Cousins Properties Incorporated: FY2016 Form 10-K Summary
Business Context and Reporting Period
For the fiscal year ended December 31, 2016, Cousins Properties operated as a self-administered, self-managed REIT focused primarily on Class A office properties and opportunistic mixed-use developments in Sunbelt markets. The company completed its merger with Parkway Properties on October 6, 2016, and spun off the combined Houston operations to New Parkway on October 7, 2016. The filing’s full-year results are therefore materially affected by the merger, spin-off, property sales, and related accounting adjustments.
At year-end, the portfolio included approximately 16.2 million square feet of office space and 786,000 square feet of mixed-use space. The company’s share of total portfolio occupancy was 97.0%. Its largest NOI exposures were Atlanta, Charlotte, and Austin.
Key Financial Metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenues | $259.2 million | $204.4 million | +26.8% |
| Rental property revenues | $249.8 million | $196.2 million | +27.3% |
| Net operating income | $152.9 million | $113.7 million | +34.5% |
| Same-property NOI | $41.0 million | $38.6 million | +6.2% GAAP |
| Net income | $80.1 million | $125.6 million | -36.2% |
| Net income available to common stockholders | $79.1 million | $125.5 million | -37.0% |
| Diluted EPS | $0.31 | $0.58 | Decreased |
| Funds from operations | $160.6 million; $0.63 per diluted share | $192.7 million; $0.89 per diluted share | Decreased |
| Net cash provided by operating activities | $111.3 million | $151.7 million | -26.6% |
NOI represented approximately 61% of consolidated rental property revenues in 2016. Management reported a 20.0% increase in second-generation GAAP net rent per square foot and a 10.3% increase on a cash basis. The company leased or renewed approximately 2.4 million square feet.
Year-end total assets were $4.17 billion, compared with $2.60 billion in 2015. Notes payable were $1.38 billion, compared with $718.8 million, and debt to total market capitalization was 32.3%, compared with 32.2%. The weighted-average interest rate on consolidated debt was 4.25%.
Cash and cash equivalents were $35.7 million at year-end. The $500 million unsecured credit facility had $134.0 million drawn and $365.0 million of stated available borrowing capacity. The company stated that it was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- The Parkway merger added substantial assets, liabilities, properties, markets, and noncontrolling interests. The company’s operating portfolio increased from approximately 15.4 million square feet immediately before the transaction to 17.0 million square feet at year-end.
- Revenue and NOI increased primarily because of the Parkway transaction and related portfolio expansion. Same-property NOI also improved, driven principally by higher occupancy at 816 Congress and Promenade.
- Net income and FFO declined despite higher NOI. Results included $24.5 million of acquisition and merger costs, increased depreciation and amortization, higher interest expense, and a $5.2 million loss on extinguishment of debt. The prior year also benefited from significant asset-sale gains.
- Operating cash flow declined by $40.4 million, primarily because of Parkway transaction expenses and the timing of property expense payments.
- Interest expense increased 17.2% to $26.7 million, primarily from debt assumed in the Parkway transaction and new mortgage financing.
- General and administrative expense increased 51.3% to $25.6 million, primarily due to fluctuations in stock-based compensation and the larger post-merger organization.
- The company sold several properties, including One Ninety One Peachtree for approximately $267.5 million, Two Liberty Place for $219 million through a joint venture, Lincoln Place for $80 million, The Forum for $70 million, and 100 North Point Center East for $22 million.
- Capital expenditures were $193.5 million, including $109.8 million for projects under development and $50.0 million for leasing costs.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management did not provide a specific quantified earnings or FFO outlook in the filing. Management expected to reduce indebtedness in 2017 through potential property sales and/or common equity issuance and intended to continue recycling capital toward acquisitions, development, and strategic portfolio repositioning.
Development projects under construction or active development had aggregate estimated costs of approximately $628 million, including Carolina Square, NCR Phase I and Phase II, 8000 Avalon, and Dimensional Place. Estimates of final costs, lease-up, completion dates, and stabilization remain subject to change.
The most significant near-term liquidity issue was debt maturity. Five non-recourse mortgage loans totaling approximately $495.9 million were scheduled to mature in 2017, including $360.0 million assumed in the Parkway transaction and an additional $127.5 million loan. The company stated that it did not then have sufficient liquid funds to repay these obligations and expected to use asset sales, unsecured debt, mortgage financing, or common equity.
Additional commitments included $135.7 million of unfunded development and tenant-improvement obligations and $3.8 million of letters of credit and performance bonds. Unconsolidated joint ventures had approximately $526.5 million of third-party debt, most of it non-recourse, with certain guarantees and carve-out obligations from Cousins.
- Tenant concentration: the top 20 tenants represented 30% of annualized base rental revenue; no individual tenant exceeded 6%.
- Geographic concentration: for the fourth quarter, 42% of NOI came from Atlanta, 18% from Charlotte, and 17% from Austin.
- Leasing and occupancy risk, including renewals, tenant concessions, declining rents, and tenant credit deterioration.
- Interest-rate, refinancing, debt-covenant, and liquidity risk, particularly in connection with 2017 maturities and variable-rate debt.
- Integration and execution risks related to the Parkway merger and New Parkway spin-off, including potential unknown liabilities, operating disruption, and failure to achieve anticipated synergies.
- Development risks involving construction delays, cost overruns, permitting, pre-leasing, and stabilization.
- Real estate impairment, environmental, casualty, insurance, joint venture, cybersecurity, and REIT qualification risks.
- The company recorded a $4.5 million impairment loss related to residential land associated with Callaway Gardens and withdrew from that joint venture in January 2017.
The company declared $0.24 per common share of dividends for 2016 and declared and paid the fourth-quarter dividend of $0.06 per share in January 2017. Management stated that future distributions would depend on operating cash flow, asset sales, joint venture distributions, financing availability, REIT requirements, and debt covenants.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2016.
Most Important Facts for Investors to Verify
- Progress in refinancing or repaying the approximately $495.9 million of 2017 mortgage maturities and the effect on leverage, interest expense, and common equity.
- Actual post-merger operating performance, including occupancy, leasing spreads, tenant retention, and realized Parkway synergies.
- Whether the $628 million development pipeline remains on budget and achieves the stated leasing, initial occupancy, and stabilization targets.
- Cash flow coverage of dividends, recurring capital expenditures, tenant improvements, and development commitments.
- Exposure to major tenants and concentrated Atlanta, Charlotte, and Austin markets, including lease expirations of 5.6% of leased space in 2017 and 7.4% in 2018.
- Potential changes in the company’s capital recycling strategy, asset-sale gains, impairment charges, and non-GAAP FFO reconciliation.
- Terms and future availability of the credit facility, compliance with financial covenants, and sensitivity to higher variable interest rates.
- Guarantees and other obligations associated with unconsolidated joint ventures, including construction loans and non-recourse carve-outs.