Cousins Properties Incorporated — Q1 2014 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three months ended March 31, 2014. Cousins is a self-managed REIT focused primarily on acquiring, developing, leasing, managing and owning Class A office properties and opportunistic mixed-use developments in Sunbelt markets, particularly Georgia, Texas and North Carolina. At quarter-end, the portfolio included 16 operating office properties totaling 14.6 million square feet, six retail properties totaling 566,000 square feet and two projects under development.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenues | $81.7 million | $38.3 million | +114% |
| Rental property revenues | $77.5 million | $33.1 million | +134% |
| Income from continuing operations | $(0.1) million | $56.0 million | Down $56.1 million |
| Net income | $7.1 million | $56.9 million | Down $49.8 million |
| Net income available to common stockholders | $5.2 million | $53.2 million | Down $48.0 million |
| FFO available to common stockholders | $36.2 million; $0.19 per share | $11.5 million; $0.11 per share | FFO +216% |
| Net cash provided by operating activities | $7.0 million | $1.8 million | + $5.2 million |
| Cash and cash equivalents | $29.1 million | $6.0 million at quarter-end | Increased $28.1 million during Q1 2014 |
| Notes payable | $587.4 million | $630.1 million at December 31, 2013 | Down $42.7 million |
| Common dividend per share | $0.075 | $0.045 | Increased |
Total revenue converted to net income represents an approximately 8.7% net margin, although reported net income benefited from a $6.4 million gain on the sale of a discontinued property. Continuing operations were approximately breakeven because of higher depreciation and amortization and the absence of significant prior-year property-sale gains.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected the 2013 acquisitions of Greenway Plaza, 777 Main, Post Oak Central and 816 Congress. Rental property operating expenses also increased substantially with these acquisitions.
- Depreciation and amortization rose 204% to $34.1 million, while interest expense increased 45% to $7.2 million, principally because of acquired properties and related mortgage financing.
- Q1 2013 included significant gains related to the sale of 50% of the Company’s interest in Terminus 100 and the staged acquisition of Terminus 200. These gains did not recur in Q1 2014.
- Same-property NOI increased 2.2%. Office net rental rates increased 11% on new leases and 14% on renewals; retail renewal rates increased 6%.
- The Company leased or renewed 454,000 square feet during the quarter. Office net effective rent was $15.14 per square foot, and net effective rent on previously occupied space increased 12.7%.
- The Company issued 8.7 million common shares in March 2014 for net proceeds of $98.6 million. Weighted-average basic shares increased to 191.7 million from 104.1 million.
- Capital expenditures were $36.7 million versus $295.8 million in Q1 2013. The prior-year amount was elevated by major property acquisitions.
- Cash provided by financing activities was $39.7 million, compared with cash used of $27.4 million in Q1 2013, primarily because of the common equity offering and lower debt repayments.
Liquidity, Debt and Capital Resources
- At March 31, 2014, the Company had no borrowings outstanding under its unsecured Credit Facility, $29.1 million of cash and $349.0 million of available borrowing capacity.
- Total notes payable were $587.4 million, consisting primarily of property-level mortgage debt. The estimated fair value of notes payable was $610.2 million.
- On April 14, 2014, after quarter-end, the Company redeemed all outstanding 7.5% Series B preferred stock for $94.8 million, excluding accrued dividends, using cash on hand and $69.0 million of Credit Facility borrowings.
- The redemption is expected to eliminate approximately $1.8 million of quarterly preferred dividends and reduce fixed charges. The Company expects a $3.5 million non-cash reduction to Q2 2014 net income available to common stockholders related to original preferred issuance costs.
- Total contractual obligations were $878.3 million, including $573.5 million of mortgage notes, $140.7 million of interest commitments and $149.6 million of ground leases. Unfunded tenant improvements and other commitments totaled $102.6 million.
Outlook, Commentary, Risks and Unusual Items
- Management expects to pursue additional acquisitions, development projects and opportunistic investments during the remainder of 2014, funded through asset sales, Credit Facility borrowings, mortgage financing, equity issuance and joint ventures.
- Management expects tenant improvement and leasing costs per square foot to remain generally consistent with Q1 levels, based on anticipated leasing and renewal activity.
- The Company expects to fund common distributions primarily from operating cash flow, while periodically reviewing the common dividend in light of projected cash flows, REIT distribution requirements and debt covenants.
- Key risks include the availability and cost of capital, refinancing maturities, interest-rate volatility, leasing and tenant-credit risk, geographic concentration, development and construction risks, asset-sale execution, joint-venture liquidity, debt-covenant compliance and continued REIT qualification.
- Unconsolidated joint ventures had $434.0 million of aggregate third-party debt. Cousins had specified guarantees totaling approximately $8.2 million at quarter-end, subject to reduction or elimination upon meeting certain conditions.
- The Company sold 600 University Park Place, a 123,000-square-foot Birmingham office property, for $19.7 million and recognized a $6.4 million gain. Lakeshore Park Plaza was held for sale at quarter-end.
- Management stated that pending litigation and ordinary-course claims were not expected to have a material adverse effect. Disclosure controls and procedures were assessed as effective.
Important Facts for Investors to Verify
- Confirm the post-quarter-end preferred stock redemption, resulting Credit Facility balance and effect on fixed charges and distributions.
- Assess whether acquisition-driven revenue growth translates into sustained same-property NOI and recurring FFO growth.
- Review the maturity schedule, refinancing assumptions and covenant requirements for the Company’s mortgage debt and Credit Facility.
- Evaluate tenant improvement, leasing and development commitments, including the $102.6 million of unfunded tenant-related obligations.
- Review the financial condition, debt and guarantee exposure of unconsolidated joint ventures.
- Distinguish recurring operating performance from gains on property sales and other discontinued-operation items when assessing earnings quality.