COUSINS PROPERTIES INC annual report, FY2018

Cousins Properties Incorporated — FY2018 Form 10-K Summary

Business Context and Reporting Period

Cousins Properties is a self-managed Georgia REIT focused primarily on Class A urban office properties and mixed-use developments in Sunbelt markets, including Atlanta, Charlotte, Austin, Phoenix and Tampa. The filing covers the fiscal year ended December 31, 2018; fourth-quarter results are included but the filing is an annual report rather than a quarterly filing.

The company owned or held interests in approximately 15.0 million square feet of office space and 310,000 square feet of mixed-use space at year-end. Cousins owned approximately 98% of Cousins Properties LP, through which substantially all operations are conducted.

Key Financial Metrics

Metric	2018	2017	Change
Total revenues	$475.2 million	$466.2 million	2.0% increase
Rental property revenues	$461.9 million	$446.0 million	3.5% increase
Net operating income	$297.2 million	$282.2 million	5.3% increase
Same-property NOI	$264.8 million	$258.3 million	2.5% increase
Net income	$80.8 million	$220.0 million	Decrease, primarily due to lower property-sale gains
Net income available to common stockholders	$79.2 million	$216.3 million	Decrease
Diluted EPS	$0.19	$0.52	Decrease
FFO	$267.9 million	$259.9 million	3.1% increase
Diluted FFO per share	$0.63	$0.61	Increase
Cash flow from operations	$229.0 million	$211.6 million	8.2% increase
Dividends declared per common share	$0.26	$0.30	Decrease

Portfolio occupancy was 94.9% at December 31, 2018, with weighted average occupancy of 92.1% during the year. Same-property NOI increased 2.1% on a GAAP basis and 4.7% on a cash basis according to management’s portfolio metrics. Second-generation net rent increased 32.5% on a GAAP basis and 13.2% on a cash basis.

Total assets were $4.15 billion at year-end, compared with $4.20 billion in 2017. Notes payable were $1.06 billion, compared with $1.09 billion in 2017. Stockholders’ investment was $2.77 billion.

Material Changes Versus the Prior Comparable Period

Revenue and NOI increased, supported by higher occupancy, rent growth, the lease-up of 8000 Avalon and commencement of operations at Spring & 8th.
Net income declined sharply because 2017 included $133.1 million of gains on investment-property sales, compared with $5.4 million in 2018. Cousins had no property dispositions in 2018.
FFO increased despite lower GAAP net income because FFO excludes gains on sales and real-estate depreciation.
Interest expense increased 17.6% to $39.4 million, driven by 2017 senior notes and higher LIBOR-related expense on the floating-rate term loan, partly offset by mortgage repayments.
General and administrative expense declined 19.9% to $22.0 million, primarily because of lower stock-based compensation expense.
Cash used in investing activities was $284.5 million, compared with $112.1 million provided in 2017, reflecting lower asset-sale proceeds and continued development and land investment.
Capital expenditures declined to $223.6 million from $320.0 million, principally because development, building-improvement and leasing expenditures decreased.

Debt, Liquidity and Capital Commitments

The company expanded and extended its unsecured revolving credit facility from $500 million to $1.0 billion, with maturity extended to January 3, 2023.
At year-end, no amounts were drawn on the credit facility; $2 million was utilized for letters of credit, leaving $998 million available. Cash, cash equivalents and restricted cash totaled $2.7 million.
Consolidated debt was approximately $1.1 billion, with a weighted average interest rate of 3.82%. Fixed-rate debt totaled $817.4 million at a weighted average rate of 3.86%; variable-rate debt totaled $250 million.
Contractual obligations totaled approximately $1.50 billion, including debt principal, interest, ground leases and other operating leases. Unfunded development and tenant-improvement commitments totaled $100.2 million.
Unconsolidated joint ventures had $342.9 million of third-party debt. Cousins guaranteed 12.5% of the $74.6 million Carolina Square construction loan and guaranteed project completion.
Cash dividends paid were $107.2 million, funded with operating cash flow. Management expects distributions to be funded through operating cash flow, asset sales, joint-venture distributions and, if necessary, debt.

Development, Leasing and Outlook

Four development projects were in process at year-end, with the company’s share of estimated total costs of $245.9 million.
Projects included Dimensional Place in Charlotte, 120 West Trinity in Atlanta, 300 Colorado in Austin and 10000 Avalon in Atlanta. Estimated completion or stabilization dates range from 2019 through 2022.
Dimensional Place was 94% leased, 300 Colorado was 87% leased and 10000 Avalon was 40% leased at year-end. The office component of Dimensional Place was 100% leased.
The company acquired interests in three land tracts during 2018 and reported sites capable of supporting up to 1.4 million square feet of future Class A office development.
Management described Sunbelt markets as supported by population migration, job growth, positive office absorption and limited supply, but noted that Charlotte, Phoenix and Austin had meaningful development pipelines.
Management did not provide a specific quantitative earnings or FFO forecast in the supplied filing text.

Risks, Contingencies and Unusual Items

Results are concentrated geographically: Atlanta, Charlotte and Austin generated 41.5%, 18.5% and 18.1%, respectively, of property NOI for the fourth quarter.
The top 20 tenants represented 36% of annualized base rental revenue; no single tenant represented more than 8%. Lease expirations represented 5.6% of leased space in 2019 and 6.6% in 2020.
Key risks include tenant defaults or nonrenewals, declining rents, oversupply, economic weakness, interest-rate increases, refinancing risk, development cost overruns, construction delays, joint-venture partner issues, impairment charges, environmental liabilities, cyber incidents and regulatory changes.
The company’s REIT status requires compliance with technical tax rules and generally distributing at least 90% of taxable income. Loss of REIT status could result in corporate-level taxation and adversely affect distributions.
The company adopted ASU 2017-05 in 2018, recording a $22.3 million cumulative-effect increase to distributions in excess of cumulative net income.
Beginning January 1, 2019, ASC 842 lease accounting was expected to add approximately $40 million of right-of-use assets and lease liabilities, with no material change expected in lessor accounting.
Management reported that ordinary-course legal proceedings were not expected to have a material adverse effect. Management and Deloitte & Touche concluded that internal control over financial reporting was effective.
Executive leadership changed effective January 2019: M. Colin Connolly became President and Chief Executive Officer, and Lawrence L. Gellerstedt III became Executive Chairman.

Most Important Facts for Investors to Verify

Whether occupancy, rent spreads and same-property NOI remain resilient as leases expire and office-market supply increases.
The timing, leasing progress and final costs of the four development projects, particularly 300 Colorado, Dimensional Place and 10000 Avalon.
Debt maturities, refinancing terms and compliance with leverage, fixed-charge and unencumbered-interest-coverage covenants.
The company’s ability to fund $100.2 million of unfunded development and tenant-improvement commitments while maintaining dividends and liquidity.
Exposure to major tenants and concentrated markets, especially Atlanta, Charlotte and Austin.
The effect of higher interest rates on the $250 million of variable-rate debt and future refinancing requirements.
Future capital allocation, asset sales and dividend policy, noting that 2018 GAAP earnings were materially lower because of the absence of the large 2017 property-sale gains.