Cousins Properties Incorporated — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2011. Cousins is a self-administered and self-managed REIT with interests in approximately 7.0 million square feet of office space, 4.8 million square feet of retail space, 1.5 million square feet of industrial space, land and residential lots. It also manages or leases approximately 12.7 million square feet for third parties.
The condensed financial statements are unaudited. The company reports Office, Retail, Land, CPS Third Party Management and Leasing, and Other segments. It sold substantially all remaining multi-family residential units in the first quarter of 2011.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $45.2 million in 2011 vs. $50.0 million in 2010 | $135.5 million vs. $165.9 million |
| Net income available to common stockholders | $0.2 million vs. $(8.4) million | $(12.4) million vs. $(18.6) million |
| Net income available per common share | $0.00 vs. $(0.08) | $(0.12) vs. $(0.18) |
| Funds from operations available to common stockholders | $14.3 million, or $0.14 per share, vs. $0.9 million, or $0.01 | $33.3 million, or $0.32 per share, vs. $22.8 million, or $0.23 |
| Net cash provided by operating activities | Not separately provided for the quarter | $38.5 million vs. $61.3 million |
| Cash and cash equivalents | Not applicable | $5.6 million at September 30, 2011 vs. $7.6 million at December 31, 2010 |
| Notes payable | Not applicable | $462.1 million at September 30, 2011 vs. $509.5 million at December 31, 2010 |
Rental property revenues increased 4% in the quarter and 3% year to date, supported by higher occupancy at several properties. Rental property operating expenses were $15.0 million in the quarter and $42.7 million year to date. The implied consolidated rental-property operating margin was approximately 57.6% for the quarter and 59.0% year to date; these are not company-wide margins.
At September 30, 2011, total assets were $1.294 billion, total liabilities were $513.7 million, and total equity was $771.3 million. The weighted-average interest rate on consolidated debt was 4.89%, and consolidated debt to total market capitalization was 37.4%.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower multi-family unit sales and residential lot and outparcel sales. No condominium units were sold in the third quarter, compared with 18 units in the prior-year quarter; no multi-family units remained for sale at period-end.
- Rental property revenues increased due to improved occupancy at Terminus 100, the American Cancer Society Center, The Avenue Forsyth and 191 Peachtree Tower.
- General and administrative expense declined 30% in the quarter and 15% year to date, largely because of lower personnel and stock-based compensation costs.
- Interest expense declined 24% in the quarter and 25% year to date, reflecting lower average debt, lower borrowing costs and the absence of the higher-cost interest-rate swaps that were terminated in 2010.
- Operating cash flow decreased $22.9 million year to date, primarily because of lower multi-family, residential lot and outparcel sales, cash incentive compensation payments and lower tax refunds.
- FFO increased substantially despite the GAAP loss, reflecting depreciation adjustments and lower losses on debt extinguishment and property sales.
- The company recorded a $3.5 million impairment loss on its investment in Verde Realty in the first quarter of 2011. The prior-year period included a $0.6 million impairment charge on a condominium project and $1.9 million of abandoned predevelopment costs.
- The company sold One Georgia Center for $48.6 million in September 2011 and recognized a $2.8 million gain. A portion of the gain, approximately $1.6 million, was allocated to a noncontrolling partner.
Liquidity, debt and capital resources
- The unsecured Credit Facility had $119.8 million outstanding, $350 million of total borrowing capacity and a 2.0% spread over LIBOR at September 30, 2011. Its maturity was extended one year to August 29, 2012.
- The company prepaid or repaid several mortgage notes during 2011, including the 333/555 North Point Center East, Lakeshore Park Plaza and 600 University Park Place notes. There were no company debt maturities scheduled for the remainder of 2011.
- Nine-month investing cash flow was $33.6 million, including $69.6 million of property-sale proceeds, $34.7 million of property acquisition, development and tenant-asset expenditures, and $13.9 million of investments in unconsolidated joint ventures.
- Nine-month financing cash flow used $74.0 million, including $142.9 million of debt repayments, $23.7 million of common and preferred dividends, partly offset by $98.9 million of Credit Facility borrowings.
- The company had $482 million remaining under a $500 million shelf registration statement at September 30, 2011.
- Contractual obligations totaled $623.4 million, including $171.6 million due within one year. Additional commitments totaled $34.6 million, including estimated development commitments of $15.9 million and unfunded tenant improvements and other commitments of $15.6 million.
Guidance, outlook, commentary and risks
- Management described leasing conditions as challenging. Atlanta rents and concessions had stabilized, but significant improvement was not expected until employment recovered. North Carolina markets were mixed, while Texas markets benefited from job growth, lease absorption, lower concessions and higher rental rates.
- Retail tenant sales and expansion plans had improved modestly, with new leases generally returning to more traditional base-rent structures, though at lower rental rates. Further improvement depends on consumer confidence and spending.
- The company began development of Emory Point through a joint venture and began construction of Mahan Village, a 147,000-square-foot retail center. Management was pursuing additional Southeastern U.S. development and acquisition opportunities.
- Management intended to continue selling non-strategic land, residential lot and industrial holdings and could sell additional operating assets to fund investments. No formal earnings guidance was provided.
- The company expected to fund debt maturities and other commitments through operating cash flow, Credit Facility borrowings, new or renewed mortgage financing and asset sales. It anticipated entering into a new credit facility before the existing facility matured.
- The Emory Point joint venture was expected to require approximately $16.7 million of additional company cash contributions. The company also estimated approximately $6.3 million of contributions for tenant costs at Ten Peachtree Place Associates.
- Key risks include refinancing and capital availability, interest-rate increases, leasing and tenant-credit risk, real estate market weakness, impairment charges, development delays and cost overruns, joint-venture funding and liquidity, debt-covenant compliance, guarantees, uninsured losses, litigation and continued qualification as a REIT.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, and no material changes to internal control over financial reporting were identified.
Important facts for investors to verify
- Ability to refinance or replace the Credit Facility before its August 2012 maturity and the availability of the stated $350 million borrowing capacity.
- Timing and pricing of future asset sales, including the planned disposition of non-strategic land and industrial holdings.
- Occupancy, rent concessions, tenant-improvement obligations and lease rollover exposure across the office and retail portfolio.
- Funding requirements and guarantee exposure for Emory Point, Mahan Village and other unconsolidated joint ventures.
- Sustainability of cash available for the $0.045 quarterly common dividend and preferred dividends, particularly given $5.6 million of unrestricted cash at quarter-end.
- Potential additional impairments, especially for Verde Realty, land holdings, development projects and other investments affected by real estate market conditions.
- The distinction between GAAP net loss and non-GAAP FFO, including the effect of depreciation, property-sale gains and discontinued operations on reported FFO.