Cousins Properties Incorporated — Form 10-Q Summary
Business context and reporting period
Cousins Properties is a self-administered REIT focused primarily on developing, acquiring, managing and owning office and retail properties in Georgia, Texas and North Carolina. The filing covers the three and nine months ended September 30, 2012, with comparative periods ended September 30, 2011. At quarter-end, the portfolio included interests in approximately 8.2 million square feet of office space, 4.4 million square feet of retail space and two projects under development.
During the quarter, the Company sold its third-party management and leasing business, effectively exiting that line, and acquired the 844,000-square-foot 2100 Ross Avenue Class-A office building in Dallas.
Financial performance and key metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $43.7 million | $31.5 million | $112.6 million | $96.1 million |
| Net income | $13.3 million | $5.6 million | $12.2 million | $0.8 million |
| Net income available to common stockholders | $9.4 million | $0.2 million | $2.7 million | $(12.4) million |
| EPS available to common stockholders | $0.09 | Approximately $0.00 | $0.03 | $(0.12) |
| Funds from operations available to common stockholders | $25.7 million | $14.3 million | $52.3 million | $33.3 million |
| FFO per share | $0.25 | $0.14 | $0.50 | $0.32 |
| Cash flow from operations | Not separately provided | Not separately provided | $52.4 million | $38.5 million |
Q3 rental property revenues were $32.6 million, up 21%, while rental property operating expenses were $14.4 million, up 22%. Consolidated rental-property margin was approximately 56% for the quarter. Fee income increased 88% in the quarter to $7.3 million, principally reflecting a $4.5 million participation interest. Other income included $3.0 million of net lease termination fee income related to the Inhibitex building.
At September 30, 2012, total assets were $1.20 billion, including $762.9 million of properties, $174.1 million of properties held for sale, $5.5 million of cash and cash equivalents, and $139.8 million of investments in unconsolidated joint ventures. Total liabilities were $571.2 million and total equity was $627.9 million.
Debt, liquidity and cash flow
- Notes payable totaled $518.6 million at September 30, 2012, compared with $539.4 million at December 31, 2011. Estimated fair value was $539.9 million.
- The Company had $93.5 million outstanding under its $350 million senior unsecured Credit Facility. The facility matures February 28, 2016, includes a one-year extension option and may be expanded to $500 million subject to conditions.
- Weighted-average consolidated debt interest rate was 4.53%, and consolidated debt to undepreciated assets was 38%.
- Nine-month investing cash flow was $(1.3) million, reflecting $73.1 million of sale proceeds and $94.1 million of property acquisition, development and tenant-asset expenditures. The principal investment was 2100 Ross Avenue, acquired for approximately $63.4 million.
- Nine-month financing cash flow was $(50.5) million, including $14.1 million of common dividends and $9.7 million of preferred dividends. Cash increased by $0.6 million to $5.5 million.
- Management expected to fund the next 12 months through operating cash flow, Credit Facility borrowings, mortgage financing and asset-sale proceeds. It expected to repay all Credit Facility borrowings by year-end 2012 and retain excess cash.
Material changes versus prior comparable periods
- Revenue increased 39% in Q3 and 17% for the first nine months, primarily due to the Promenade acquisition, 2100 Ross Avenue, improved occupancy at 191 Peachtree Tower and higher fee income.
- Q3 net income available to common stockholders increased to $9.4 million from $0.2 million; nine-month results improved to $2.7 million from a $12.4 million loss.
- FFO increased 80% in Q3 and 57% for the first nine months, benefiting from higher property income, acquisitions, joint-venture results and the gain associated with the management-business sale.
- Interest expense declined 12% in Q3 and 17% for the first nine months because of lower average borrowings and interest rates, debt repayments and increased capitalized interest, partly offset by the new 191 Peachtree Tower mortgage.
- Income from unconsolidated joint ventures increased to $14.2 million for the first nine months from $7.5 million, largely due to a $7.5 million gain on the Ten Peachtree Place sale.
- The Company reduced personnel from 320 at the beginning of 2012 to an expected 173 by year-end following the business sale and staffing reductions.
Outlook, unusual items and risks
- Management characterized Texas markets as strongest, citing above-national-average employment growth. Atlanta employment growth lagged Texas and North Carolina, although office absorption was strong in 2012.
- Management expected occupancy at 191 Peachtree Tower to rise from 82% in Q3 to 87% as executed leases commence. The 2100 Ross Avenue building was 67% leased and was viewed as having future earnings-growth potential.
- The Company leased or renewed 175,000 square feet of office space and 119,000 square feet of retail space during Q3.
- The Company sold its third-party management and leasing business for potential gross proceeds of up to $15.4 million; approximately 63.5% was received at closing. The final amount remains subject to working-capital adjustments, an earn-out and possible additional contracts. A $7.4 million gain was recognized.
- Properties held for sale included The Avenue Webb Gin and The Avenue Forsyth, which were expected to close in Q4 2012. Cosmopolitan Center was sold in October 2012 for $7.0 million.
- The nine-month discontinued-operations result included a $12.2 million impairment loss related to The Avenue Collierville. The filing also corrected its classification from impairment losses to discontinued operations and stated that the correction was not material to previously issued financial statements.
- Unconsolidated joint ventures had total debt of $386.0 million, with the Company’s share of joint-venture debt to third parties at $165.6 million. Approximately $40.6 million was recourse to the Company, including guarantees related to CF Murfreesboro, Cousins Watkins and EP I.
- Key risks include property leasing and tenant credit, real estate market conditions, asset-sale execution, interest-rate volatility, refinancing and debt-covenant compliance, joint-venture liquidity, development costs, impairment risk and continued REIT qualification.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Litigation matters were not expected to have a material adverse effect based on current expectations.
Investor verification points
- Verify the sustainability of FFO growth excluding the $7.4 million management-business sale gain, the $7.5 million joint-venture gain and other nonrecurring items.
- Track execution of the planned asset sales, repayment of the $93.5 million Credit Facility balance and the amount of cash retained at year-end.
- Assess lease-up progress at 2100 Ross Avenue and 191 Peachtree Tower, including tenant-improvement and leasing-cost requirements.
- Review the final consideration and earn-out outcome from the management and leasing-business sale.
- Monitor joint-venture debt maturities, guarantees and potential funding requirements, particularly the CF Murfreesboro facility maturing in July 2013.
- Evaluate dividend coverage against operating cash flow, preferred dividends, capital expenditures and Credit Facility covenants.