Cousins Properties Incorporated — Q2 2012 Form 10-Q Summary
Business context and reporting period
Cousins Properties is a self-administered and self-managed REIT that develops, acquires, owns and manages primarily office and retail properties in Georgia, Texas and North Carolina. The filing covers the three and six months ended June 30, 2012. At quarter-end, the portfolio included interests in 7.4 million square feet of office space, 4.3 million square feet of retail space and two projects under development, plus commercial and residential land holdings. The company also managed or leased approximately 11 million square feet for third parties.
Financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $45.2 million | $39.9 million | $90.4 million | $83.2 million |
| Net income available to common stockholders | $6.4 million | $(4.7) million | $(6.7) million | $(12.6) million |
| Basic/diluted EPS | $0.06 | $(0.05) | $(0.06) | $(0.12) |
| FFO available to common stockholders | $13.2 million | $10.9 million | $26.6 million | $19.0 million |
| FFO per share | $0.13 | $0.11 | $0.26 | $0.18 |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $35.2 million | $27.1 million |
Q2 rental property revenues increased 14% to $35.6 million, while rental property operating expenses increased 12% to $14.7 million. Implied rental-property operating margin was approximately 58.8%, compared with approximately 58.2% in Q2 2011. Six-month rental-property operating income increased approximately 14% to $42.5 million.
At June 30, 2012, total assets were $1.14 billion, cash and cash equivalents were $3.0 million, restricted cash was $4.9 million, and notes payable were $461.0 million. Total debt declined from $539.4 million at December 31, 2011. The weighted-average interest rate on consolidated debt was 4.90%, and consolidated debt to undepreciated assets was 36%. Estimated fair value of notes payable was $483.7 million.
Six-month investing cash flow was $62.6 million, primarily reflecting $63.2 million of property-sale proceeds and $25.2 million of distributions from unconsolidated joint ventures, partly offset by $18.6 million of property acquisition, development and tenant-asset expenditures. Financing cash flow was $(99.7) million, including $430.9 million of credit-facility repayments, $105.9 million of new notes and construction-facility borrowings, and $15.8 million of common and preferred dividends. Cash declined by $1.8 million from year-end 2011.
Material changes versus the prior comparable period
- Revenue increased 13% in Q2 and 9% for the first six months, principally from the November 2011 acquisition of the Promenade office building and higher occupancy at The Avenue Forsyth.
- Third-party management and leasing revenue increased 31% in Q2 and 24% year to date, while fee income declined 19% and 17%, respectively, primarily because of lower leasing fees from the MSREF/Terminus 200 venture.
- Interest expense declined 20% in Q2 and 19% year to date because of lower average debt, debt repayments and increased capitalized interest. The benefit was partly offset by the new 191 Peachtree Tower mortgage.
- General and administrative expense declined 8% in Q2 and 9% year to date, reflecting lower salaries, benefits and director expenses.
- Income from unconsolidated joint ventures increased to $9.8 million in Q2 and $11.9 million year to date, largely because of the company’s share of the gain from the Ten Peachtree Place sale.
- Six-month net loss available to common stockholders improved by $5.9 million, but remained a loss because of a $12.2 million impairment charge on The Avenue Collierville and other non-cash depreciation and amortization.
- FFO increased 21% in Q2 and 40% year to date, although Q2 and year-to-date results included substantial gains and distributions associated with property and venture sales.
Guidance, outlook, risks and unusual items
Management did not provide explicit full-year earnings or FFO guidance in the filing. Management expects current commitments over the next 12 months to be funded through operating cash flow, credit-facility borrowings, mortgage financing and asset-sale proceeds. It expects to sell a significant portion of residential projects and land holdings over the next several years, while continuing to evaluate acquisitions, developments, joint ventures and potential equity or debt issuance.
The company amended its $350 million senior unsecured credit facility in February 2012, extending maturity to February 2016, adding a potential one-year extension and increasing borrowing capacity through an accordion feature to as much as $500 million. At June 30, $40.5 million was outstanding. Key covenants include minimum unencumbered interest coverage of 2.00, minimum fixed-charge coverage of 1.40 and maximum leverage of 60%.
Q2 asset dispositions included Galleria 75 for $9.2 million and The Avenue Collierville for $55.0 million. The Ten Peachtree Place joint venture sold its property for $45.3 million, producing approximately $5.0 million of net proceeds to Cousins and approximately $7.5 million of the company’s share of gain. The Collierville sale followed a $12.2 million first-quarter impairment charge.
Leasing activity included 186,000 square feet of office leases or renewals and 84,000 square feet of retail leases or renewals. Leasing percentages remained generally consistent with the prior quarter and year-end 2011. Atlanta and North Carolina experienced limited employment and demand growth, while Texas markets showed better job growth and lower unemployment; retail tenant sales increased.
Principal risks include refinancing and capital availability, interest-rate exposure, credit-facility covenant compliance, tenant defaults or failed renewals, property-sale pricing and closing risk, development cost overruns, joint-venture liquidity and debt obligations, impairment risk, litigation, uninsured losses and continued qualification as a REIT. The company’s share of unconsolidated joint-venture debt was approximately $156.4 million, including approximately $32.5 million recourse to the company. Significant guarantees include approximately $26.2 million for CF Murfreesboro, $2.9 million for Cousins Watkins and $3.4 million for EP I.
Most important facts for investors to verify
- Whether recurring property-level cash flow and occupancy trends support the $0.045 quarterly common dividend, in addition to preferred dividends.
- The sustainability of FFO after adjusting for property-sale gains, venture distributions and other unusual transactions.
- Actual availability under the credit facility and compliance with the 60% leverage, interest-coverage and fixed-charge covenants.
- Refinancing plans and valuation support for $414.6 million of mortgage notes, including $373.8 million maturing more than five years after June 30, 2012.
- Performance and leasing progress at Promenade, Mahan Village and the other development or repositioning projects.
- Potential obligations from unconsolidated joint ventures, guarantees, tenant-improvement commitments of $13.3 million and total contractual obligations of $630.2 million.
- Whether additional impairments may arise from residential, land or other non-core assets as the simplification strategy proceeds.