Cousins Properties Incorporated — Q1 2015 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Cousins is a self-administered and self-managed REIT focused primarily on acquiring, developing, leasing, managing and owning Class A office properties and opportunistic mixed-use properties in Sunbelt markets, particularly Georgia, Texas and North Carolina.
At March 31, 2015, the portfolio included interests in 17 operating office properties totaling 16.1 million square feet, one operating mixed-use property totaling 484,000 square feet, and two projects under active development.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Rental property revenues | $90.0 million | $77.5 million | Up 16% |
| Total revenues | $92.0 million | $81.7 million | Up 12.5% |
| Net income | $7.2 million | $7.1 million | Up $0.1 million |
| Net income available to common stockholders | $7.2 million | $5.2 million | Up $2.0 million |
| Net income per diluted share | $0.03 | $0.03 | Flat |
| Funds from operations available to common stockholders | $45.9 million | $36.2 million | Up 27% |
| FFO per diluted share | $0.21 | $0.19 | Up 11% |
| Net operating income | $58.1 million | $50.0 million | Up 16% |
| Same-property NOI | $43.3 million | $41.2 million | Up 5.2% |
| Net cash provided by operating activities | $2.4 million | $7.0 million | Down $4.6 million |
Approximate consolidated rental-property operating margin was 57.8% in Q1 2015, compared with 55.0% in Q1 2014. Net income margin was approximately 7.8% versus 8.7%, while FFO represented approximately 49.9% of revenue versus 44.3%. These calculated margins are affected by depreciation, gains on property sales and other non-operating items.
Balance sheet, debt and liquidity
- Total assets were $2.685 billion at March 31, 2015, compared with $2.667 billion at December 31, 2014.
- Notes payable were $847.9 million, up from $792.3 million at year-end 2014. Estimated fair value of debt was $898.3 million.
- Debt consisted principally of a $198.0 million unsecured credit facility and property-level mortgage notes. The listed maturities range from 2016 through 2024; the credit facility matures in 2019.
- The company had $4.4 million of cash and cash equivalents and $4.8 million of restricted cash at March 31, 2015.
- The credit facility had $198.0 million drawn and $302.0 million of additional borrowing capacity.
- Cash used in investing activities was $36.3 million, including $37.8 million for property acquisition, development and tenant asset expenditures.
- Cash provided by financing activities was $38.2 million, primarily reflecting $94.1 million of credit-facility borrowings, partly offset by $36.3 million of repayments and $17.3 million of common dividends.
- Common dividends declared were $0.080 per share, compared with $0.075 in the prior-year quarter. Management expected operating cash flow and joint-venture distributions to fund common dividends in the remaining 2015 quarters.
Material changes versus the prior comparable period
- Rental revenue benefited from the October 2014 acquisition of Northpark Town Center and the August 2014 acquisition of Fifth Third Center, higher occupancy at 2100 Ross and Promenade, and increased rental rates at Post Oak. These increases were partly offset by the December 2014 sale of 777 Main.
- Rental operating expenses increased 9%, primarily because of the Northpark Town Center and Fifth Third Center acquisitions, partly offset by the 777 Main disposition.
- General and administrative expense declined $2.1 million to $3.5 million, primarily because of lower long-term incentive compensation expense.
- Interest expense increased 7% to $7.7 million, reflecting the 816 Congress mortgage and higher average credit-facility borrowings, partly offset by higher capitalized interest.
- FFO increased to $45.9 million from $36.2 million. FFO benefited from stronger property operations and the absence of $1.8 million of preferred dividends following redemption of all preferred stock in 2014.
- Cash flow from operations declined despite higher earnings, mainly because of increased property taxes, restricted-stock-unit-related payments and changes in operating liabilities.
- Investing cash use increased because Q1 2015 had only $1.3 million of property-sale proceeds versus $20.0 million in Q1 2014.
- Capital expenditures totaled $37.8 million, including $23.5 million of operating leasing costs, $4.3 million of development costs and $3.4 million of building improvements.
Operating performance, outlook and risks
- The company leased or renewed 440,839 square feet of office space during the quarter. Net effective rent was $14.31 per square foot, and net effective rent on previously occupied space increased 33.6%.
- Office net rental rates increased 1% on new and expansion leases and 15% on renewal leases. Management reported stable same-property leasing percentage during the quarter.
- Management intended to pursue lease-up of the existing portfolio, execute its development pipeline and make opportunistic investments in its core markets. It expected tenant improvements and leasing costs per square foot to remain consistent with Q1 levels based on anticipated activity.
- Long-term capital plans included strategic asset sales, additional secured and unsecured borrowings, construction financing, equity issuance and joint ventures. Management stated that the business depends on raising or recycling capital; unavailable or unfavorable financing could reduce development and acquisition activity.
- Material risks include refinancing and interest-rate risk, debt-covenant compliance, leasing and tenant-credit risk, geographic concentration in Atlanta and Houston, exposure to the energy industry, development delays and cost overruns, property values, joint-venture liquidity, environmental or uninsured losses, litigation and continued qualification as a REIT.
- Unconsolidated joint ventures had $219.4 million of aggregate third-party debt. Cousins guaranteed up to $8.6 million of an EP II construction loan with total capacity of $46.0 million.
- Commitments included $107.9 million of future tenant-improvement obligations, $146.4 million of future ground and office lease obligations, and $2.4 million of letters of credit and performance bonds.
- Management reported no material changes to the risk factors in the 2014 Form 10-K, no material changes to critical accounting policies, and effective disclosure controls and procedures.
Important facts for investors to verify
- Confirm leasing momentum, occupancy and renewal spreads, particularly in the Atlanta, Houston, Dallas, Austin, Charlotte and Raleigh/Durham markets.
- Assess whether operating cash flow is sufficient to fund the $0.08 quarterly dividend after tenant improvements, leasing costs and development spending.
- Review credit-facility availability, debt maturities beginning in 2016, refinancing assumptions and compliance with leverage and other covenants.
- Evaluate exposure to Northpark Town Center, Fifth Third Center, 816 Congress and other major properties, including tenant concentration and energy-sector exposure.
- Track development commitments, especially Colorado Tower, and compare actual costs and leasing progress with expectations.
- Distinguish recurring operating performance from gains on property sales, discontinued operations, acquisition effects and other unusual items when assessing earnings quality.
- Review joint-venture debt, guarantee obligations and the financial condition of joint-venture partners.