Cousins Properties Incorporated — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Cousins Properties Incorporated is a self-managed, self-administered REIT focused primarily on Class A office properties and mixed-use developments in Sun Belt markets, including Atlanta, Austin, Phoenix, Tampa, Charlotte, Dallas, and Nashville. The portfolio comprised approximately 18.8 million square feet of office space and 310,000 square feet of multifamily space at March 31, 2023. This unaudited filing covers the three months ended March 31, 2023, with comparison to the three months ended March 31, 2022.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $202.7 million | $186.9 million | 8.5% increase |
| Rental property revenues | $200.1 million | $183.2 million | 9.2% increase |
| Net income | $22.4 million | $28.2 million | 20.6% decrease |
| Net income available to common stockholders | $22.2 million | $28.0 million | 20.7% decrease |
| Diluted EPS | $0.15 | $0.19 | Decrease |
| Funds from operations | $98.1 million, or $0.65 per share | $99.4 million, or $0.67 per share | 1.3% decrease |
| Consolidated NOI | $128.7 million | $116.9 million | 10.1% increase |
| Net cash provided by operating activities | $26.5 million | $24.1 million | $2.4 million increase |
| Capital expenditures and tenant asset expenditures | $69.9 million | $77.8 million | $7.9 million decrease |
Rental property revenue increased 9.2%, while rental property operating expenses increased 9.8% to $71.2 million. Same-property NOI increased 5.5% to $120.9 million; management also reported same-property NOI growth of 5.3% for the consolidated portfolio and the Company's share of unconsolidated properties. NOI margin based on consolidated rental property revenue was approximately 64.3% in Q1 2023 versus 63.8% in Q1 2022. GAAP net margin declined to approximately 11.0% from 15.1%, primarily because of higher interest expense and depreciation.
Interest expense increased 61.2% to $25.0 million, principally because of the October 2022 term loan, higher rates on variable-rate debt, and higher average credit-facility borrowings. Depreciation and amortization increased 7.1% to $75.8 million. Fee income declined 73.1% to $0.4 million following completion of the Norfolk Southern transactions in 2022.
Cash flow from investing activities was a use of $93.8 million, including $69.9 million for property, development, and tenant-related expenditures and $24.0 million of contributions to unconsolidated joint ventures. Financing activities provided $65.8 million, including $165.0 million of credit-facility borrowings, partially offset by $49.3 million of repayments and $48.4 million of common dividends. Cash and cash equivalents declined to $3.6 million from $5.1 million at December 31, 2022.
Balance Sheet, Debt, and Liquidity
- Total assets were $7.58 billion and total equity was $4.62 billion at March 31, 2023.
- Notes payable totaled $2.45 billion, or $2.45 billion net of unamortized loan costs, compared with $2.34 billion at December 31, 2022. The weighted-average debt maturity was 3.8 years.
- Debt consisted of $1.92 billion of unsecured debt and $533.2 million of fixed-rate, non-recourse mortgage debt. Approximately 77% of consolidated debt carried fixed interest rates and 23% carried floating rates based on SOFR.
- The $1.0 billion credit facility matured in April 2027. Borrowings were $172.3 million, with reported available borrowing capacity of $827.7 million.
- The Company reported compliance with all debt covenants. Credit-facility covenants include minimum unencumbered interest coverage of 1.75x, minimum fixed-charge coverage of 1.50x, maximum secured leverage of 50%, and maximum overall leverage of 60%.
- Management stated that available liquidity is expected to be sufficient for obligations for the foreseeable future. Material 2023 cash needs included $172.4 million of unfunded tenant improvements and construction costs.
- Common dividends declared were $0.32 per share, and $48.4 million of common dividends were paid during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue and consolidated NOI increased, supported by higher economic occupancy at Domain and Buckhead Plaza, tenant-funded improvements, stabilization of 100 Mill and Heights Union, and commencement of operations at Promenade Central following redevelopment.
- Leasing activity included 258,000 square feet of office leases and renewals. Straight-line net rent per square foot increased 20.1% for office space under lease within the prior year.
- Property operating expenses increased because of higher real estate taxes, inflation, and greater physical occupancy.
- Interest expense rose $9.5 million, materially reducing GAAP net income and diluted EPS despite higher property-level operating results.
- Joint-venture income declined 40.1% to $0.7 million, primarily reflecting the September 2022 sale of the Company's interest in the Carolina Square joint venture.
- Capital expenditures decreased as Domain 9 and other redevelopment projects approached completion, partly offset by higher leasing costs and increased investment in the Neuhoff mixed-use development joint venture.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide specific full-year numerical earnings or FFO guidance in the filing text. Management expects office usage to gradually increase through the remainder of 2023 as hybrid-work practices evolve, which could support parking revenue but also increase certain operating expenses.
The Company entered into a floating-to-fixed interest-rate swap effective April 19, 2023 covering $200 million of the $400 million 2022 Term Loan; the underlying SOFR rate was fixed at 4.298%. The existing $350 million 2021 Term Loan was also subject to a swap fixing the underlying SOFR rate at 4.234%.
Subsequent to quarter-end, a joint venture sought an $83.0 million, nine-year, 4.80% fixed-rate mortgage for the Medical Offices at Emory Hospital property. The expected proceeds would repay an existing $62.4 million mortgage maturing June 1, 2023.
SVB Financial, a tenant at Hayden Ferry, filed for Chapter 11 after Silicon Valley Bank was placed into receivership. The tenant was current through May 2023, and the lease had not been rejected as of the filing. The lease was projected to generate approximately $0.7 million per month through January 2026; the associated net assets were $1.9 million at March 31, 2023.
The Company had $172.4 million of future tenant-improvement and construction obligations under leases and $0.7 million of performance bonds. Management stated that ordinary-course litigation is not expected to have a material adverse effect. Key risks include office demand and remote work, leasing and occupancy, tenant credit, interest rates, refinancing and debt-covenant compliance, capital-market access, inflation, development costs, joint-venture obligations, impairment, and continued REIT qualification.
Important Facts for Investors to Verify
- Whether higher interest costs and upcoming debt maturities pressure future FFO, dividend coverage, and leverage metrics.
- The timing and cost of the $172.4 million of unfunded tenant-improvement and construction commitments.
- Occupancy, leasing spreads, renewal rates, and tenant demand across the concentrated Sun Belt office portfolio.
- The collectability and eventual status of the SVB Financial lease following the tenant's bankruptcy proceedings.
- Progress, funding requirements, and debt terms for the Neuhoff mixed-use development and other projects.
- Available credit-facility capacity, covenant headroom, and the Company's ability to refinance or repay debt maturing in 2024 and 2025.
- The sustainability of the $0.32-per-share quarterly dividend relative to operating cash flow, FFO, capital expenditures, and financing needs.