28.5 million | $212.4 million | $82.9 million |
| Net income available to common stockholders | $12.1 million | $11.7 million | $184.9 million | $42.2 million |
| Diluted earnings per share | $0.03 | $0.06 | $0.45 | $0.20 |
| Funds from operations | $62.3 million | $46.4 million | $195.7 million | $133.2 million |
| Diluted FFO per share | $0.15 | $0.22 | $0.46 | $0.63 |
Rental property NOI margin was approximately 62.9% in Q3 and 63.1% for the first nine months, based on consolidated rental property revenues. Same-property NOI increased 1.3% in Q3 and 4.7% for the first nine months. Management attributed the improvement primarily to higher occupancy at Fifth Third Center and 816 Congress, partly offset by higher real estate taxes, repairs and maintenance, and parking costs.
The company leased or renewed 334,905 square feet during Q3 at a weighted-average net effective rent of $20.73 per square foot. For leases previously occupied within the prior year, net effective rent increased 16.9%.
Balance sheet, debt, liquidity, and cash flow
- Total assets were $4.22 billion at September 30, 2017, compared with $4.17 billion at December 31, 2016.
- Total debt was $1.10 billion, down from $1.38 billion at year-end 2016. The debt balance comprised approximately $850.9 million of fixed-rate debt and $250.0 million of variable-rate debt.
- Cash and cash equivalents were $62.2 million, compared with $35.7 million at December 31, 2016.
- The $500 million unsecured credit facility had no borrowings and $499 million of available borrowing capacity, subject to borrowing-base and covenant requirements.
- Net cash provided by operating activities was $194.9 million for the first nine months, compared with $119.3 million in the prior-year period.
- Net cash used in investing activities was $25.9 million, including $229.8 million of property acquisition, development, and tenant-related expenditures and $171.3 million of property-sale proceeds.
- Net cash used in financing activities was $142.6 million, primarily reflecting debt repayments and common dividends, partly offset by a $211.6 million common equity issuance and $350 million of senior-note proceeds.
- The company declared common dividends of $0.06 per share for Q3 and $0.24 per share for the first nine months.
Material changes and unusual items
- The American Cancer Society Center was sold on June 15, 2017, for $166.0 million, generating a net gain of approximately $119.8 million. Associated debt was repaid.
- Emory Point I and II were sold through unconsolidated joint ventures for a combined gross price of $199.0 million. Cousins received a $70.0 million distribution and recognized a $37.9 million gain through joint-venture income.
- The company issued $350 million of senior unsecured notes: $100 million at 4.09% maturing in 2027 and $250 million at 3.91% maturing in 2025.
- Several mortgage notes were repaid during 2017, including debt secured by One Eleven Congress, San Jacinto Center, Two Buckhead Plaza, and 3344 Peachtree. Debt repayments resulted in a $2.3 million gain on extinguishment; the ACS Center debt repayment also generated a $0.4 million loss from unamortized financing costs.
- Income from unconsolidated joint ventures rose to $43.4 million for the first nine months from $5.1 million, largely because of the Emory Point sale and other joint-venture activity.
- Depreciation and amortization increased substantially due to properties acquired in the Parkway merger. General and administrative expense increased 27% for the first nine months, primarily from higher long-term compensation expense.
- Three Orlando properties totaling 1.038 million square feet were classified as held for sale in October 2017; management expected disposition in Q4 2017 or Q1 2018.
Outlook, risks, contingencies, and accounting matters
The filing does not provide a specific quantitative earnings or FFO outlook. Management expects future tenant-improvement and leasing costs per square foot to remain generally consistent with the first nine months of 2017 and expects to fund future dividends through operating cash flow, asset sales, joint-venture distributions, and, if necessary, borrowings.
- Future capital needs include development, acquisitions, tenant improvements, leasing costs, debt maturities, and dividends. Management stated that the business depends on continued access to debt, equity, asset-sale, and joint-venture capital.
- Contractual obligations totaled approximately $1.58 billion, including $500.9 million of mortgage debt, $274.4 million of interest commitments, and $208.0 million of ground-lease obligations.
- The company had $188.3 million of future tenant-improvement and construction obligations, $3.7 million of letters of credit and performance bonds, and a $7.8 million guarantee related to its share of the Carolina Square construction loan.
- Key risks include refinancing and interest-rate exposure, covenant compliance, leasing and occupancy trends, tenant credit quality, development delays and cost overruns, asset-sale execution, joint-venture performance, market concentration in Atlanta, Charlotte, Austin, and Phoenix, and maintaining REIT qualification.
- The company expects to adopt the new revenue-recognition standard using the modified retrospective method on January 1, 2018, and is assessing effects on management, development, leasing, parking, and other non-lease revenue. It expects to adopt the new leasing standard on January 1, 2019.
- Management reported that disclosure controls and procedures were effective and that there were no material changes in internal control over financial reporting. No material change in previously disclosed risk factors was reported.
Important facts for investors to verify
- Assess the sustainability of operating performance excluding the $119.8 million ACS Center gain, the Emory Point joint-venture gain, and other transaction-related items.
- Reconcile FFO and per-share results for the post-Parkway capital structure, including the substantial increase in weighted-average shares.
- Monitor same-property occupancy, lease spreads, renewal activity, and operating-cost growth in the concentrated Sunbelt markets.
- Review debt maturities, variable-rate exposure, credit-facility covenants, refinancing plans, and the effect of future interest-rate changes.
- Evaluate funding requirements for development and tenant-improvement commitments against operating cash flow, asset-sale proceeds, and available liquidity.
- Confirm the timing and pricing of the planned Orlando property dispositions and any resulting gains, losses, or debt repayments.