Cousins Properties Incorporated: 2016 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2016, compared with March 31, 2015. Cousins is a self-administered REIT focused primarily on Class A office and opportunistic mixed-use properties in Sunbelt markets, especially Georgia, Texas and North Carolina. At quarter-end, the portfolio included 15 operating office properties totaling 14.6 million square feet, two operating mixed-use properties totaling 786,000 square feet, and three development projects.
Financial results and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $91.3 million | $92.0 million | (0.8%) |
| Rental property revenue | $88.5 million | $90.0 million | (1.7%) |
| Net operating income | $52.9 million | $52.1 million | 1.5% |
| Same-property NOI | $40.3 million | $38.6 million | 4.3% |
| Net income | $22.8 million | $7.2 million | 216.5% |
| Net income per diluted share | $0.11 | $0.03 | Increase |
| Funds from operations | $43.5 million, or $0.21 per share | $45.9 million, or $0.21 per share | FFO down 5.4%; per share unchanged |
| Operating cash flow | $5.5 million | $2.4 million | Increase of $3.1 million |
| Cash and cash equivalents | $5.5 million | $4.4 million at March 31, 2015 | Increase of $1.1 million |
Net income benefited substantially from a $14.2 million gain on the sale of 100 North Point Center East. The filing does not provide a clear standalone net-income margin discussion; reported net income was approximately 25% of revenue, but this comparison is materially affected by the property-sale gain.
General and administrative expense increased 136% to $8.5 million, primarily because of higher long-term incentive compensation. Depreciation and amortization declined 12% to $32.0 million, mainly following property dispositions and changes in useful lives of certain tenant assets. Interest expense declined to $7.4 million from $7.7 million.
Balance sheet, debt and liquidity
- Total assets were $2.61 billion and total equity was $1.68 billion at March 31, 2016.
- Notes payable were $767.8 million, up from $718.8 million at December 31, 2015. The debt included $143.0 million drawn on the unsecured credit facility and primarily fixed-rate mortgage debt.
- The credit facility had $356.0 million of additional borrowing capacity, subject to its terms. Letters of credit totaled $1.0 million under the facility; total letters of credit and performance bonds were $1.9 million.
- Cash provided by operations was $5.5 million, while investing activities used $20.3 million and financing activities provided $18.2 million.
- Capital expenditures and development-related spending totaled $26.2 million, including $9.1 million for development.
- The company paid $16.9 million of common dividends, or $0.08 per share, and repurchased 1.6 million shares for $13.7 million during the quarter. The repurchase program was suspended in March 2016.
- Contractual obligations totaled $1.06 billion, including $770.2 million of debt principal and $144.1 million of interest commitments. Unfunded tenant-improvement and other commitments totaled $75.3 million.
Material changes versus the prior comparable period
- Same-property NOI increased 4.3%, driven primarily by higher occupancy at 816 Congress and increased rental income at 191 Peachtree Tower.
- Total NOI increased 1.5%, while non-same-property NOI declined 6.5%, principally because of property sales, partly offset by the commencement of operations at Colorado Tower.
- Office leasing and renewals totaled 220,232 square feet. Net effective rent was $17.24 per square foot, and the filing states that net effective rent on previously occupied space increased 18.9% year over year.
- The company sold the 129,000-square-foot 100 North Point Center East office building for a gross price of $22.0 million and recognized a $14.2 million gain.
- FFO declined despite higher GAAP net income because the prior-year FFO included less effect from property-sale adjustments and current-period operating performance was affected by dispositions and higher corporate compensation expense.
- The company formed a 50%-owned joint venture with Dimensional Fund Advisors to develop a 229,000-square-foot headquarters building in Charlotte. Each partner contributed $6.6 million of pre-development costs.
Outlook, transactions, risks and unusual items
Management provided no formal full-year numerical earnings or FFO guidance in the filing. It expects tenant-improvement and leasing costs per square foot to remain generally consistent with first-quarter 2016 levels and intends to fund dividends through operating cash flow, asset sales, joint-venture distributions and, if necessary, borrowings. Management also expects to refinance or repay maturing mortgage debt through asset sales or other financing.
On April 28, 2016, after quarter-end, Cousins entered into a merger agreement with Parkway Properties. Parkway shareholders would receive 1.63 Cousins common shares per Parkway common share. The transaction also contemplates a spin-off of the combined Houston business into a separately traded entity, HoustonCo. The transactions were anticipated to close in the fourth quarter of 2016, subject to shareholder approvals, regulatory and listing conditions, financing and other customary closing conditions.
- Failure or delay of the Parkway merger or HoustonCo spin-off could adversely affect operations and the stock price.
- Under specified termination circumstances, Cousins could owe a termination fee of up to $65 million or expense reimbursement of up to $20 million, subject to REIT-related limitations.
- Completion of the transactions would dilute existing Cousins shareholders; the filing estimated continuing Cousins shareholders would own approximately 52% of the combined company and former Parkway equity holders approximately 48%.
- Real estate risks include leasing and tenant-credit risk, market concentration, development delays and cost overruns, competition, interest-rate volatility, refinancing risk and potential impairment charges.
- Unconsolidated joint ventures had $398.4 million of third-party debt. Cousins guaranteed up to $8.6 million of the EP II construction loan, with $3.2 million guaranteed at quarter-end, and guaranteed 12.5% of the Carolina Square construction loan, which had no outstanding balance at quarter-end.
- The company had $144.5 million of future obligations under ground and office leases as a lessee and $75.3 million of obligations to fund tenant improvements as a lessor.
- Management stated that pending litigation was not expected to have a material adverse effect, individually or in the aggregate, based on current expectations.
Most important facts for investors to verify
- Whether the Parkway merger and HoustonCo spin-off received all required approvals and closed on the anticipated timetable.
- The effect of the transactions on share count, ownership dilution, leverage, portfolio composition and Houston-related assets.
- Whether same-property NOI growth and leasing gains persisted after the first quarter.
- Debt maturities, refinancing terms and available credit capacity, particularly the 2017 maturity of the American Cancer Society Center mortgage and the 2018 maturity of the 191 Peachtree Tower mortgage.
- Cash-flow coverage of the $0.08 per-share dividend after development, tenant-improvement, leasing and capital expenditures.
- The financial performance and funding requirements of unconsolidated joint ventures, including guaranteed construction-loan obligations.
- Whether higher incentive compensation and transaction-related costs materially affected subsequent-period margins and FFO.