Cousins Properties Incorporated — FY2019 Form 10-K Summary
Business context and reporting period
Cousins Properties is a self-managed Georgia REIT focused primarily on Class A office properties and select mixed-use developments in Sunbelt markets, including Atlanta, Austin, Charlotte, Phoenix, Tampa, and Dallas. The filing covers the fiscal year ended December 31, 2019; fourth-quarter results are also presented.
- Portfolio at year-end: approximately 21.5 million square feet of office space and 310,000 square feet of mixed-use space.
- Total office portfolio leased: 93.6%; weighted average occupancy: 90.9%.
- Largest NOI markets in fourth-quarter 2019: Atlanta 33.8%, Austin 23.2%, and Charlotte 16.9%.
- The June 14, 2019 merger with TIER REIT added nine operating office properties totaling 5.8 million square feet, two development projects totaling 620,000 expected square feet, and additional development land.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues | $657.5 million | $475.2 million | +38.4% |
| Rental property revenues | $628.8 million | $463.4 million | +35.7% |
| Total NOI | $399.4 million | $297.2 million | +34.4% |
| Net income | $152.7 million | $80.8 million | +89.1% |
| Net income available to common stockholders | $150.4 million | $79.2 million | +90.0% |
| Net income per diluted share | $1.17 | $0.75 | +56.0% |
| Funds from operations | $328.8 million | $267.9 million | +22.7% |
| Diluted FFO per share | $2.53 | $2.51 | +0.8% |
| Dividends declared per common share | $1.16 | $1.04 | +11.5% |
| Cash flow from operating activities | $303.2 million | $229.0 million | +32.4% |
- Derived rental-property NOI margin was approximately 63.5% in 2019, compared with approximately 64.1% in 2018. Total NOI increased despite higher operating expenses, depreciation, interest, and transaction costs.
- Same-property NOI increased 2.6% on a GAAP basis and 4.8% on a cash basis for the year.
- Leasing activity totaled 3.1 million square feet. Second-generation net rent increased 21.3% on a GAAP basis and 7.7% on a cash basis.
- Year-end total assets were $7.15 billion, compared with $4.15 billion in 2018. Stockholders’ investment was $4.36 billion, compared with $2.77 billion.
Debt, liquidity, and cash flows
- Total notes payable were $2.22 billion at December 31, 2019, versus $1.06 billion at year-end 2018.
- The company had $1.7 billion of fixed-rate debt at a weighted average rate of 3.97% and $501.5 million of variable-rate debt. A 1% increase in variable rates would have increased 2019 interest expense by approximately $3.9 million based on average balances.
- The $1.0 billion unsecured credit facility had $251.5 million outstanding and $748.5 million of available borrowing capacity at year-end. Cash, cash equivalents, and restricted cash totaled $17.6 million.
- 2019 cash flow from investing activities was negative $357.4 million, including $482.6 million of property acquisition, development, and tenant-asset expenditures.
- Financing activities provided $69.2 million, primarily reflecting increased borrowing and the issuance of $650 million of senior unsecured notes, partly offset by debt repayments and dividends.
- Scheduled debt principal payments total $38.7 million in 2020, $266.4 million in 2021, $102.4 million in 2022, and $504.7 million in 2023.
- Unfunded development and tenant-improvement commitments totaled $205.4 million, substantially due within one year.
Material changes versus the prior comparable period
- The TIER merger materially expanded the balance sheet, property portfolio, debt, and share count. The company issued approximately 41.6 million post-reverse-split shares in the merger and recorded a total purchase price of approximately $1.60 billion.
- Merger-related costs were $52.9 million in 2019 versus $0.2 million in 2018, and interest expense rose 36.9% to $54.0 million.
- Fee income increased 182.7% to $28.5 million, primarily from development and consulting agreements with Norfolk Southern.
- The company purchased its partner’s interest in Terminus Office Holdings for $148 million, consolidated the properties, and recognized a $92.8 million gain on the acquisition achieved in stages.
- Gain on investment property transactions increased to $110.8 million from $5.4 million, primarily due to the Terminus transaction and the sale of Atlanta air rights.
- Capital expenditures increased to $482.6 million from $223.6 million, reflecting acquisitions, development, building improvements, and leasing activity.
- ASC 842 lease adoption resulted in recognition of a $56.3 million ground-lease right-of-use asset and related liability at January 1, 2019.
Guidance, outlook, commentary, risks, and unusual items
- Management characterized Sunbelt markets as supported by job growth, migration, positive office absorption, and relatively low supply, but provided no clear company-wide quantitative earnings or FFO guidance in the filing.
- Development pipeline estimated costs totaled $755.0 million, with the company’s share at $565.6 million. Key projects include Domain 12, Domain 10, 10000 Avalon, 300 Colorado, 100 Mill, and the mixed-use 120 West Trinity project.
- Management expected Domain 12 and 10000 Avalon to begin operations in 2020, Domain 10 in late 2020, 300 Colorado in early 2021, and 100 Mill in early 2022. Timing remains subject to construction and tenant-improvement progress.
- Truist exercised its option to purchase Hearst Tower for $455.5 million; closing was expected in March 2020. Hearst Tower and Woodcrest were classified as held for sale at year-end.
- In January 2020, the company agreed to sell its interest in Charlotte Gateway Village to Bank of America for $52.2 million. It also sold its remaining Wildwood interest and recognized a $1.4 million gain. In February 2020, it prepaid the $23.0 million Meridian Mark Plaza mortgage.
- Key risks include office leasing and tenant credit risk, concentration in Atlanta, Austin, and Charlotte, development cost overruns and delays, interest-rate and refinancing risk, debt covenant compliance, joint-venture obligations, environmental and uninsured casualty exposure, cybersecurity, impairment risk, and maintaining REIT qualification.
- The top 20 tenants represented 32.1% of annualized rent; no single tenant represented more than 6%. Approximately 19.1 million square feet of company-share leased space was subject to lease expirations, including 7.7% expiring in 2020 and 11.2% in 2021.
- Critical audit matters included impairment analysis, the Norfolk Southern transactions, and accounting and fair-value allocations for the TIER merger. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether the expected Hearst Tower and Gateway Village dispositions closed on the stated terms and how proceeds were used.
- Actual 2020 leasing, occupancy, rent growth, and tenant-retention results, especially in Atlanta, Austin, and Charlotte.
- Progress, final costs, pre-leasing, and stabilization timing for the development pipeline and the $205.4 million of unfunded commitments.
- Debt maturities beginning in 2021 and 2023, refinancing terms, variable-rate exposure, and compliance with leverage and coverage covenants.
- The recurring contribution of operations versus nonrecurring gains, including the $92.8 million Terminus gain, $110.8 million total investment-property gains, and $52.9 million of merger costs.
- Reconciliation of GAAP earnings to FFO and the sustainability of the $1.16 per-share dividend relative to operating cash flow and future capital needs.