COUSINS PROPERTIES INC annual report, FY2015

Cousins Properties Incorporated — FY2015 Form 10-K Summary

Business context and reporting period

Cousins Properties Incorporated is a self-administered and self-managed Georgia REIT focused primarily on Class A office properties and opportunistic mixed-use developments in Sunbelt markets, particularly Georgia, Texas and North Carolina. The filing covers the fiscal year ended December 31, 2015, with comparative data for 2014 and 2013. The company operated approximately 14.8 million square feet of office space and 786,000 square feet of mixed-use space at year-end.

During 2015, Cousins shifted investment emphasis from acquisitions toward development, leasing and portfolio optimization. Its consolidated operating portfolio was 98% leased at year-end, and the weighted-average remaining office lease term was approximately seven years.

Financial performance and key metrics

Metric	2015	2014	Change
Total revenues	$381.6 million	$361.4 million	+5.6%
Rental property revenues	$373.1 million	$343.9 million	+8.5%
Net operating income	$216.9 million	$188.0 million	+15.4%
Net income available to common stockholders	$125.5 million	$45.5 million	+175.7%
Net income per diluted common share	$0.58	$0.22	+0.36
FFO available to common stockholders	$192.7 million	$165.2 million	+16.7%
FFO per diluted share	$0.89	$0.81	+9.9%
Net cash provided by operating activities	$151.7 million	$142.4 million	+6.5%

Consolidated rental property NOI was $216.9 million, including $150.4 million from same-property operations and $66.5 million from non-same-property operations. Same-property NOI increased 3.5% on a GAAP basis; management separately reported a 7.3% increase on a cash basis. The filing reports no impairment losses in 2015 or 2014. Depreciation and amortization was $135.4 million, and interest expense was $30.7 million.

Reported earnings were materially supported by $80.4 million of gains on investment property sales, including gains of $35.7 million on the North Point properties, $36.2 million on 2100 Ross and $6.7 million on The Points at Waterview. FFO excludes gains on depreciable property and therefore provides a less transaction-driven operating measure.

Balance sheet, debt and liquidity

Total assets were $2.60 billion and stockholders’ investment was $1.68 billion at December 31, 2015.
Notes payable totaled $721.3 million, down from $792.3 million at year-end 2014. Consolidated indebtedness declined by $71.1 million.
Debt to total undepreciated assets was 27.5%, compared with 29.5% in 2014. Fixed-charge coverage improved to 4.8 times from 4.3 times, and debt to annualized EBITDA was 4.0 times.
The $500 million unsecured Credit Facility had $92.0 million outstanding and $407.0 million of available borrowing capacity at year-end. It matures in May 2019 and may be expanded to $750 million, subject to lender commitments and conditions.
Fixed-rate debt was $629.3 million at a weighted-average rate of 4.57%; variable-rate debt consisted of the $92.0 million Credit Facility at a weighted-average rate of 1.53%. A 100-basis-point increase in variable rates would have increased 2015 interest expense by approximately $1.8 million based on average balances.
Cash and cash equivalents were $2.0 million at year-end. The company stated that it was in compliance with its Credit Facility covenants.
Future contractual obligations totaled approximately $1.02 billion, including debt principal, interest commitments, ground leases and operating leases. Unfunded tenant improvements and other commitments totaled $82.4 million.

Cash flow, capital allocation and portfolio activity

Operating cash flow increased to $151.7 million from $142.4 million.
Investing activities provided $38.5 million, reflecting $225.3 million of property-sale proceeds and $185.0 million of acquisition, development and tenant-asset expenditures.
Development and capital expenditures included $52.0 million for projects under development, $28.1 million of leasing costs and $83.6 million of building improvements.
Financing activities used $188.1 million, including $47.8 million for share repurchases and $69.2 million of common dividends.
The company sold 2100 Ross for $131.0 million, The Points at Waterview for $26.8 million, and three North Point Center East buildings for $70.3 million. It also sold 8,643 acres of land for gross proceeds of $20.9 million.
A $100 million share repurchase program was initiated in 2015. Through year-end, 5.2 million shares were repurchased for $47.8 million at an average price of $9.22. An additional approximately 193,000 shares were repurchased through January 31, 2016 for $1.6 million.
The quarterly common dividend increased from $0.075 to $0.080 per share in the first quarter of 2015; total dividends declared were $0.32 per share.

