Cousins Properties Incorporated — Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
Cousins Properties is a self-managed REIT focused on Class A office and mixed-use properties in Sun Belt markets, primarily Georgia, Texas, North Carolina, Arizona, and Florida. The filing covers the three and nine months ended September 30, 2020. The portfolio comprised 35 operating properties with approximately 19.4 million square feet and six projects under active development.
The results remain affected by the June 2019 TIER REIT merger, property acquisitions and dispositions, the consolidation of Terminus in late 2019, and the COVID-19 pandemic.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Total revenue | $183.4 million | $188.3 million | $557.2 million | $463.1 million |
| Rental property revenue | $179.0 million | $180.8 million | $543.3 million | $439.6 million |
| Net income | $28.3 million | $20.7 million | $226.8 million | $34.1 million |
| Net income available to common stockholders | $28.1 million | $20.4 million | $226.2 million | $33.3 million |
| Diluted EPS | $0.19 | $0.14 | $1.52 | $0.27 |
| Funds from operations per diluted share | $0.69 | $0.72 | $2.10 | $1.80 |
| NOI | $115.8 million | $111.6 million | $350.5 million | $279.5 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $259.0 million | $198.4 million |
Q3 net income margin was approximately 15.4% of total revenue, while consolidated NOI margin was approximately 64.7% of rental property revenue. YTD NOI margin was approximately 64.5%.
At September 30, 2020, total assets were $6.89 billion, notes payable were $1.93 billion, cash and cash equivalents were $36.9 million, and total cash, cash equivalents, and restricted cash were $38.7 million. Total equity was $4.53 billion. Approximately 84% of debt carried fixed interest rates.
The company paid $131.7 million of common dividends during the first nine months and declared a third-quarter dividend of $0.30 per share.
Cash Flow, Capital Spending, Debt and Liquidity
- Operating cash flow increased $60.6 million year over year to $259.0 million, primarily reflecting contributions from merger-related properties, 1200 Peachtree, and Terminus.
- Investing activities provided $178.3 million, compared with $128.6 million used in the prior-year period, mainly because of property and joint venture dispositions.
- Financing activities used $416.2 million, including $605.7 million of credit facility and other debt repayments, $131.7 million of common dividends, and other financing uses.
- Property acquisition, development, and tenant asset expenditures were $306.1 million, including $96.0 million for acquisitions, $37.1 million for development, $36.2 million for leasing costs, and $78.3 million for building improvements.
- The company had the full $1.0 billion borrowing capacity available under its senior unsecured credit facility and $36.9 million of cash at September 30, 2020.
- Debt maturities include the $250 million unsecured term loan due in December 2021 and mortgage obligations of $3.99 million due within one year. The weighted-average maturity of notes payable was 5.2 years.
- Management reported compliance with all credit facility, term loan, senior note, and mortgage covenants.
Material Changes Versus the Prior Comparable Period
- Q3 rental property revenue declined 1.0%, while YTD rental property revenue increased 23.6%, largely because the 2019 TIER merger and other acquisitions affected the comparable periods.
- Q3 consolidated NOI increased 3.8% to $115.8 million; YTD NOI increased 25.4% to $350.5 million.
- Same-property NOI declined 0.5% in Q3 and was essentially flat for the first nine months. Management attributed the quarterly decline primarily to lower parking revenue from reduced physical occupancy; excluding parking, same-property NOI would have increased 1.6%.
- Fee income declined 42.0% in Q3 and 40.9% YTD, primarily because of lower revenue from the Norfolk Southern development and consulting arrangements.
- YTD interest expense increased 19.6% to $45.0 million because of interest on senior notes issued in 2019 and higher average credit facility borrowings earlier in 2020.
- YTD net income benefited from a $90.4 million gain on the sale of Hearst Tower and a $44.6 million gain on the sale of the Gateway Village joint venture interest. These gains materially increased GAAP earnings but are excluded from recurring FFO.
- The company sold Hearst Tower, Woodcrest, and interests in the Gateway Village and Wildwood joint ventures, while acquiring an $85.0 million parking garage in Charlotte.
Guidance, Outlook, Commentary and Risks
The filing does not provide clear quantitative full-year earnings or FFO guidance. Management expects available liquidity and operating cash flow to satisfy obligations for the foreseeable future, but noted that the COVID-19 pandemic could adversely affect future cash flows and financial condition.
Management stated that lease obligations had not been materially affected by COVID-19 through the filing date, although tenants broadly adopted teleworking and property physical occupancy declined. Certain tenants received rent forgiveness or payment deferrals, and future impairments or valuation adjustments to tenant receivables remain possible.
- Key COVID-19 risks include tenant defaults or bankruptcies, lower demand for office space, reduced parking and ancillary revenue, delayed leasing decisions, increased operating costs, and lasting changes from remote work.
- The company has high lease revenue concentrations in Atlanta, Austin, Charlotte, Phoenix, Tampa, and Dallas.
- Outstanding commitments included $174.6 million of tenant improvement and other future construction obligations and $1.2 million of performance bonds.
- Contractual obligations totaled $2.51 billion, including debt principal, interest commitments, ground leases, and other operating leases.
- The company relies on asset sales, debt, equity, joint ventures, and operating cash flow to fund development and acquisition activity. Capital availability and refinancing conditions are material risks.
- Variable-rate debt references LIBOR, whose planned phaseout after 2021 could affect borrowing costs and debt agreements.
- Unconsolidated joint ventures had $214.5 million of third-party debt. The company reported no material litigation expected to adversely affect financial condition, liquidity, or results of operations.
Important Facts for Investors to Verify
- Reconcile recurring operating performance and dividend coverage against reported FFO, excluding the substantial 2020 property and joint venture sale gains.
- Monitor same-property leasing, occupancy, parking revenue, tenant concessions, rent collections, and any COVID-19-related impairments.
- Assess refinancing plans for the $250 million term loan due in 2021 and upcoming mortgage maturities.
- Review the sustainability of development and tenant-improvement spending relative to operating cash flow and available credit capacity.
- Evaluate exposure to office demand changes from remote work and the concentration of revenues in the company’s principal Sun Belt markets.
- Confirm future dividend levels against REIT distribution requirements, debt covenants, liquidity, and projected cash flows.