Cousins Properties Incorporated — Q2 2019 Form 10-Q Summary
Business context and reporting period
Cousins Properties Incorporated (NYSE: CUZ) is a self-managed REIT focused on Class A office and mixed-use properties in Sun Belt markets, including Atlanta, Austin, Charlotte, Dallas, Phoenix and Tampa. This unaudited filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
On June 14, 2019, Cousins completed its stock-for-stock merger with TIER REIT. The transaction added nine operating properties totaling 5.8 million square feet, two development properties expected to add 620,000 square feet, and seven land parcels with potential for up to 2 million additional square feet. Following the merger, the portfolio included 38 operating properties totaling 21.8 million square feet and five active development projects.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total revenues | $142.0 million | $116.6 million | 21.8% |
| Rental property revenues | $134.9 million | $114.3 million | 18.0% |
| Fee income | $7.1 million | $1.8 million | 294% |
| Net operating income | $88.0 million | $73.0 million | 20.7% |
| Same-property NOI | $70.0 million | $67.0 million | 4.5% |
| Net income available to common stockholders | $(22.4) million | $21.3 million | Declined |
| diluted EPS | $(0.20) | $0.20 | Declined |
| Funds from operations | $31.9 million | $64.6 million | Declined |
| Diluted FFO per share | $0.28 | $0.60 | Declined |
Six-month revenue was $274.8 million versus $233.8 million in 2018. Six-month net income available to common stockholders was $12.9 million versus $37.3 million, and diluted FFO was $116.4 million versus $129.2 million.
Q2 consolidated NOI margin was approximately 65.2% of rental property revenue, compared with approximately 63.8% in the prior-year quarter. The filing defines NOI as a supplemental, non-GAAP measure and cautions that it is not a measure of liquidity or cash available for distribution.
Cash flow, balance sheet, debt and liquidity
- Net cash provided by operating activities was $77.8 million for the first six months, down from $104.7 million in 2018, primarily because of merger-related cash expenses.
- Net cash used in investing activities was $37.2 million, including $168.7 million of property acquisition, development and tenant-related expenditures, partially offset by $57.8 million of property-sale proceeds and $86.0 million of cash acquired in the merger.
- Net cash used in financing activities was $29.2 million. The company paid $57.8 million of common dividends during the six months.
- Cash, cash equivalents and restricted cash totaled $14.1 million at June 30, 2019, compared with $2.7 million at December 31, 2018.
- Total assets were $6.68 billion and total equity was $4.37 billion at June 30, 2019. Notes payable totaled $1.84 billion, compared with $1.06 billion at year-end 2018.
- The company had $64.0 million drawn under its $1.0 billion unsecured credit facility and reported $936.0 million of additional borrowing capacity.
- More than 80% of debt was fixed rate. Fixed-rate debt totaled approximately $1.5 billion, while variable-rate debt totaled $314.0 million, consisting of the credit facility and a $250.0 million term loan.
- In June 2019, Cousins issued $650.0 million of unsecured senior notes in three tranches with interest rates of 3.78% to 3.95% and maturities from 2027 to 2029.
Material changes versus the prior comparable period
- The TIER merger materially expanded the asset base, equity capitalization, debt and operating footprint. The company issued approximately 166 million shares to former TIER stockholders before the subsequent one-for-four reverse stock split; merger consideration was approximately $1.6 billion.
- Merger-related transaction costs were $49.8 million in Q2 and for the first six months, compared with $0.1 million and $0.2 million, respectively, in the prior-year periods. These costs were the primary reason for the quarterly GAAP loss and the decline in FFO.
- Rental property revenues increased due to the TIER properties, the 1200 Peachtree acquisition, and the commencement of operations at Spring & 8th. Same-property NOI increased 4.5%, supported by higher occupancy and parking revenue, partly offset by higher real estate taxes.
- Fee income increased primarily from the Norfolk Southern headquarters development and consulting arrangements. Cousins recognized $5.0 million in related fee income during Q2 and $11.6 million during the first six months.
- The company leased or renewed 1.1 million square feet during Q2, including a 561,000-square-foot BB&T/SunTrust headquarters lease at Hearst Tower. Net effective rent increased 21.5% for leases previously occupied within the prior year.
- Common dividends were $0.29 per share in Q2 and $0.58 per share for the first six months, versus $0.26 and $0.52, respectively, in the prior-year periods.
- The company adopted ASC 842 on January 1, 2019 and recorded $56.3 million of ground-lease right-of-use assets and lease liabilities at adoption.
Outlook, commentary, risks and unusual items
Management stated that the merger is expected to strengthen the company’s Sun Belt office portfolio, expand its Austin and Charlotte presence, provide entry into Dallas, and add development and land-bank opportunities. The filing does not provide a clear numerical 2019 earnings or FFO guidance value in the supplied text.
- Subsequent to quarter-end, Cousins agreed to purchase its partner’s interest in Terminus Office Holdings LLC in a transaction valuing Terminus 100 and 200 at $503 million. Closing was expected in the fourth quarter of 2019, with management expecting to recognize a gain from the acquisition achieved in stages.
- The company had $245.7 million of future obligations for tenant improvements and other construction commitments, primarily due within one year.
- Cousins guaranteed 12.5% of the Carolina Square construction loan; its guaranteed share of the $75.2 million outstanding balance was $9.4 million.
- Key risks include integrating TIER, achieving expected synergies, retaining tenants and employees, managing increased leverage and refinancing maturities, interest-rate and LIBOR-related exposure, development and leasing risks, market concentration in Sun Belt cities, and maintaining REIT qualification.
- Management reported no material adverse expected effect from ordinary-course litigation and concluded that disclosure controls and procedures were effective.
Most important facts for investors to verify
- Whether the TIER portfolio produces the expected occupancy, NOI growth, cost savings and development returns after full-period integration.
- The effect of the $49.8 million merger cost charge on reported earnings, FFO and future recurring expenses.
- Debt covenant compliance, refinancing requirements, available credit capacity and sensitivity to variable interest rates.
- Progress and economics of the Terminus acquisition, including the expected gain and resulting consolidated debt and assets.
- Funding requirements for the $245.7 million of tenant-improvement and construction commitments and the company’s ability to fund dividends from recurring operating cash flow.
- Leasing performance, including the sustainability of the 21.5% net effective rent increase and exposure to major tenants and concentrated markets.