Cousins Properties Incorporated — Form 10-Q Summary
Business context and reporting period
Cousins is a self-administered, self-managed REIT focused primarily on Class A office and opportunistic mixed-use properties in Sunbelt markets, particularly Georgia, Texas and North Carolina. The filing covers the three and nine months ended September 30, 2016. At quarter-end, the portfolio included 15 operating office properties totaling 14.6 million square feet, two operating mixed-use properties totaling 786,000 square feet, and five projects under development.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenues | $94.7 million | $98.1 million | $278.7 million | $288.0 million |
| Net income | $11.7 million | $53.6 million | $42.2 million | $68.8 million |
| Net income per diluted share | $0.06 | $0.25 | $0.20 | $0.32 |
| Funds from operations | $46.4 million | $52.5 million | $133.2 million | $143.6 million |
| FFO per diluted share | $0.22 | $0.24 | $0.63 | $0.66 |
| Consolidated rental NOI | $54.9 million | $54.7 million | $159.8 million | $161.6 million |
| Operating cash flow | Not separately provided | Not separately provided | $119.3 million | $103.0 million |
Q3 net income margin was approximately 12.3%, compared with approximately 54.6% in the prior-year quarter; the comparison was materially affected by a $37.1 million gain on property sales in Q3 2015. Consolidated rental NOI was approximately 57.9% of total revenue in Q3 2016.
- Same-property NOI increased 0.2% for the quarter and 2.2% for the nine-month period. Q3 same-property NOI growth was separately described by management as 3.6% in its overview, reflecting a differing presentation from the consolidated same-property table.
- The company leased or renewed 970,707 square feet during Q3. Net effective rent was $17.33 per square foot, and rent on leases previously occupied within the preceding year increased 27.9%.
- Cash and cash equivalents were $97.2 million at September 30, 2016, compared with $2.0 million at December 31, 2015.
- Total assets were $2.76 billion and total equity was $1.67 billion at September 30, 2016.
- Notes payable totaled $789.4 million, compared with $718.8 million at year-end 2015. The aggregate estimated fair value of debt was $915.0 million.
- The company had no borrowings under its unsecured credit facility at September 30, with $499.0 million of borrowing capacity available; $1.0 million was drawn under letters of credit.
- Common dividends declared were $0.08 per share per quarter, or $0.24 per share for the nine months. The company paid $50.5 million of common dividends during the nine-month period.
Cash flow, capital allocation and material changes
- Operating cash flow increased $16.2 million year over year to $119.3 million.
- Investing activities used $131.4 million, primarily reflecting $122.4 million of property acquisition, development and tenant-related expenditures and $24.9 million invested in unconsolidated joint ventures. This compared with $14.6 million of investing cash use in 2015, when property sale proceeds were substantially higher.
- Financing activities provided $107.4 million, including $270.0 million of new note proceeds, partly offset by $274.8 million of credit facility repayments and $13.7 million of share repurchases.
- Development expenditures rose to $69.9 million from $53.8 million, while operating building-improvement expenditures declined sharply to $2.1 million from $65.8 million. Leasing costs increased to $53.4 million from $17.5 million.
- General and administrative expense increased 47% in Q3 and 39% for the nine months, primarily from higher long-term incentive compensation and bonus expense.
- Acquisition and merger costs were $1.9 million in Q3 and $4.4 million for the nine months, compared with minimal costs in 2015.
- The company repurchased 1.6 million shares for $13.7 million in Q1 2016 before suspending the program in March because of the Parkway transaction. No ordinary repurchases occurred in Q2 or Q3.
Parkway transaction, outlook and unusual items
- On October 6, 2016, after the reporting date, Cousins completed its merger with Parkway Properties. Former Parkway common stockholders received approximately 183 million Cousins common shares, and former Parkway limited voting stockholders received approximately 7 million Cousins limited voting preferred shares.
- On October 7, 2016, Cousins spun off the combined Houston real-estate operations into New Parkway, which became a separate public company trading as PKY. The company expects the Spin-Off to result in discontinued operations in Q4 2016.
- The estimated value of assets and liabilities assumed in the merger was approximately $1.9 billion, but purchase-price allocation and other acquisition disclosures were incomplete at the filing date.
- Following the transactions, Cousins assumed ten consolidated mortgages with an aggregate stated principal balance of $542.0 million and an average stated interest rate of 5.24%. As of October 31, 2016, $200 million was outstanding under the credit facility.
- 191 Peachtree Tower was classified as held for sale at September 30 and sold in October for $268 million. Management expected to recognize a gain in Q4. The related $99.2 million mortgage was repaid, with a $3.7 million prepayment penalty.
- The company entered into $120 million and $150 million fixed-rate mortgages secured by Colorado Tower and Fifth Third Center, respectively, in September 2016.
- No formal earnings or operating guidance was provided. Management expects future distributions to be funded by operating cash flow, asset-sale proceeds, joint-venture distributions and, if necessary, borrowings. It expects tenant-improvement and leasing costs per square foot to remain generally consistent with the first nine months of 2016.
Risks, contingencies and commitments
- Contractual obligations totaled $1.22 billion at September 30, including $892.1 million of mortgage principal, $183.8 million of interest commitments and $143.4 million of ground-lease obligations.
- Unfunded tenant improvements and other commitments totaled $79.0 million. Letters of credit and performance bonds totaled approximately $1.9 million.
- Unconsolidated joint ventures had $397.1 million of third-party debt. Cousins guaranteed up to $3.4 million of EP II debt and $1.2 million related to the Carolina Square construction loan as of quarter-end.
- Key risks include refinancing and debt-covenant compliance, interest-rate volatility, leasing and tenant-credit risk, development delays and cost overruns, access to capital, joint-venture performance, REIT qualification, and integration of the expanded Parkway portfolio.
- Following the transaction, TPG received board nomination and committee rights while owning at least 5% on an as-converted basis, and may influence governance, change-of-control matters and future share sales.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect, although specific outcomes cannot be assured.
Investor verification checklist
- Verify the final purchase-price allocation, acquired assets and liabilities, pro forma results and merger-related costs for the Parkway transaction.
- Assess the Q4 2016 gain on the 191 Peachtree Tower sale, the $3.7 million debt-prepayment penalty and the accounting treatment of the Houston Spin-Off.
- Reconcile post-transaction debt, credit-facility borrowings, maturities and covenant headroom.
- Review occupancy, lease expirations, leasing spreads and tenant-improvement requirements across the expanded portfolio.
- Evaluate whether operating cash flow and asset-sale proceeds adequately support dividends, development spending and debt repayments.
- Distinguish GAAP net income from FFO and NOI, both of which exclude or adjust for significant non-operating items and are not substitutes for liquidity measures.