Cousins Properties Incorporated — FY2014 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2014. Cousins is a self-managed Georgia REIT focused primarily on Class A office properties and opportunistic mixed-use developments in Sunbelt markets, particularly Georgia, Texas and North Carolina. At year-end, the portfolio included approximately 15.7 million square feet of office space, 80,000 square feet of retail space and 404,000 square feet of apartments.
On December 31, 2014, Cousins Real Estate Corporation merged into the REIT and certain assets and contracts were contributed to newly formed taxable REIT subsidiary Cousins TRS Services LLC, which began operations in 2015.
Key financial metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenues | $361.4 million | $210.7 million | 72% increase |
| Rental property revenues | $343.9 million | $194.4 million | 77% increase |
| Net operating income | $215.7 million | $138.1 million | 56% increase |
| Same-property NOI | $58.9 million | $56.8 million | 3.6% increase |
| Net income | $53.0 million | $126.8 million | 58% decrease |
| Net income available to common stockholders | $45.5 million | $109.1 million | 58% decrease |
| FFO available to common stockholders | $165.2 million, or $0.81 per share | $77.1 million, or $0.53 per share | 114% increase |
| Net income per diluted common share | $0.22 | $0.76 | Decrease |
| Cash flow from operating activities | $142.4 million | $137.3 million | 4% increase |
| Total assets at year-end | $2.67 billion | $2.27 billion | 17% increase |
| Notes payable at year-end | $792.3 million | $630.1 million | 26% increase |
NOI represented approximately 60% of reported revenue. Net income was affected by substantially higher depreciation and amortization and by the absence of significant 2013 gains from joint venture and property transactions. FFO, the company’s principal supplemental REIT operating measure, increased materially because of portfolio growth and excludes real estate depreciation and disposition gains.
Material changes versus the prior comparable period
- Acquired Fifth Third Center in Charlotte for $215 million and Northpark Town Center in Atlanta for approximately $348 million.
- Disposed of $259.1 million of non-core operating assets, including 777 Main, Mahan Village and two Birmingham office properties. The company exited Birmingham and Fort Worth and eliminated stand-alone grocery-anchored and power-center retail assets from its portfolio.
- Issued 26.7 million common shares in two offerings for net proceeds of $321.9 million, increasing common shares outstanding to approximately 216.5 million at year-end.
- Redeemed all remaining Series B preferred stock for $94.8 million, eliminating preferred stock from the capital structure.
- Expanded and amended the unsecured credit facility from $350 million to $500 million, extended maturity to May 2019 and reduced pricing spreads and fees.
- Leased or renewed 2.2 million square feet of office space. Same-property NOI increased 3.6%.
- Completed or advanced development projects, including Colorado Tower, Research Park V, Victory Center and Emory Point Phase II.
- Adopted new discontinued-operations accounting guidance in 2014, changing the classification of certain property dispositions and affecting comparability.
Debt, liquidity and cash flow
- Consolidated debt was $792.3 million at December 31, 2014, consisting of $652.1 million of fixed-rate mortgage debt and $140.2 million drawn on the variable-rate credit facility.
- Weighted-average consolidated debt interest rate was 3.99%; fixed-rate debt had a weighted-average rate of 4.11% and variable-rate debt was approximately 1.25% at year-end.
- The company reported $359.8 million of available borrowing capacity under the $500 million credit facility and was in compliance with its financial covenants.
- Net cash used in investing activities was $461.6 million, including $710.7 million of acquisition, development and tenant-asset expenditures and $244.5 million of property-sale proceeds.
- Net cash provided by financing activities was $318.2 million, principally reflecting equity issuance and debt activity. Year-end cash and cash equivalents were zero, with $5.0 million of restricted cash.
- Contractual obligations totaled $1.12 billion, including $792.3 million of debt, $176.3 million of interest commitments and $146.2 million of ground and operating lease commitments.
- The company paid $64.5 million of common and preferred dividends in 2014. The quarterly common dividend increased from $0.045 to $0.075 per share during 2014 and to $0.08 per share in the first quarter of 2015.
Guidance, outlook, risks and unusual items
Management expected to create value through leasing and lease-up of the existing portfolio, execution of the development pipeline, and opportunistic acquisitions and developments in core markets. Management indicated that comparable acquisition opportunities could decline in 2015 while development opportunities were expected to increase, and it expected to pursue projects in Decatur, Georgia and Chapel Hill, North Carolina.
- Key market risks include economic weakness, changes in office demand and rents, tenant defaults, lease expirations and required leasing concessions.
- Portfolio concentration is material: the top 20 tenants represented 41% of annualized base rent, the energy sector represented 24%, and Houston and Atlanta generated 45% and 39%, respectively, of fourth-quarter NOI.
- Houston exposure creates sensitivity to sustained low oil and natural-gas prices, including potential effects on tenant credit quality, occupancy, rents and property values.
- Development projects remain subject to construction delays, cost overruns, permitting, lease-up and stabilization risks. Estimated costs and stabilization dates are subject to change.
- The company’s business depends on continued access to asset sales, debt, equity and joint-venture capital. Failure to refinance or comply with debt covenants could materially affect liquidity.
- Unconsolidated joint ventures had aggregate third-party debt of approximately $395.0 million. Cousins guaranteed up to $8.6 million of the Emory Point Phase II construction loan.
- Reported results included significant disposition and joint-venture gains, including $12.5 million of gains on continuing-operations property sales and $21.2 million of discontinued operations. These items make GAAP earnings volatile and reduce comparability with 2013.
- No material adverse effect was expected from disclosed litigation or environmental matters based on management’s current assessment.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile 2014 FFO growth with portfolio acquisitions, share issuance and the absence of 2013’s large transaction gains.
- Assess occupancy, lease rollover and rent mark-to-market assumptions, particularly at Fifth Third Center, Northpark Town Center and other recently acquired assets.
- Monitor Houston tenant exposure and energy-sector concentration in a lower-oil-price environment.
- Review debt maturities, variable-rate exposure, credit-facility covenants and refinancing needs, including the $138.2 million due in 2017 and $105.7 million due in 2018.
- Evaluate funding requirements and leasing progress for Colorado Tower, Research Park V, Victory Center and Emory Point Phase II.
- Confirm the effect of the 2014 equity offerings on per-share FFO, dividend coverage and future dilution.
- Review joint-venture debt, guarantees, partner funding obligations and the treatment of unconsolidated assets and liabilities.
- Verify REIT qualification, required distributions and the tax consequences of the CREC merger and formation of the taxable REIT subsidiary.