Cousins Properties Incorporated: FY2017 Form 10-K Summary
Business context and reporting period
Cousins Properties is a self-administered REIT focused primarily on Class A urban office properties and mixed-use developments in Sunbelt markets, including Atlanta, Charlotte, Austin, Phoenix and Tampa. The filing covers the fiscal year ended December 31, 2017, with quarterly information for the fourth quarter.
At year-end, the Company had interests in approximately 14.2 million square feet of office space and 310,000 square feet of mixed-use space. Cousins owns approximately 98% of Cousins Properties LP, through which substantially all operations are conducted.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenues | $466.2 million | $259.2 million | +79.8% |
| Rental property revenues | $446.0 million | $249.8 million | +78.5% |
| Net operating income | $282.2 million | $152.9 million | +84.5% |
| Same-property NOI | $89.9 million | $86.1 million | +4.4% |
| Net income | $220.0 million | $80.1 million | +174.6% |
| Net income available to common stockholders | $216.3 million | $79.1 million | +173.4% |
| FFO | $259.9 million | $160.6 million | +61.9% |
| Diluted EPS | $0.52 | $0.31 | +$0.21 |
| Diluted FFO per share | $0.61 | $0.63 | -$0.02 |
| Dividends declared per share | $0.30 | $0.24 | +$0.06 |
Results benefited materially from the 2016 Parkway merger and were also affected by 2017 asset sales. The filing cautions that historical results may not be indicative of future performance.
Fourth-quarter 2017 revenue was $114.1 million, net income was $31.9 million, net income available to common stockholders was $31.4 million, and diluted EPS was $0.07.
Cash flow, margins, debt and liquidity
- Net cash provided by operating activities was $211.6 million, compared with $117.7 million in 2016.
- Net cash provided by investing activities was $112.1 million, including $370.9 million of investment-property sale proceeds and $320.0 million of property acquisition, development and tenant-asset expenditures.
- Net cash used in financing activities was $169.3 million. Common dividends paid were $99.2 million.
- Cash, cash equivalents and restricted cash totaled $205.7 million at December 31, 2017, versus $51.3 million at December 31, 2016.
- Total notes payable were $1.09 billion, down from $1.38 billion. Net debt to EBITDA improved to 3.75x from 5.22x.
- The Company had no borrowings under its $500 million credit facility at year-end, with $499 million of available borrowing capacity and $1 million drawn under letters of credit.
- Debt consisted of $848.8 million of fixed-rate debt at a weighted average rate of 3.86% and $250.0 million of variable-rate debt, primarily the term loan.
- Weighted average interest rate on consolidated debt was 3.61%. A 1% increase in variable interest rates would have increased 2017 interest expense by approximately $3.1 million based on average variable-rate balances.
- Property-level operating portfolio occupancy was 94.1% on a company-share basis; same-property leasing was 92.6% at year-end.
Material changes versus the prior comparable period
- Revenue, NOI, operating cash flow and net income increased substantially, primarily because 2017 included a full year of operations from properties acquired in the Parkway transactions.
- Same-property NOI increased 4.4% on a GAAP basis and 5.3% on a cash basis. Same-property second-generation rents increased 19.6% on a GAAP basis and 6.9% on a cash basis.
- Depreciation and amortization doubled to $196.7 million, primarily due to the Parkway transactions.
- Interest expense increased 25.8% to $33.5 million because of the term loan and 2017 senior notes, partly offset by mortgage repayments.
- The Company issued 25 million common shares for gross proceeds of $212.9 million and used the net proceeds primarily to reduce indebtedness.
- Cousins issued $350 million of senior unsecured notes: $100 million due in 2027 at 4.09% and $250 million due in 2025 at 3.91%.
- The Company repaid four Parkway-assumed mortgage loans totaling approximately $359 million and also repaid the $127 million mortgage on the American Cancer Society Center following its sale.
- Asset dispositions included the American Cancer Society Center for $166 million, three Orlando properties for $208.1 million, Emory Point for $199 million through joint ventures, and the Company's Courvoisier Centre interest.
- The Company purchased the remaining 25.4% interest in 111 West Rio for $19.6 million and consolidated the property.
Development, outlook, risks and unusual items
- Five development projects were in process at year-end. The Company's share of estimated project costs was approximately $490.5 million, with $311.2 million incurred.
- Projects included NCR's 864 and 858 Spring Street developments in Atlanta, Dimensional Place in Charlotte, 120 West Trinity in Atlanta and 300 Colorado in Austin. Several projects were substantially or fully leased before completion.
- Avalon 8000 in Atlanta and Carolina Square in Chapel Hill were completed and commenced operations in 2017. Initial occupancy at NCR Phase I occurred January 1, 2018.
- In January 2018, the Company replaced its credit facility with a $1 billion facility maturing in 2023, expandable to $1.5 billion subject to additional commitments and other conditions.
- The Company expects to fund future obligations through operating cash flow, asset sales, joint-venture distributions, debt, equity and other capital sources. No formal earnings guidance is provided in the filing.
- Contractual obligations totaled $1.51 billion, including $1.10 billion of principal debt, $204.6 million of interest commitments and $207.5 million of ground-lease obligations. Unfunded development and tenant-improvement commitments totaled $46.8 million.
- Unconsolidated joint ventures had $338.6 million of third-party debt. Cousins guaranteed 12.5% of the Carolina Square construction loan, which had $64.4 million outstanding at year-end, and also provided completion-related guarantees.
- Principal risks include tenant concentration, lease expirations, exposure to Atlanta, Charlotte and Austin, economic and real-estate-market conditions, development delays and cost overruns, refinancing and interest-rate risk, joint-venture obligations, impairment risk, environmental liabilities, cybersecurity, REIT qualification and changes in tax law.
- The top 20 tenants represented 31% of annualized base rental revenue; no single tenant represented more than 6%. For the fourth quarter, Atlanta, Charlotte and Austin generated 33.9%, 22.4% and 19.7% of property NOI, respectively.
- The filing reports no legal proceedings expected to have a material adverse effect. Management and the auditors concluded that disclosure controls and internal control over financial reporting were effective.
- The Company adopted certain cash-flow and business-definition accounting standards in 2017 and adopted revenue recognition and nonfinancial-asset derecognition standards in 2018. The filing states that ASC 606 was not expected to require material financial-statement adjustments.
Important facts for investors to verify
- Reconcile reported growth with the impact of the Parkway merger, asset dispositions and changes in discontinued operations.
- Review FFO, NOI and same-property NOI reconciliations because these are non-GAAP measures and may not be comparable across issuers.
- Assess lease rollover exposure, particularly the 777,011 square feet and $21.0 million of contractual rent expiring in 2018.
- Confirm development budgets, leasing status, stabilization dates and remaining funding needs for the five projects under development.
- Evaluate debt maturities, including $261.3 million scheduled in 2021 and $97.0 million in 2022, along with variable-rate exposure and covenant compliance.
- Review joint-venture debt, guarantees, completion obligations and potential capital calls, especially for Carolina Square.
- Assess geographic and tenant concentration, refinancing availability, market rents, occupancy trends and potential impairment charges.
- Verify the effect of the January 2018 credit-facility refinancing and subsequent accounting-standard adoptions on liquidity, leverage and reported results.