Cousins Properties Incorporated — Form 10-Q Summary
Business context and reporting period
Cousins Properties 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 and Tampa. The filing covers the three and nine months ended September 30, 2018. At quarter-end, the portfolio included 27 operating properties totaling 15.1 million square feet and five projects under active development.
Key financial metrics
- Third-quarter revenue: $118.7 million, up from $113.2 million; rental property revenue was $115.4 million, up 5.4%.
- Nine-month revenue: $352.5 million, essentially flat versus $352.1 million, with rental property revenue up 1.9% to $342.5 million.
- Net income available to common stockholders: $19.5 million, or $0.05 per diluted share, versus $12.1 million, or $0.03, in the third quarter of 2017. Nine-month net income was $56.8 million, or $0.14 per diluted share, versus $184.9 million, or $0.45.
- Funds from operations: $67.5 million, or $0.16 per diluted share, in the third quarter, compared with $62.3 million, or $0.15. Nine-month FFO was $196.7 million, or $0.46 per diluted share, compared with $195.7 million, or $0.46.
- Net operating income: Consolidated NOI was $73.9 million in the quarter and $220.0 million for nine months, up 7.2% and 3.6%, respectively. Including unconsolidated ventures, total segment NOI was $80.9 million for the quarter and $241.6 million for nine months.
- Same-property performance: Same-property NOI increased 3.1% in the quarter and 2.6% for nine months. Management reported same-property NOI growth of 2.7% for consolidated and unconsolidated properties combined in the quarter.
- Cash flow: Nine-month cash flow from operating activities was $178.0 million, up from $161.2 million. Investing activities used $182.4 million, principally for development and property investment, while financing activities used $118.3 million.
- Liquidity: Cash and cash equivalents were $82.7 million at September 30, 2018; cash, cash equivalents and restricted cash totaled $83.1 million. The company had $998 million available under its $1.0 billion unsecured credit facility, subject to borrowing conditions, with $2 million utilized for letters of credit.
- Debt: Notes payable totaled $1.065 billion, down from $1.093 billion at December 31, 2017. The weighted-average maturity was six years. The company had no borrowings under its credit facility and repaid the $22.3 million mortgage secured by The Pointe in August 2018.
- Dividends: Common dividends declared were $0.065 per share for the quarter and $0.195 per share for nine months, compared with $0.060 and $0.240, respectively, in the prior-year periods.
Material changes versus the prior comparable period
- Quarterly net income and FFO increased, supported by higher rental revenue, improved property NOI and lower general and administrative expense.
- Nine-month GAAP net income declined substantially because 2017 included large gains from investment-property sales, including the sale of the American Cancer Society Center and other assets. The 2018 nine-month gain on sale was only $4.9 million versus $119.7 million in 2017.
- Interest expense increased 25.9% in the quarter and 12.3% for nine months, primarily because of higher LIBOR and lower capitalized interest as development projects were completed.
- General and administrative expense decreased 45.6% in the quarter and 14.6% for nine months, primarily due to lower long-term compensation expense.
- Development and capital expenditures fell to $132.5 million from $229.8 million, reflecting completion of projects and lower building-improvement spending. Development spending was $47.8 million versus $144.1 million.
- Operating-property activity benefited from the lease-up of 8000 Avalon and commencement of 864 Spring Street, while prior-year comparisons were affected by the sale of American Cancer Society Center and 2017 dispositions of Orlando and other properties.
- The company adopted ASU 2017-05, recording a $22.3 million cumulative increase to investments in unconsolidated joint ventures and equity. The filing states that adoption of ASC 606 did not change previously reported amounts.
- During the quarter, the company leased or renewed 485,598 square feet. Net effective rent on leases previously occupied within the prior year increased 25.8%.
Guidance, outlook, risks and unusual items
The filing references 2018 guidance but the provided filing text does not state a clear numerical guidance range. Management expects future tenant-improvement and leasing costs per square foot to remain generally consistent with the first nine months of 2018 and expects to fund future dividends through operating cash flow, asset sales, joint-venture distributions and, if necessary, additional debt.
Management’s strategy emphasizes a low-leverage balance sheet, selective development and acquisitions, and disposition of non-core assets. The company expects to refinance or repay maturing mortgage debt using asset-sale proceeds, debt or other capital sources.
- Material commitments included $93.8 million of unfunded tenant-improvement and construction obligations, $206.3 million of future ground and other operating lease obligations, and $2.7 million of letters of credit and performance bonds.
- Unconsolidated joint ventures had $343.8 million of aggregate third-party debt. The company guaranteed $9.2 million related to its 12.5% guarantee of the Carolina Square construction loan; that loan had a $74.0 million outstanding balance and was extended to May 2019.
- Key risks include refinancing and capital availability, interest-rate changes, leasing and tenant-credit risk, development delays and cost overruns, real estate market conditions in concentrated Sunbelt markets, joint-venture performance, debt-covenant compliance and continued REIT qualification.
- Management stated that ordinary-course litigation is not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Verify the company’s complete 2018 guidance range and reconcile it with reported FFO and operating trends.
- Assess leasing velocity, occupancy, renewal spreads and the sustainability of the reported 25.8% increase in net effective rent on comparable leases.
- Review the maturity schedule, variable-rate exposure, applicable debt covenants and the company’s ability to refinance or repay upcoming obligations.
- Monitor development commitments, including the $93.8 million of unfunded tenant-improvement and construction obligations and the status of 10000 Avalon and other projects.
- Evaluate cash generation after capital expenditures and dividends, given the $122.6 million decrease in cash, cash equivalents and restricted cash during the first nine months.
- Review the impact of asset dispositions and joint-venture activity on recurring earnings, as prior-year GAAP results benefited materially from property-sale gains.