Cousins Properties Incorporated — 2019 Q3 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, principally Georgia, Texas, North Carolina, Arizona, and Florida. This unaudited filing covers the three and nine months ended September 30, 2019.
The period includes the June 14, 2019 stock-for-stock merger with TIER REIT. The merger added nine operating properties, two properties under development, and seven land parcels. At quarter-end, the portfolio included 38 operating properties containing 21.8 million square feet and five active development projects.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $188.3 million | $118.7 million | $463.1 million | $352.5 million |
| Rental property revenue | $180.8 million | $115.7 million | $439.6 million | $343.8 million |
| Net income | $20.7 million | $19.9 million | $34.1 million | $58.0 million |
| Net income available to common stockholders | $20.4 million | $19.5 million | $33.3 million | $56.8 million |
| Diluted earnings per share | $0.14 | $0.19 | $0.27 | $0.54 |
| Funds from operations | $106.2 million | $67.5 million | $222.6 million | $196.7 million |
| Diluted FFO per share | $0.72 | $0.63 | $1.80 | $1.84 |
| Net operating income | $111.6 million | $73.9 million | $279.5 million | $220.0 million |
Q3 net income margin was approximately 11.0%, compared with approximately 16.7% in the prior-year quarter. Nine-month net income margin was approximately 7.4%, compared with approximately 16.5% in the prior-year period. The decline primarily reflects higher depreciation and amortization, merger-related transaction costs, and increased interest expense.
- Q3 rental property revenue increased 56.3%; nine-month revenue increased 27.9%.
- Q3 NOI increased 51.1%; nine-month NOI increased 27.1%.
- Same-property NOI increased 0.6% in Q3 and 3.2% for the nine-month period on a consolidated-property basis.
- Q3 fee income was $7.5 million, versus $2.5 million; nine-month fee income was $23.3 million, versus $7.2 million, primarily from Norfolk Southern-related agreements.
- Q3 interest expense increased 54% to $14.7 million; nine-month interest expense increased 29% to $37.6 million.
- Q3 depreciation and amortization increased 82% to $82.0 million; nine-month depreciation and amortization increased 31.6% to $178.8 million.
Cash flow, liquidity, debt, and capital allocation
- Net cash provided by operating activities was $198.4 million for the first nine months, compared with $178.0 million in 2018.
- Net cash used in investing activities was $128.6 million, including $252.0 million of property acquisition, development, and tenant asset expenditures, offset by $59.0 million of property-sale proceeds and $86.0 million of cash acquired in the TIER merger.
- Net cash used in financing activities was $57.8 million. The company paid $100.4 million of common dividends during the period.
- Cash, cash equivalents, and restricted cash totaled $14.7 million at September 30, 2019, compared with $2.7 million at December 31, 2018.
- Total notes payable were $1.85 billion, compared with $1.06 billion at year-end 2018. The weighted-average maturity was 6.3 years.
- The company had $80.0 million outstanding under its $1.0 billion unsecured credit facility and $920.0 million of stated available borrowing capacity.
- More than 80% of debt was fixed-rate. Fixed-rate debt totaled approximately $1.5 billion at a weighted-average rate of 3.89%; variable-rate debt totaled $330 million.
- Capital commitments included $206.6 million of future tenant-improvement and construction obligations and $487,000 of performance bonds.
Material changes versus the prior comparable period
- The TIER merger materially increased the asset base, operating revenue, debt, depreciation, share count, and equity. Merger-related costs totaled $50.9 million for the first nine months.
- The company issued $650 million of unsecured senior notes in connection with the merger, at a weighted-average interest rate of 3.88%.
- Common shares increased substantially, with weighted-average diluted shares rising to 148.5 million in Q3 from 106.9 million in the prior-year quarter.
- Rental property revenue and NOI benefited from acquired TIER properties, the 1200 Peachtree acquisition, and the Spring & 8th development becoming operational.
- On March 1, 2019, the company sold land to Norfolk Southern, entered into development and consulting agreements, and acquired 1200 Peachtree, a 370,000-square-foot building fully leased to Norfolk Southern. It recognized $5.6 million of related fee income in Q3 and $17.2 million year to date.
- The company completed a one-for-four reverse stock split on June 14, 2019; historical share and per-share information was presented retrospectively.
- The common dividend increased to $0.29 per share in Q3 2019 from $0.26 in Q3 2018; the nine-month dividend was $0.87 per share versus $0.78.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical full-year earnings or FFO guidance range. Management stated that historical results may not be indicative of future results because of the TIER merger and the Norfolk Southern transactions.
- During Q3, the company leased or renewed 741,000 square feet. Net effective rent was $27.03 per square foot, and rent increased 17.2% for leases previously occupied within the prior year.
- Management expects to fund future dividends primarily with operating cash flow, asset-sale proceeds, joint-venture distributions, and, if necessary, additional indebtedness.
- On October 1, 2019, the company purchased its partner’s interest in Terminus Office Holdings for $148 million. It expects to consolidate the entity in Q4 and recognize an approximately $94 million gain from the staged acquisition.
- Key risks include successful integration of TIER, realization of expected synergies, tenant retention and leasing demand, concentrated exposure to Atlanta, Austin, Charlotte, Phoenix, Tampa, and Dallas, development costs and delays, refinancing and debt-covenant compliance, interest-rate and LIBOR-transition risk, joint-venture obligations, and REIT qualification.
- The company guaranteed $9.4 million of outstanding Carolina Square construction debt through a 12.5% guarantee. Management indicated that ordinary-course litigation is not expected to have a material adverse effect.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported revenue and FFO growth for the TIER merger, 1200 Peachtree, and other non-same-property additions versus underlying same-property performance.
- Assess the effect of $1.85 billion of debt, upcoming maturities, variable-rate exposure, and credit-facility covenants on liquidity and dividend capacity.
- Review the sustainability of the $0.29 quarterly dividend against operating cash flow, development spending, tenant-improvement commitments, and refinancing needs.
- Confirm the timing, valuation, and approximately $94 million expected gain from the October 2019 Terminus acquisition.
- Evaluate whether the 0.3% reported same-property NOI increase cited in management commentary and the 0.6% consolidated same-property NOI increase reconcile to the underlying portfolio definition.
- Monitor TIER integration costs, tenant retention, projected synergies, development execution, and the company’s concentrated Sun Belt market exposure.