Cousins Properties Incorporated — Q1 2017 Form 10-Q Summary
Business Context and Reporting Period
Cousins Properties is a self-administered REIT focused primarily on Class A office and opportunistic mixed-use properties in Sunbelt markets. The filing covers the three months ended March 31, 2017. At quarter-end, the portfolio included 31 operating office properties totaling 16.2 million square feet, two operating mixed-use properties totaling 786,000 square feet, and six development projects.
Comparisons with Q1 2016 are significantly affected by the October 2016 Parkway merger and the related spin-off of Houston properties to New Parkway. Historical results therefore may not be indicative of future results.
Financial Performance and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $119.9 million | $47.9 million | +150% |
| Rental property revenues | $112.5 million | $45.4 million | +148% |
| Net operating income | $71.0 million | $27.5 million | +158% |
| Same-property NOI | $26.1 million | $24.8 million | +5.5% |
| Net income | $4.9 million | $22.8 million | Down $17.9 million |
| Net income available to common stockholders | $4.8 million | $22.8 million | Down $18.0 million |
| Diluted EPS | $0.01 | $0.11 | Down $0.10 |
| FFO | $67.0 million | $43.5 million | +54% |
| Diluted FFO per share | $0.16 | $0.21 | Down $0.05 |
| Operating cash flow | $23.1 million | $5.5 million | +$17.6 million |
Rental property operating expenses were $41.5 million, producing a consolidated rental-property NOI margin of approximately 63%. Net income margin on total revenues was approximately 4%. The decline in GAAP earnings and per-share FFO despite higher aggregate FFO reflects substantially higher depreciation and amortization, interest expense, transaction costs, and a larger share count following the Parkway merger and equity issuance.
Management reported 570,744 square feet of office leasing and renewals during the quarter. Weighted-average net effective rent was $18.66 per square foot, and leases previously occupied within the prior year achieved a 15.8% increase in net effective rent.
Balance Sheet, Debt, Liquidity, and Cash Flow
- Total assets were $4.21 billion at March 31, 2017, compared with $4.17 billion at December 31, 2016.
- Total notes payable were $1.11 billion, down from $1.38 billion at year-end, including $127.0 million of debt classified with the American Cancer Society Center as held for sale.
- Cash and cash equivalents were $35.8 million, plus $13.5 million of restricted cash.
- The $500 million unsecured credit facility had no borrowings and $499 million of available borrowing capacity at quarter-end. The facility matures in 2019.
- Debt to total market capitalization declined from 32.3% at December 31, 2016 to 29.8% at March 31, 2017, according to management.
- February’s issuance of 25.0 million common shares generated $211.8 million of net proceeds, which were used to reduce indebtedness.
- Operating activities provided $23.1 million, while investing activities used $74.0 million, principally for $70.7 million of development, acquisition, and tenant asset expenditures and the $13.4 million purchase of a tenant-in-common interest.
- Financing activities provided $51.0 million after borrowings, debt repayments, equity proceeds, and dividends.
- Declared common dividends were $0.12 per share for the quarter. Cash dividends paid were $23.6 million.
Material Changes and Unusual Items
- Aggregate results increased primarily because the Parkway merger added properties and operations, while the Houston portfolio was presented as discontinued operations in Q1 2016 and is no longer included in continuing operations.
- Depreciation and amortization increased to $54.9 million from $16.5 million, and interest expense increased to $9.7 million from $5.4 million, primarily because of acquired properties and assumed mortgage debt.
- Other income increased by $5.0 million, primarily from termination fees at Nascar Plaza, Hayden Ferry, and Northpark Town Center.
- Acquisition and transaction costs increased to $1.9 million, primarily related to the Parkway transactions. Management did not expect material additional merger-related costs.
- The Company purchased American Airlines’ remaining 25.4% interest in the 111 West Rio Building for $19.6 million and began consolidating the property. A $3.5 million loss was recognized in income from unconsolidated joint ventures in connection with the transaction.
- The American Cancer Society Center, a 996,000-square-foot Atlanta office property, was classified as held for sale and was expected to sell in Q2 2017.
Outlook, Commitments, and Risks
Management expects to create value through continued portfolio lease-up, development execution, and opportunistic investments in core Sunbelt markets. It expects future tenant improvement and leasing costs per square foot to remain generally consistent with Q1 levels. The filing does not provide formal full-year revenue, earnings, or FFO guidance.
Subsequent to quarter-end, the Company repaid the $128 million One Eleven Congress mortgage and the $101 million San Jacinto Center mortgage. It also closed a $350 million private placement of senior unsecured debt: $100 million was drawn in April 2017 at a fixed 4.09% rate for 10 years, and $250 million was scheduled to be drawn in July 2017 at a fixed 3.91% rate for eight years.
- Future capital needs include development, acquisitions, tenant improvements, leasing costs, debt maturities, dividends, and operating partnership distributions.
- Contractual obligations totaled $1.63 billion, including $991.6 million of mortgage debt, $179.9 million of interest commitments, and $210.8 million of ground and other operating lease obligations.
- Unfunded tenant improvement and construction commitments totaled $214.8 million.
- Unconsolidated joint ventures had $526.0 million of third-party debt. The Company guaranteed $3.4 million of EP II debt and $4.7 million of Carolina Square debt at quarter-end.
- Key risks include refinancing and capital availability, interest-rate changes, leasing and tenant credit risk, development cost overruns and delays, property-market concentration in Atlanta, Charlotte, and Austin, joint-venture partner liquidity, debt covenant compliance, REIT qualification, and risks associated with integrating Parkway.
- Management stated that existing litigation was not expected to have a material adverse effect, but litigation outcomes remain uncertain.
Important Facts for Investors to Verify
- Reconcile post-merger operating trends using comparable-property metrics rather than relying solely on reported year-over-year revenue growth.
- Verify the timing and proceeds from the expected ACS Center sale and the use of related debt repayment proceeds.
- Confirm completion and terms of the April and July 2017 private-placement debt tranches and the effect on leverage and interest expense.
- Evaluate upcoming mortgage maturities, including the debt classified as held for sale, against available liquidity and asset-sale or refinancing capacity.
- Assess whether operating cash flow and recurring FFO adequately support the $0.12-per-share dividend and planned development spending.
- Monitor leasing activity, same-property NOI, occupancy, tenant concessions, and renewal economics in the concentrated Atlanta, Charlotte, and Austin markets.
- Review joint-venture debt, construction-loan extensions, guarantees, and potential additional capital requirements.