Cousins Properties Incorporated — Q1 2013 Form 10-Q Summary
Business context and reporting period
Cousins Properties is a self-administered and self-managed REIT focused primarily on acquiring, developing, leasing, managing and owning Class-A office and retail properties in Sunbelt markets, particularly Georgia, Texas and North Carolina. The filing covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. At quarter-end, the portfolio included 13 office properties totaling 9.0 million square feet, 16 retail properties totaling 3.7 million square feet, and two projects under development.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $41.3 million | $34.7 million | +$6.6 million, 19% |
| Rental property revenue | $36.1 million | $29.6 million | +$6.6 million, 22% |
| Income from continuing operations | $56.9 million | $(1.7) million | Improved primarily from property-sale gains |
| Net income attributable to controlling interest | $56.4 million | $(9.9) million | Improved primarily from property-sale gains |
| Net income available to common stockholders | $53.2 million | $(13.1) million | Improved primarily from property-sale gains |
| Net income per diluted common share | $0.51 | $(0.13) | Improved |
| Funds from operations available to common stockholders | $11.5 million, or $0.11 per share | $13.5 million, or $0.13 per share | Down 15% |
| Net cash provided by operating activities | $1.8 million | $10.2 million | Down $8.5 million |
| Cash and cash equivalents at March 31 | $6.0 million | $4.0 million | Year-over-year comparison |
| Notes payable at March 31 | $344.8 million | Not directly comparable in the filing | Down from $425.4 million at December 31, 2012 |
Rental property operating expenses were $16.3 million, producing consolidated rental property net operating income of approximately $19.8 million and an implied rental property margin of approximately 55%. Interest expense declined 21% to $4.9 million. Depreciation and amortization increased 17% to $12.3 million. Common and preferred dividends paid totaled $7.9 million during the quarter, including a common dividend of $0.045 per share.
Material changes versus the prior comparable period
- Revenue benefited from the February 2013 acquisition of Post Oak Central, the 2012 acquisition of 2100 Ross, improved occupancy and recovery income at 191 Peachtree Tower, and the commencement of operations at Mahan Village.
- Revenue was partially reduced by the sale of 50% of the Company's interest in Terminus 100. Fee income increased 25%, while other income declined because Q1 2012 included a $1.0 million settlement payment.
- The Company acquired the remaining 80% interest in Terminus 200 for $53.8 million, repaid the related $74.6 million mortgage, contributed Terminus 100 and Terminus 200 to Terminus Office Holdings LLC, and sold 50% of that venture to institutional investors advised by J.P. Morgan Asset Management for $112.2 million.
- The Terminus transactions generated a $19.7 million gain from the step acquisition of Terminus 200 and a $37.1 million gain from the contribution and sale transaction. These gains drove the substantial increase in GAAP earnings.
- The Company acquired Post Oak Central, a 1.3 million-square-foot Houston office complex, for $230.9 million. The property was 92% leased at closing and was acquired with redevelopment potential.
- Property acquisition, development and tenant asset expenditures increased to $295.8 million from $8.0 million, primarily because of the Post Oak Central and Terminus 200 transactions.
- FFO declined despite higher revenue because of lower joint-venture income, higher depreciation and operating expenses, and the loss of fee income following the 2012 sale of the third-party management and leasing business.
- Discontinued-operations losses declined to $86,000 from $9.7 million. Q1 2012 included a $12.2 million impairment loss related to Avenue Collierville and results from the subsequently sold third-party management and leasing business.
Liquidity, debt and cash flow
- Cash declined from $176.9 million at December 31, 2012 to $6.0 million at March 31, 2013, primarily reflecting acquisitions, debt repayment and property investment.
- At quarter-end, the Company had $55.0 million outstanding under its unsecured credit facility. Consolidated debt had a weighted-average interest rate of 4.53%, excluding loan amortization, and consolidated debt to undepreciated assets was 26%.
- Consolidated notes payable had an estimated fair value of $364.8 million at March 31, 2013. The filing identifies $69.2 million of variable-rate debt and $275.6 million of fixed-rate debt.
- Cash used in investing activities was $145.2 million, including $295.8 million of property acquisition, development and tenant expenditures, partially offset by $112.7 million of property-sale proceeds and $39.6 million of joint-venture distributions.
- Cash used in financing activities was $27.4 million, including $75.1 million of note repayments, $47.0 million of credit-facility repayments, $102.0 million of credit-facility borrowings, and $7.9 million of common and preferred dividends.
- The Company had total contractual obligations of $434.3 million and additional commitments of $26.7 million at March 31, 2013, including $24.5 million of future tenant-improvement obligations, $2.3 million of letters of credit and performance bonds, and approximately $15.9 million of future ground and office lease obligations.
- Unconsolidated joint ventures had $534.3 million of third-party debt, of which $40.6 million was recourse to the Company. Notable guarantees included $26.2 million related to CF Murfreesboro, $11.5 million related to an EP I construction loan, and $2.9 million related to Cousins Watkins loans.
Guidance, outlook, commentary, risks and unusual items
- Management stated that its markets had positive office absorption, stable portfolio rental rates and projected job growth generally above the national average, with Texas markets expected to be strongest.
- The Company leased or renewed 567,000 square feet of office and retail space during the quarter.
- Subsequent to quarter-end, the Company issued 16.5 million common shares for net proceeds of $165.1 million, acquired 816 Congress Avenue in Austin for $102.4 million, and announced redemption of all outstanding 7.75% Series A preferred stock for $74.8 million on May 13, 2013.
- Management expected the post-quarter equity offering, Austin acquisition and preferred-stock redemption to improve portfolio quality and geographic diversity, reduce leverage and fixed charges, and lower preferred dividends.
- As of April 30, 2013, the Company reported $19.8 million of cash and no credit-facility borrowings. On May 3, 2013, a joint venture refinancing generated $14.3 million of proceeds to the Company.
- Management may fund future acquisitions and development through asset sales, credit-facility borrowings, mortgage financing, common or preferred equity, and joint-venture formations. The business model depends on continued access to capital and recycling of assets.
- Key risks include refinancing and debt-covenant risk, interest-rate volatility, leasing and tenant-credit risk, development cost overruns and delays, asset-sale pricing, joint-venture liquidity, market conditions, environmental and regulatory liabilities, and continued qualification as a REIT.
- Management reported no material change in previously disclosed risk factors, no material adverse expected effect from disclosed litigation, and effective disclosure controls and procedures.
Most important facts for investors to verify
- Whether the large Q1 GAAP profit is appropriately evaluated separately from recurring operating performance, given the $57.2 million of property-sale gains.
- The sustainability of recurring FFO, which declined to $0.11 per share despite higher revenue.
- The effect of the April equity offering, Austin acquisition and Series A preferred-stock redemption on leverage, liquidity, fixed charges and per-share results.
- Lease-up, tenant retention and redevelopment performance at Post Oak Central, 816 Congress Avenue, 2100 Ross and other renovation projects.
- Debt maturities, refinancing availability, variable-rate exposure, credit-facility covenants and the Company's ability to fund tenant improvements and development spending.
- Potential obligations under unconsolidated joint-venture debt guarantees, particularly the $26.2 million CF Murfreesboro repayment guarantee and other disclosed guarantees.
- Whether operating cash flow is sufficient to fund dividends, since Q1 operating cash flow of $1.8 million was below cash dividends paid of $7.9 million.