Cousins Properties Incorporated 10-Q Summary
Business Context and Reporting Period
Cousins Properties Incorporated is a self-managed REIT focused primarily on Class A office properties and opportunistic mixed-use developments in Sun Belt markets, including Atlanta, Austin, Phoenix, Tampa, Charlotte, Dallas, and Nashville. As of September 30, 2023, the operating portfolio included approximately 18.8 million square feet of office space and 310,000 square feet of multifamily space. This report covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Financial Performance and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $198.8 million | $195.2 million | $605.9 million | $567.7 million |
| Net income available to common stockholders | $19.4 million | $80.6 million | $64.2 million | $142.7 million |
| diluted EPS | $0.13 | $0.53 | $0.42 | $0.95 |
| Funds from operations | $99.0 million | $104.4 million | $300.0 million | $308.6 million |
| FFO per diluted share | $0.65 | $0.69 | $1.97 | $2.06 |
| Consolidated NOI | $133.3 million | $126.6 million | $392.3 million | $364.0 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $277.5 million | $272.3 million |
Rental property revenue increased 2.6% in the third quarter and 7.6% for the first nine months. Consolidated NOI increased 5.3% in the third quarter and 7.8% for the first nine months. Based on consolidated rental property revenue, NOI margins were approximately 67.2% in Q3 2023 and 65.1% for the first nine months, calculated from reported figures.
Net income and EPS declined sharply because the prior-year periods included a $56.3 million gain from the sale of the Carolina Square joint venture interest. Interest expense also increased 46.9% in the quarter and 54.6% year to date, primarily because of the 2022 Term Loan, higher rates, the Terminus mortgage refinancing, and higher average credit-facility borrowings.
Balance Sheet, Debt, and Liquidity
- Total assets were $7.59 billion at September 30, 2023, compared with $7.54 billion at December 31, 2022.
- Notes payable were $2.42 billion, up from $2.33 billion at year-end 2022. The weighted-average maturity was 3.3 years.
- Debt consisted of $1.89 billion of unsecured debt and $529.1 million of secured mortgage debt. Approximately 86% of consolidated debt carried fixed interest rates.
- Cash and cash equivalents were $6.9 million. The $1.0 billion credit facility had $144.5 million drawn and $855.5 million of available borrowing capacity.
- The Company reported compliance with all unsecured and secured debt covenants. Credit-facility covenants include leverage, fixed-charge coverage, and interest-coverage requirements.
- Common dividends paid during the first nine months were $145.9 million, or $0.96 per share declared for the period.
Cash Flow and Capital Allocation
- Operating cash flow increased $5.2 million year over year to $277.5 million.
- Investing cash outflows were $212.1 million, primarily reflecting $198.3 million of property acquisition, development, and tenant-asset expenditures.
- Financing cash outflows were $63.6 million, including $145.9 million of common dividends, partly offset by net credit-facility borrowings.
- Capital expenditures declined from $262.8 million to $198.3 million, mainly because of lower leasing, building-improvement, and development spending versus 2022.
- The Company had $161.7 million of unfunded tenant-improvement and other future construction obligations.
Material Changes Versus the Prior Comparable Period
- Same-property NOI increased 4.1% in Q3 and 5.3% for the first nine months, supported by higher occupancy and rent growth.
- The Company leased or renewed 548,000 square feet during Q3 and 1.2 million square feet year to date. Straight-line net rent per square foot increased 28.7% for Q3 leases and 24.8% for year-to-date leases executed within the prior year.
- Fee income declined 81.0% in Q3 and 80.6% year to date because Norfolk Southern-related consulting and development contracts were substantially completed in 2022.
- Income from unconsolidated joint ventures fell 71.5% year to date, primarily because 2022 included gains and income related to asset and joint-venture-interest sales.
- The Company recorded a $507,000 gain on the September 2023 sale of an Atlanta land parcel.
- In May 2023, a joint venture refinanced the Medical Offices at Emory Hospital mortgage with an $83.0 million fixed-rate loan maturing in 2032.
Outlook, Commentary, Risks, and Unusual Items
Management stated that physical occupancy increased during 2023 and expects the gradual increase to continue, although the pace is difficult to estimate. Management believes high-quality, well-amenitized office properties may benefit as employers seek greater in-person collaboration and productivity. The Company expects sufficient liquidity to meet obligations for the foreseeable future and expects to fund future dividends primarily through operating cash flow, supplemented as necessary by asset sales, joint-venture distributions, debt, or equity capital.
- Hybrid and remote-work trends could reduce tenant demand, occupancy, leasing rates, and required office space.
- Higher interest rates and debt maturities in 2024 and 2025 create refinancing and funding risk, particularly for the August 2024 mortgage and the August 2024 and March 2025 term-loan maturities.
- WeWork leases represented approximately $6.5 million of nine-month 2023 rental revenue. Management did not expect a material 2023 impact from a potential WeWork bankruptcy, but disclosed possible exposure of approximately $1.2 million if two additional leases are rejected, plus projected November and December revenue of $902,000 at those properties.
- SVB Financial’s lease at Hayden Ferry was rejected in bankruptcy. The Company recorded a $1.6 million revenue reduction and recognized $2.3 million of cash-basis rental revenue during Q3. The property was expected to be removed from operations in the fourth quarter for redevelopment.
- No held-for-sale buildings or real estate impairment charges were reported. Management cautioned that future impairments could result from weaker economic or office-market conditions, underperformance, or shortened holding periods.
- Unconsolidated joint ventures had $282.9 million of third-party debt, generally non-recourse to Cousins, although certain non-recourse carve-out guarantees exist.
- The filing reported no material changes to previously disclosed risk factors and no material adverse effect expected from disclosed litigation based on current expectations.
Important Facts for Investors to Verify
- Confirm the sustainability of same-property NOI and rent growth as hybrid-work practices and office demand continue to evolve.
- Review the maturity and refinancing plans for debt due in 2024 and 2025, including the effect of prevailing interest rates.
- Assess available liquidity after considering the $161.7 million of unfunded tenant and construction commitments and ongoing dividends.
- Monitor WeWork lease performance, potential lease rejections, letters of credit, and any resulting revenue or valuation impacts.
- Distinguish recurring operating performance from prior-period gains, including the $56.3 million Carolina Square disposition gain.
- Evaluate the effect of redevelopment plans, capital expenditures, occupancy trends, and potential future impairment charges on cash flow and asset values.