Cousins Properties Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2014. Cousins is a self-managed REIT focused primarily on acquiring, developing, leasing, managing and owning Class A office properties in Sunbelt markets, particularly Georgia, Texas and North Carolina. At quarter-end, the portfolio included 16 office properties totaling 14.6 million square feet, six retail properties totaling 566,000 square feet, and two development projects.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Year-over-Year Change | Six Months Ended June 30, 2014 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenues | $84.5 million | Up 98.7% | $166.2 million | Up 105.8% |
| Rental property revenues | $80.0 million | Up 116% | $157.5 million | Up 124% |
| Net income | $2.6 million | Up from $0.8 million | $9.7 million | Down from $57.7 million |
| Net income available to common stockholders | $(2.2) million | Improved from $(5.6) million | $3.0 million | Down from $47.6 million |
| FFO available to common stockholders | $35.8 million, or $0.18 per share | Up from $14.2 million, or $0.12 | $72.0 million, or $0.37 per share | Up from $25.6 million, or $0.23 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $50.1 million | Up from $21.2 million |
| Net operating income | $51.3 million | Up from $28.6 million | $101.3 million | Up from $54.7 million |
Consolidated rental property NOI was $44.1 million for the quarter and $86.7 million year to date, representing margins of approximately 55.1% and 55.0%, respectively, on consolidated rental property revenues. Same-property NOI increased 7.7% in the quarter and 5.1% year to date.
Quarter-end assets were $2.28 billion, including $1.90 billion of real estate assets, $111.2 million of investments in unconsolidated joint ventures and $6.3 million of cash. Total liabilities were $838.6 million and total equity was $1.44 billion.
Notes payable totaled $665.9 million at June 30, 2014, compared with $630.1 million at December 31, 2013. The debt portfolio was principally fixed-rate mortgage debt, with $80.5 million outstanding under the unsecured credit facility. The estimated fair value of notes payable was $701.2 million.
The company had $6.3 million of cash and reported the ability to borrow approximately $418.6 million under its credit facility. The recast facility has total commitments of $500 million, with potential expansion to $750 million subject to additional lender commitments and other conditions.
Common dividends declared were $0.075 per share for the quarter and $0.150 per share year to date. The company had no preferred stock outstanding at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue and NOI increased substantially, primarily because of the September 2013 acquisitions of Greenway Plaza and 777 Main, as well as the earlier acquisitions of Post Oak Central and 816 Congress.
- Six-month net income and earnings available to common stockholders declined sharply because the 2013 period included approximately $57.6 million of gains on sales of investment properties, compared with $1.5 million in 2014.
- Six-month FFO increased to $72.0 million from $25.6 million, reflecting the larger operating portfolio and excluding most property-sale gains and real estate depreciation.
- Interest expense increased 54% year to date to $14.1 million, mainly because of mortgage loans associated with Post Oak Central and Promenade.
- Depreciation and amortization increased 165% year to date to $69.3 million, primarily due to the acquired properties.
- The company issued 8.7 million common shares for net proceeds of $98.5 million and redeemed all outstanding 7.5% Series B preferred shares for $94.8 million, excluding accrued dividends. The redemption resulted in a $3.5 million non-cash reduction to income available to common stockholders.
- The credit facility was amended in May 2014, increasing capacity from $350 million to $500 million, extending maturity to May 28, 2019, and reducing variable-rate spreads and certain fees.
- Operating cash flow improved to $50.1 million from $21.2 million, while investing cash outflows declined to $48.7 million from $242.4 million, largely because the prior-year period included major acquisitions.
Guidance, Outlook, Risks and Unusual Items
Management did not provide explicit full-year earnings or FFO guidance in the filing. Management intends to create value through portfolio lease-up, development projects and opportunistic acquisitions in targeted Sunbelt markets. The company leased or renewed 416,000 square feet during the second quarter and 870,000 square feet during the first half. Net effective office rent was $17.37 per square foot in the quarter and $16.26 per square foot for the first half.
In July 2014, the company entered into a definitive agreement to acquire Fifth Third Center, a 698,000-square-foot Class A office property in Charlotte, North Carolina, for a gross purchase price of $215.0 million. The property was expected to be approximately 82% leased at closing, with closing scheduled for early August 2014, subject to customary conditions. The company expected to fund the acquisition with equity proceeds or credit-facility borrowings. The $10.0 million earnest-money deposit was described as non-refundable, subject to title, survey and customary closing conditions.
Key commitments included $101.2 million of unfunded tenant improvements and leasing obligations, $149.7 million of future ground and office lease obligations, and $955.8 million of contractual obligations, including debt principal, interest and leases. Unconsolidated joint ventures had $419.3 million of third-party debt. The company had guarantees totaling approximately $8.2 million on certain joint-venture debt balances.
Principal risks include refinancing and capital availability, interest-rate volatility, debt-covenant compliance, leasing and tenant-credit risk, geographic concentration in Sunbelt markets, development delays and cost overruns, asset-sale execution, joint-venture partner liquidity, potential impairment charges, environmental and uninsured-loss exposure, and continued qualification as a REIT. Management stated that ordinary-course litigation was not expected to have a material adverse effect.
The filing identifies no material changes in critical accounting policies, no material weaknesses in disclosure controls, and no material changes in internal control over financial reporting. Future adoption of new accounting guidance for discontinued operations and revenue recognition was not expected to have a material effect based on the filing.
Important Facts for Investors to Verify
- Whether Fifth Third Center closed on the expected terms and how the $215.0 million acquisition was financed.
- Actual remaining borrowing capacity and compliance with the credit facility’s leverage, coverage and minimum-equity covenants.
- Lease-up, renewal spreads, occupancy and tenant-concentration trends, particularly at recently acquired properties.
- Whether operating cash flow and joint-venture distributions are sufficient to fund common dividends, tenant improvements and development spending.
- Refinancing plans for mortgage maturities, including the $131.9 million ACS Center loan maturing in 2017 and the $100.0 million 191 Peachtree Tower loan maturing in 2018.
- The effect of property sales, discontinued operations and non-cash preferred-stock issuance costs when comparing GAAP earnings with FFO.
- The company’s exposure to joint-venture debt, guarantees, variable-rate borrowings and potential future equity dilution.