Material changes versus the prior comparable period

Revenue and NOI increased primarily because of the 2014 acquisitions, the commencement of operations at Colorado Tower, and improved same-property performance. The 2015 dispositions partially offset growth.
Net income increased sharply because 2015 included substantially higher gains on property sales. The comparison is therefore not representative of recurring operating growth.
FFO increased 16.7%, supported by portfolio growth and leasing, but FFO per share increased less because the weighted-average share count rose from 204.5 million diluted shares to 216.0 million.
Fee income declined 41.7% to $7.3 million, primarily because 2014 included a $4.5 million participant interest and the company had fewer third-party development engagements.
General and administrative expense declined 14.4% to $17.1 million, while interest expense increased 5.5% because of higher average borrowings and the 816 Congress loan, partly offset by higher capitalized interest.
Capital expenditures fell substantially from $710.7 million in 2014 to $185.0 million in 2015 because the company made no operating-property acquisitions in 2015.

Development, outlook and management commentary

The active development pipeline had estimated total costs of $323 million, with $42.6 million incurred at year-end. It included the 50%-owned Carolina Square mixed-use project in Chapel Hill, North Carolina, with estimated costs of $123 million, and the wholly owned NCR headquarters project in Atlanta, with estimated costs of $200 million. NCR Phase I was 100% leased and targeted initial occupancy and stabilization in the first quarter of 2018. Carolina Square was 67% pre-leased for office space and targeted initial occupancy in the second quarter of 2017 and stabilization in the second quarter of 2018.

Completed or opened projects included Colorado Tower and Research Park V in Austin and Phase II of Emory Point in Atlanta. Colorado Tower was 100% leased at year-end, while Research Park V was approximately 30% leased and Emory Point Phase II was in lease-up.

Management expected fewer comparable acquisition and development opportunities in 2016 and planned to focus on leasing, renewals and servicing existing tenants, while continuing to execute the development pipeline and pursue opportunistic investments in core markets. No formal quantitative earnings or FFO guidance is provided in the filing text.

Principal risks, contingencies and unusual items

Geographic concentration is significant: for the fourth quarter, 45% of NOI came from metropolitan Houston and 41% from metropolitan Atlanta. Energy-sector tenants represented 23% of annualized base rent, and the top 20 tenants represented 41%.
Low oil and natural gas prices could weaken Houston tenants, reduce occupancy and rents, and impair property values.
Leasing, tenant credit, renewal, concessions and capital-expenditure requirements could adversely affect cash flow and NOI. Approximately 5.3% of leased office space and 4.2% of annual contractual rents were scheduled to expire in 2016.
Development projects are exposed to construction delays, cost overruns, permitting issues, lease-up risk and changes in market conditions. Project cost and stabilization estimates are subject to change.
Interest-rate, refinancing and Credit Facility covenant risks remain relevant. Consolidated debt maturities include $138.2 million in 2017, $105.7 million in 2018 and $101.4 million in 2019.
Unconsolidated joint ventures had $402.0 million of third-party debt. Cousins guaranteed up to $8.6 million of the Emory Point Phase II construction loan and 12.5% of the Carolina Square construction loan, which had no balance outstanding at year-end.
The company must continue satisfying REIT qualification and distribution requirements. Failure to qualify could result in corporate-level taxation and reduced distributions.
Ordinary-course litigation was not expected to have a material adverse effect. Management reported no known material environmental liability, and Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Quarterly results were affected by the timing of asset sales and related gains. The filing also reflects a change in discontinued-operations presentation following adoption of new accounting guidance.

Facts investors should verify

Whether 2016 Houston occupancy, rents and tenant credit metrics deteriorate further because of energy-sector weakness.
The pace, final cost and lease-up of NCR Phase I, Carolina Square, Research Park V and Emory Point Phase II.
Upcoming debt maturities, refinancing terms and continued compliance with Credit Facility covenants.
Recurring FFO and same-property NOI excluding property-sale gains and other nonrecurring items.
Cash funding requirements for development, tenant improvements, leasing costs, dividends and the remaining share-repurchase authorization.
The financial performance and guarantee exposure of unconsolidated joint ventures, particularly Emory Point Phase II and Carolina Square.
The effect of tenant concentration, lease expirations and future capital requirements on liquidity and dividend coverage.