COUSINS PROPERTIES INC quarterly report, Q3 FY2014

Cousins Properties Incorporated — Form 10-Q Summary

Business Context and Reporting Period

Unaudited quarterly report for the three and nine months ended September 30, 2014. Cousins is a self-managed REIT focused primarily on acquiring, developing, leasing, managing and owning Class A office properties and opportunistic mixed-use assets in Sunbelt markets, especially Georgia, Texas and North Carolina. At quarter-end, the portfolio included 16 operating office properties totaling 15.1 million square feet, six retail properties totaling 566,000 square feet, and two active development projects.

Financial Performance and Key Metrics

Metric	Q3 2014	Q3 2013	9M 2014	9M 2013
Total revenues	$89.1 million	$50.4 million	$255.3 million	$131.2 million
Net income attributable to common stockholders	$19.3 million	$59.4 million	$22.3 million	$107.0 million
Net income per diluted share	$0.09	$0.36	$0.11	$0.83
Funds from operations available to common stockholders	$41.7 million	$17.2 million	$113.6 million	$42.8 million
FFO per diluted share	$0.20	$0.11	$0.57	$0.33
Net operating income	$55.1 million	$34.8 million	$156.4 million	$89.6 million
Cash flow from operating activities	Not separately provided	Not separately provided	$94.6 million	$98.7 million

Q3 2014 rental property revenue was $86.9 million, while rental property operating expenses were $38.7 million, producing consolidated property NOI of $48.2 million before discontinued operations and joint venture contributions. Total NOI of $55.1 million represented approximately 61.9% of consolidated revenue. Net income margin was approximately 21.7% in the quarter and 8.7% for the first nine months, although results were materially affected by depreciation, property-sale gains and discontinued operations.

Same-property NOI increased 3.6% year over year in the quarter and 4.4% for the first nine months. Office leasing activity totaled 691,492 square feet in the quarter and approximately 1.5 million square feet year to date. Net effective office rent was $16.81 per square foot in the quarter and $16.55 per square foot year to date.

Balance Sheet, Debt and Liquidity

Total assets were $2.534 billion at September 30, 2014, compared with $2.273 billion at December 31, 2013.
Notes payable totaled $671.1 million, compared with $630.1 million at year-end 2013. Estimated fair value of notes payable was $711.3 million.
Cash and cash equivalents were $7.2 million, with restricted cash of $4.7 million.
The amended unsecured Credit Facility had a $500 million commitment, a May 28, 2019 maturity, and $87.7 million outstanding at quarter-end, leaving reported borrowing capacity of $411.3 million.
The Credit Facility included a maximum overall leverage ratio of 60%, minimum unencumbered interest coverage of 2.00, minimum fixed-charge coverage of 1.50 and minimum shareholders’ equity requirements. The filing states that the Company was in compliance with applicable covenants.
Debt consisted primarily of fixed-rate, non-recourse mortgage notes, with variable-rate debt including the Credit Facility and the Mahan Village construction facility.
Common dividends declared were $0.075 per share for the quarter and $0.225 per share for the first nine months.

Cash Flow and Capital Allocation

Operating cash flow was $94.6 million for the first nine months, down from $98.7 million in the comparable 2013 period.
Investing activities used $304.6 million, including $351.7 million for property acquisitions, development and tenant-related expenditures, partly offset by $53.8 million of property-sale proceeds.
Financing activities provided $216.3 million, including $321.9 million of net common-stock issuance proceeds and net Credit Facility borrowings, partly offset by debt repayments, preferred-stock redemption and dividends.
Capital expenditures included $234.5 million for acquisitions, $55.3 million for development, $49.3 million for building improvements and $7.6 million for leasing costs.

Material Changes Versus the Prior Comparable Period

Revenue increased 77% in Q3 and 95% for the first nine months, primarily because of the Greenway Plaza, 777 Main, Post Oak Central, 816 Congress and Fifth Third Center acquisitions.
Q3 FFO increased 142% to $41.7 million, and FFO per share increased to $0.20 from $0.11. The nine-month FFO increase was also substantial, but benefited from the expanded property portfolio and the absence of certain 2013 costs.
GAAP net income attributable to common stockholders declined sharply because the 2013 periods included substantial gains from joint-venture and property sales. Nine-month income from unconsolidated joint ventures fell to $5.3 million from $65.9 million.
Interest expense increased 32% in Q3 and 46% year to date, primarily due to mortgage financing on Post Oak Central and Promenade.
Depreciation and amortization increased 77% in Q3 and 128% year to date, largely reflecting acquired properties.
The Company issued 26.7 million common shares during the first nine months, generating $321.9 million of net proceeds. It redeemed all outstanding Series B preferred stock for $94.8 million in April 2014 and has no preferred stock outstanding.
The Credit Facility was increased from $350 million to $500 million, its maturity was extended to 2019, and pricing spreads and fees were reduced.

Guidance, Outlook, Risks and Unusual Items

Management expected to sell 777 Main, Mahan Village and a joint venture containing four Publix-anchored shopping centers before year-end, with proceeds intended primarily to reduce Credit Facility borrowings.
The Company was evaluating a potential joint venture partner for 191 Peachtree in the first half of 2015, with any proceeds also expected to reduce debt.
Subsequent to quarter-end, Cousins acquired Northpark Town Center in Atlanta for a gross purchase price of $348.0 million, funded with cash and Credit Facility borrowings. It also obtained an $85.0 million mortgage secured by 816 Congress and used the proceeds to reduce Credit Facility borrowings. Credit Facility borrowings were $318.2 million as of October 24, 2014.
The Mahan Village construction facility maturity was extended to January 2015, creating a near-term refinancing or repayment requirement.
Future obligations included $103.6 million of tenant-improvement commitments, $150.0 million of ground and office lease obligations, and a $7.4 million land-purchase commitment. Outstanding letters of credit and performance bonds totaled $2.4 million.
Unconsolidated joint ventures had $418.0 million of third-party debt. Cousins guaranteed approximately $2.9 million of Cousins Watkins debt and $3.6 million of EP II construction debt at quarter-end.
Management cited risks relating to capital availability, refinancing, interest rates, leasing and tenant credit, geographic concentration, development execution, asset-sale pricing, joint-venture partners, debt covenants, litigation, environmental and regulatory matters, and continued REIT qualification.
The Company adopted revised discontinued-operations guidance in 2014, changing the presentation of certain properties held for sale, including 777 Main and Mahan Village.
An October 2014 participation payment of $4.5 million was expected to be recognized as fourth-quarter fee income, with a related $1.1 million employee commission recorded in other expenses.

Important Facts for Investors to Verify

Whether planned asset sales and the proposed 191 Peachtree joint venture close on expected terms and reduce leverage as anticipated.
The financing impact of the Northpark Town Center acquisition and the subsequent increase in Credit Facility borrowings.
The January 2015 maturity of the Mahan Village construction facility and the Company’s refinancing or repayment plan.
Same-property occupancy, leasing spreads, tenant-improvement costs and exposure to major tenants in the concentrated Sunbelt office portfolio.
Reconciliation of GAAP net income to FFO, particularly the effects of property-sale gains, depreciation and joint-venture results.
Compliance with Credit Facility leverage, coverage and equity covenants, including after post-quarter-end acquisitions and borrowings.
Joint-venture debt, guarantees and potential capital contributions, as well as the Company’s ability to fund its $954.7 million of contractual obligations and $113.5 million of commitments.