Business Context and Reporting Period
Cousins Properties Incorporated is a self-administered and self-managed REIT focused primarily on Class A office and mixed-use properties in Sunbelt markets, including Atlanta, Austin, Charlotte, Phoenix, Tampa and other markets. The unaudited Form 10-Q covers the three months ended March 31, 2018, with comparison to the three months ended March 31, 2017.
At March 31, 2018, the portfolio included interests in 29 operating properties containing approximately 15.0 million square feet and four active development projects. The company leased or renewed 329,583 square feet during the quarter.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $117.2 million | $119.9 million | Down 2.2% |
| Rental property revenues | $113.3 million | $112.5 million | Up 0.7% |
| Net operating income | $73.2 million | $71.0 million | Up 3.1% |
| Net income | $16.4 million | $4.9 million | Up $11.5 million |
| Net income available to common stockholders | $16.0 million | $4.8 million | Up $11.3 million |
| Diluted earnings per share | $0.04 | $0.01 | Up $0.03 |
| Funds from operations | $64.6 million | $67.0 million | Down 3.6% |
| Diluted FFO per share | $0.15 | $0.16 | Down $0.01 |
| Cash flow from operations | $20.9 million | $25.2 million | Down 17.2% |
| Capital expenditures and development spending | $60.2 million | $70.7 million | Down 14.9% |
Rental property operating expenses were $40.2 million, producing a consolidated rental-property NOI margin of approximately 64.5%, compared with approximately 63.1% in the prior-year quarter. Net income margin was approximately 14.0% of total revenues, compared with 4.1% in Q1 2017. The filing does not provide a single company-wide EBITDA margin.
Same-property NOI, including consolidated properties and the company’s share of unconsolidated properties, increased 2.6% year over year. Consolidated same-property NOI increased 2.9%, supported primarily by higher occupancy at Research Park V and Corporate Center. Net effective rent on leases previously occupied within the prior year increased 35.2%.
At March 31, 2018, total assets were $4.16 billion, cash and cash equivalents were $108.2 million, restricted cash was $1.2 million, and total equity was $2.84 billion. Notes payable totaled $1.09 billion, or approximately 26% of total assets. The weighted average maturity of notes payable was 6.4 years.
Cash Flow, Debt and Liquidity
- Operating cash flow was $20.9 million. Investing cash outflows were $82.8 million, including $60.2 million of property acquisition, development and tenant-related expenditures and $21.6 million invested in unconsolidated joint ventures.
- Financing cash outflows were $34.5 million, including $25.2 million of common dividends, $6.0 million of deferred financing costs and $2.2 million of debt repayments.
- Cash, cash equivalents and restricted cash declined by $96.4 million during the quarter to $109.3 million.
- The company recast its unsecured credit facility in January 2018, increasing capacity from $500 million to $1.0 billion and extending maturity from May 2019 to January 2023. At quarter-end, $997 million was available, with $3 million used for letters of credit and no borrowings outstanding.
- Contractual obligations totaled $1.56 billion, including $1.10 billion of principal debt, $259.1 million of interest commitments and $206.9 million of ground-lease obligations. Additional commitments included $58.4 million of unfunded tenant improvements and construction obligations.
- Unconsolidated joint ventures had $343.1 million of third-party debt. Cousins guaranteed $8.8 million outstanding under a 12.5% guarantee related to the Carolina Square construction loan.
Material Changes Versus the Prior Comparable Period
- Net income increased primarily because of lower depreciation and amortization, lower acquisition and transaction costs, and higher income from unconsolidated joint ventures.
- Depreciation and amortization declined 18% to $45.1 million, primarily reflecting property dispositions in 2017, partly offset by newly operational properties.
- Other income declined 82% to $1.0 million because Q1 2017 included lease termination fees at Hayden Ferry and Northpark.
- Acquisition and transaction costs declined 95% to $0.1 million; management did not expect material additional expenses related to the Parkway Properties transaction.
- FFO declined despite higher GAAP net income, reflecting property sales and lower operating contributions from certain joint ventures.
- Segment NOI increased to $80.6 million from $80.2 million. Orlando operations were absent from the 2018 segment comparison following the company’s 2017 exit from that market.
- The company adopted ASU 2017-05 on January 1, 2018, recording a $22.3 million cumulative-effect credit to distributions in excess of cumulative net income. The adoption did not represent current-period operating earnings.
- The company formed Austin 300 Colorado Project, LP, a 50%-owned joint venture developing a 309,000-square-foot office building in Austin, Texas.
Guidance, Outlook, Risks and Unusual Items
The filing references 2018 guidance as a forward-looking matter but does not provide a clear quantitative guidance range in the supplied filing text. Management expects future tenant improvement and leasing costs per square foot to remain generally consistent with first-quarter 2018 levels and expects to fund future dividends through operating cash flow, asset sales, joint-venture distributions and, if necessary, debt.
Management’s strategy emphasizes a low-leveraged balance sheet, selective acquisitions and development, and dispositions of non-core assets. Future capital requirements depend on access to debt, equity, asset-sale proceeds and joint-venture capital.
- Key risks include refinancing and debt-covenant compliance, interest-rate volatility, tenant renewals and leasing rates, tenant credit quality, development delays and cost overruns, asset-sale pricing, competition, joint-venture partner liquidity and real estate market conditions.
- Lease revenue is concentrated in Atlanta, Charlotte, Austin, Phoenix and Tampa, increasing exposure to local economic and property-market conditions.
- The company had $3.7 million of letters of credit and performance bonds. Management stated that existing litigation is not expected to have a material adverse effect, although outcomes are inherently uncertain.
- The company adopted ASC 606 and ASU 2017-05 using modified retrospective methods. The filing states that ASC 606 had no cumulative-effect impact on previously reported amounts; ASU 2017-05 produced the $22.3 million equity adjustment.
- The common dividend declared was $0.065 per share, compared with $0.120 per share declared in Q1 2017.
Investor Verification Items
- Verify the company’s full-year 2018 guidance and reconcile it with Q1 FFO of $0.15 per diluted share.
- Monitor same-property occupancy, leasing spreads and renewal activity, particularly in the concentrated Atlanta, Charlotte, Austin, Phoenix and Tampa markets.
- Assess the ability to fund development, tenant-improvement obligations and dividends while operating cash flow is below capital expenditures.
- Review debt maturities, variable-rate exposure, covenant headroom and the availability of the $997 million unsecured credit facility.
- Evaluate exposure to unconsolidated joint-venture debt and the Carolina Square loan guarantee.
- Confirm the effect of property dispositions and newly operational properties on recurring NOI, FFO and cash flow.
- Distinguish the $22.3 million accounting adjustment from recurring earnings and cash generation.