Cousins Properties Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2014. Cousins is a self-managed REIT focused primarily on acquiring, developing, leasing, managing and owning Class A office properties and opportunistic mixed-use assets in Sunbelt markets, especially Georgia, Texas and North Carolina. At quarter-end, the portfolio included 16 operating office properties totaling 15.1 million square feet, six retail properties totaling 566,000 square feet, and two active development projects.
Financial Performance and Key Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenues | $89.1 million | $50.4 million | $255.3 million | $131.2 million |
| Net income attributable to common stockholders | $19.3 million | $59.4 million | $22.3 million | $107.0 million |
| Net income per diluted share | $0.09 | $0.36 | $0.11 | $0.83 |
| Funds from operations available to common stockholders | $41.7 million | $17.2 million | $113.6 million | $42.8 million |
| FFO per diluted share | $0.20 | $0.11 | $0.57 | $0.33 |
| Net operating income | $55.1 million | $34.8 million | $156.4 million | $89.6 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $94.6 million | $98.7 million |
Q3 2014 rental property revenue was $86.9 million, while rental property operating expenses were $38.7 million, producing consolidated property NOI of $48.2 million before discontinued operations and joint venture contributions. Total NOI of $55.1 million represented approximately 61.9% of consolidated revenue. Net income margin was approximately 21.7% in the quarter and 8.7% for the first nine months, although results were materially affected by depreciation, property-sale gains and discontinued operations.
Same-property NOI increased 3.6% year over year in the quarter and 4.4% for the first nine months. Office leasing activity totaled 691,492 square feet in the quarter and approximately 1.5 million square feet year to date. Net effective office rent was $16.81 per square foot in the quarter and $16.55 per square foot year to date.
Balance Sheet, Debt and Liquidity
- Total assets were $2.534 billion at September 30, 2014, compared with $2.273 billion at December 31, 2013.
- Notes payable totaled $671.1 million, compared with $630.1 million at year-end 2013. Estimated fair value of notes payable was $711.3 million.
- Cash and cash equivalents were $7.2 million, with restricted cash of $4.7 million.
- The amended unsecured Credit Facility had a $500 million commitment, a May 28, 2019 maturity, and $87.7 million outstanding at quarter-end, leaving reported borrowing capacity of $411.3 million.
- The Credit Facility included a maximum overall leverage ratio of 60%, minimum unencumbered interest coverage of 2.00, minimum fixed-charge coverage of 1.50 and minimum shareholders’ equity requirements. The filing states that the Company was in compliance with applicable covenants.
- Debt consisted primarily of fixed-rate, non-recourse mortgage notes, with variable-rate debt including the Credit Facility and the Mahan Village construction facility.
- Common dividends declared were $0.075 per share for the quarter and $0.225 per share for the first nine months.
Cash Flow and Capital Allocation
- Operating cash flow was $94.6 million for the first nine months, down from $98.7 million in the comparable 2013 period.
- Investing activities used $304.6 million, including $351.7 million for property acquisitions, development and tenant-related expenditures, partly offset by $53.8 million of property-sale proceeds.
- Financing activities provided $216.3 million, including $321.9 million of net common-stock issuance proceeds and net Credit Facility borrowings, partly offset by debt repayments, preferred-stock redemption and dividends.
- Capital expenditures included $234.5 million for acquisitions, $55.3 million for development, $49.3 million for building improvements and $7.6 million for leasing costs.
Material Changes Versus the Prior Comparable Period
- Revenue increased 77% in Q3 and 95% for the first nine months, primarily because of the Greenway Plaza, 777 Main, Post Oak Central, 816 Congress and Fifth Third Center acquisitions.
- Q3 FFO increased 142% to $41.7 million, and FFO per share increased to $0.20 from $0.11. The nine-month FFO increase was also substantial, but benefited from the expanded property portfolio and the absence of certain 2013 costs.
- GAAP net income attributable to common stockholders declined sharply because the 2013 periods included substantial gains from joint-venture and property sales. Nine-month income from unconsolidated joint ventures fell to $5.3 million from $65.9 million.
- Interest expense increased 32% in Q3 and 46% year to date, primarily due to mortgage financing on Post Oak Central and Promenade.
- Depreciation and amortization increased 77% in Q3 and 128% year to date, largely reflecting acquired properties.
- The Company issued 26.7 million common shares during the first nine months, generating $321.9 million of net proceeds. It redeemed all outstanding Series B preferred stock for $94.8 million in April 2014 and has no preferred stock outstanding.
- The Credit Facility was increased from $350 million to $500 million, its maturity was extended to 2019, and pricing spreads and fees were reduced.
Guidance, Outlook, Risks and Unusual Items
- Management expected to sell 777 Main, Mahan Village and a joint venture containing four Publix-anchored shopping centers before year-end, with proceeds intended primarily to reduce Credit Facility borrowings.
- The Company was evaluating a potential joint venture partner for 191 Peachtree in the first half of 2015, with any proceeds also expected to reduce debt.
- Subsequent to quarter-end, Cousins acquired Northpark Town Center in Atlanta for a gross purchase price of $348.0 million, funded with cash and Credit Facility borrowings. It also obtained an $85.0 million mortgage secured by 816 Congress and used the proceeds to reduce Credit Facility borrowings. Credit Facility borrowings were $318.2 million as of October 24, 2014.
- The Mahan Village construction facility maturity was extended to January 2015, creating a near-term refinancing or repayment requirement.
- Future obligations included $103.6 million of tenant-improvement commitments, $150.0 million of ground and office lease obligations, and a $7.4 million land-purchase commitment. Outstanding letters of credit and performance bonds totaled $2.4 million.
- Unconsolidated joint ventures had $418.0 million of third-party debt. Cousins guaranteed approximately $2.9 million of Cousins Watkins debt and $3.6 million of EP II construction debt at quarter-end.
- Management cited risks relating to capital availability, refinancing, interest rates, leasing and tenant credit, geographic concentration, development execution, asset-sale pricing, joint-venture partners, debt covenants, litigation, environmental and regulatory matters, and continued REIT qualification.
- The Company adopted revised discontinued-operations guidance in 2014, changing the presentation of certain properties held for sale, including 777 Main and Mahan Village.
- An October 2014 participation payment of $4.5 million was expected to be recognized as fourth-quarter fee income, with a related $1.1 million employee commission recorded in other expenses.
Important Facts for Investors to Verify
- Whether planned asset sales and the proposed 191 Peachtree joint venture close on expected terms and reduce leverage as anticipated.
- The financing impact of the Northpark Town Center acquisition and the subsequent increase in Credit Facility borrowings.
- The January 2015 maturity of the Mahan Village construction facility and the Company’s refinancing or repayment plan.
- Same-property occupancy, leasing spreads, tenant-improvement costs and exposure to major tenants in the concentrated Sunbelt office portfolio.
- Reconciliation of GAAP net income to FFO, particularly the effects of property-sale gains, depreciation and joint-venture results.
- Compliance with Credit Facility leverage, coverage and equity covenants, including after post-quarter-end acquisitions and borrowings.
- Joint-venture debt, guarantees and potential capital contributions, as well as the Company’s ability to fund its $954.7 million of contractual obligations and $113.5 million of commitments.