Cousins Properties Incorporated — 2022 Q3 Form 10-Q Summary
Business context and reporting period
Cousins Properties is a self-administered, self-managed REIT focused primarily on Class A office properties and mixed-use developments in Sun Belt markets, including Atlanta, Austin, Charlotte, Phoenix, Tampa, Dallas, and Nashville. As of September 30, 2022, the portfolio comprised approximately 18.5 million square feet of office space and 310,000 square feet of other space. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Total revenue | $195.2 million | $188.7 million | $567.7 million | $564.9 million |
| Rental property revenue | $193.5 million | $185.5 million | $559.9 million | $552.1 million |
| Net income | $80.8 million | $54.1 million | $143.1 million | $111.5 million |
| Net income available to common stockholders | $80.6 million | $54.0 million | $142.7 million | $111.3 million |
| diluted EPS | $0.53 | $0.36 | $0.95 | $0.75 |
| Funds from operations | $104.4 million | $102.4 million | $308.6 million | $306.4 million |
| FFO per diluted share | $0.69 | $0.69 | $2.06 | $2.06 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $272.3 million | $298.6 million |
| Net operating income | $126.6 million | $118.4 million | $364.0 million | $354.0 million |
Rental property NOI margin, calculated as NOI divided by rental property revenue, was approximately 65.4% in the quarter and 65.0% for the first nine months, based on consolidated-property figures presented in MD&A. Same-property NOI increased 1.8% in the quarter but declined 0.8% for the first nine months. Total NOI increased 6.9% in the quarter and 2.8% year to date, supported by non-same-property contributions.
At September 30, 2022, total assets were $7.50 billion, total liabilities were $2.83 billion, and total equity was $4.67 billion. Notes payable totaled $2.30 billion gross, or $2.296 billion net of unamortized costs and premiums. Cash and cash equivalents were $5.5 million, with total cash, cash equivalents, and restricted cash of $6.7 million.
Material changes versus the prior comparable period
- Quarterly rental property revenue increased $7.9 million, or 4.3%, while year-to-date rental property revenue increased $7.8 million, or 1.4%.
- Quarterly net income available to common stockholders increased $26.6 million, primarily because of a $56.3 million gain on the sale of the Company’s 50% interest in Carolina Square, compared with a $13.1 million gain on the comparable 2021 joint venture disposition. The gain was partly offset by higher depreciation and interest expense.
- Interest expense increased 10.0% in the quarter to $18.4 million, driven by higher variable interest rates and a higher average balance on the credit facility.
- Fee income declined 45.8% in the quarter and 56.8% year to date as the Norfolk Southern development and consulting transactions reached completion.
- General and administrative expense declined 18.4% in the quarter, primarily due to lower stock-based and other employee compensation expense.
- Operating cash flow declined $26.2 million year to date, primarily because of timing of prepaid rent receipts and lower operating distributions from unconsolidated joint ventures.
- Investing cash outflows increased to $248.4 million from $51.4 million, reflecting redevelopment activity, contributions to the Neuhoff joint venture, the acquisition of the partner’s 10% Avalon interest, and lower prior-year asset-sale proceeds.
- Property acquisition, development, and tenant asset expenditures were $262.8 million year to date, including $153.3 million of operating leasing costs, $72.5 million of building improvements, and $68.6 million of development expenditures.
- The Company issued 2.6 million shares under its ATM/forward-sales program for gross proceeds of approximately $105.1 million and net cash proceeds of approximately $101.4 million.
- The quarterly common dividend increased to $0.32 per share from $0.31; year-to-date dividends paid were $143.8 million.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that it expects sufficient liquidity to meet obligations for the foreseeable future. At quarter end, $301.2 million was drawn on the $1.0 billion credit facility, leaving $698.8 million of borrowing capacity, subject to facility conditions.
- The credit facility was amended in May 2022, extending maturity to April 30, 2027. The Company was in compliance with all debt covenants at September 30, 2022, and reported that 87% of consolidated debt carried fixed interest rates.
- On October 3, 2022, after quarter end, the Company borrowed the full $400 million available under a new delayed-draw term loan maturing March 3, 2025, with extension options. This borrowing is tied to SOFR and is intended to support liquidity and capital needs.
- The Company entered into a swap that effectively fixed the underlying SOFR rate on its $350 million 2021 Term Loan at 4.23% through August 2024. The swap had a $652,000 liability at quarter end.
- After quarter end, the Company paid off the Legacy Union One and Promenade Tower mortgages and applied to extend the Terminus property mortgages. The proposed extension would increase combined principal to $221 million, carry a 6.34% interest rate, and extend maturities to January 2031; closing was expected before December 31, 2022.
- Management expects office usage to gradually increase through the remainder of 2022, potentially increasing parking revenue and certain operating expenses. However, usage remained below pre-pandemic levels, and hybrid work could continue to affect tenant demand, occupancy, parking revenue, leasing rates, and space requirements.
- The Company leased or renewed 431,000 square feet during the quarter. Straight-line net rent per square foot increased 20.4% for office spaces under lease within the past year.
- Future risks include higher interest rates, refinancing and debt-covenant risk, inflation, economic weakness, changes in office demand and remote work, tenant defaults, leasing and redevelopment risk, construction costs and delays, capital-market access, joint venture performance, cybersecurity, and the potential for future impairment charges.
- Future obligations included $161.7 million of tenant-improvement and other construction commitments under leases and $692,000 of performance bonds. Management stated that ordinary-course litigation is not expected to have a material adverse effect.
- No impairment charges were recorded for held-for-investment buildings, held-for-sale buildings, land, or projects under development during the periods presented.
Most important facts for investors to verify
- Reconcile reported earnings growth with the $56.3 million Carolina Square gain and assess recurring operating performance using same-property NOI and FFO.
- Evaluate exposure to rising interest rates, including the $301.2 million credit-facility balance, the $400 million post-quarter-end term loan, and remaining variable-rate debt.
- Review the maturity and refinancing plan for secured mortgages, particularly the Terminus loans and debt maturing in 2023–2025.
- Assess office demand, occupancy, leasing spreads, tenant-improvement costs, and the ongoing effects of hybrid work.
- Monitor liquidity after redevelopment, leasing, dividend, and debt-service requirements, including the $161.7 million of future tenant-improvement and construction obligations.
- Confirm the closing and final terms of the proposed Terminus mortgage extension and the subsequent repayment of Legacy Union One and Promenade Tower mortgages.
- Consider the sustainability of dividends and the potential dilution from future ATM or other equity issuances.