Business Context and Reporting Period
Cousins Properties Incorporated is a self-administered and self-managed REIT focused primarily on Class A office and opportunistic mixed-use properties in Sunbelt markets, especially Georgia, Texas and North Carolina. The Form 10-Q covers the three and six months ended June 30, 2015. At quarter-end, the portfolio included 17 operating office properties totaling 16.1 million square feet, one operating mixed-use property totaling 484,000 square feet and three projects under active development.
The financial statements are unaudited. The company adopted the revised discontinued-operations guidance in 2014; consequently, certain property sales are presented in continuing operations rather than discontinued operations.
Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Rental property revenues | $96.2 million, up 20% | $186.2 million, up 18% |
| Total revenues | $97.9 million, up 16% | $189.9 million, up 14% |
| Net income available to common stockholders | $8.0 million, versus $(2.2) million | $15.2 million, versus $3.0 million |
| Net income per diluted share | $0.04, versus $(0.01) | $0.07, versus $0.02 |
| Funds from operations available to common stockholders | $45.2 million, or $0.21 per share | $91.2 million, or $0.42 per share |
| Net cash provided by operating activities | Not separately provided | $45.1 million, versus $50.1 million |
| Net cash used in investing activities | Not separately provided | $(65.9) million, versus $(48.7) million |
| Net cash provided by financing activities | Not separately provided | $22.8 million, versus $4.0 million |
| Cash and cash equivalents at period-end | Not separately provided | $2.0 million, versus $6.3 million at June 30, 2014 |
Consolidated rental-property net operating income was $54.8 million for the quarter and $106.9 million for the six months. This represents rental-property operating margins of approximately 56.9% and 57.4%, respectively. Same-property NOI increased 1.6% for the quarter and 3.4% for the six months. Net income margins on total revenue were approximately 8.1% for the quarter and 8.0% for the six months.
Total assets were $2.69 billion at June 30, 2015, compared with $2.67 billion at December 31, 2014. Notes payable were $849.8 million, compared with $792.3 million at year-end. The debt portfolio included a $202.0 million unsecured credit-facility balance and $647.8 million of mortgage debt. The credit facility had $297.0 million of additional borrowing capacity, excluding $1.0 million drawn under letters of credit.
The company declared common dividends of $0.08 per share for the quarter and $0.16 per share for the six months. Common dividends paid during the six months were $34.7 million.
Material Changes Versus Prior Comparable Period
- Rental revenue growth primarily reflected the October 2014 acquisition of Northpark Town Center, the August 2014 acquisition of Fifth Third Center, commencement of operations at Colorado Tower, higher rents and occupancy at selected properties, partly offset by the December 2014 sale of 777 Main.
- Fee and other revenue declined materially because of lower lease-termination fees.
- General and administrative expense declined by $1.9 million for the six months, primarily because of lower long-term incentive compensation expense.
- Interest expense increased $1.4 million for the six months, primarily due to the 816 Congress mortgage and higher average credit-facility borrowings, partly offset by higher capitalized interest.
- Operating cash flow decreased $5.0 million year over year, while investing cash outflows increased $17.1 million due to lower property-sale proceeds and higher acquisition, development and tenant expenditures.
- FFO increased to $91.2 million from $72.0 million for the six months, and FFO per share increased to $0.42 from $0.37.
- The 2014 preferred-stock redemption eliminated preferred dividends and related issuance-cost charges in 2015.
- During the second quarter, the company classified 2100 Ross, an 844,000-square-foot Dallas office property, as held for sale. The property had $86.8 million of assets and $3.1 million of liabilities classified as held for sale at June 30, 2015.
Guidance, Outlook, Risks and Unusual Items
Management expects to fund common dividends from operating cash flow and joint-venture distributions during the remaining quarters of 2015, subject to cash flows, REIT distribution requirements and credit-facility covenants. The company expects to sell 2100 Ross and potentially other operating properties in the second half of 2015 or in 2016 to repay borrowings and fund development.
In July 2015, the company purchased a 4.16-acre Atlanta site for $27.0 million for development of NCR Corporation’s headquarters. The planned approximately 485,000-square-foot office building is 100% pre-leased to NCR for 15 years. The purchase was funded with credit-facility proceeds.
The company formed a 50%-owned Carolina Square joint venture in May 2015 to develop a mixed-use property in Chapel Hill, North Carolina. The project has a construction loan capacity of $79.8 million, and each partner guarantees 12.5% of the loan amount.
Key risks include refinancing and repayment of debt, interest-rate volatility, dependence on asset sales and capital-market access, tenant leasing and renewal risk, geographic concentration in Atlanta and Houston, exposure to the energy industry, development cost overruns and delays, joint-venture liquidity, debt-covenant compliance and continued REIT qualification. Unconsolidated joint ventures had $225.2 million of third-party debt at quarter-end; the company guaranteed $2.5 million outstanding under the EP II construction loan and 12.5% of the Carolina Square construction loan capacity.
Outstanding commitments included $106.3 million of future tenant-improvement obligations, $146.0 million of ground and office lease obligations, $2.0 million of letters of credit and performance bonds, and $1.14 billion of total contractual obligations. Management stated that pending litigation was not expected to have a material adverse effect on liquidity, results of operations, business or financial condition.
There were no material changes to previously disclosed market risks or risk factors. Management concluded that disclosure controls and procedures were effective and identified no material changes in internal control over financial reporting.
Facts Investors Should Verify
- Whether the planned sale of 2100 Ross and other property sales close on schedule and at expected values.
- The company’s ability to refinance or repay mortgage maturities, including $23.1 million due within one year and $149.1 million due in one to three years.
- Credit-facility availability, leverage and compliance with dividend and other debt covenants.
- Actual leasing, occupancy and rent performance, including the 91.7% same-property leasing percentage and declining net effective rents on previously occupied space.
- Funding requirements and execution risk for NCR headquarters, Carolina Square and other development projects.
- Cash-flow coverage of dividends given $45.1 million of operating cash flow versus $34.7 million of common dividends paid during the six months.
- The effect of joint-venture debt, guarantees and variable-rate exposure on future liquidity.
- The comparability of 2015 results with 2014, particularly the impact of acquisitions, the sale of 777 Main and revised discontinued-operations presentation.