Cousins Properties Incorporated — Q2 2016 Form 10-Q Summary
Business context and reporting period
Self-administered REIT focused primarily on Class A office and opportunistic mixed-use properties in Sunbelt markets, particularly Georgia, Texas and North Carolina. The filing covers the three and six months ended June 30, 2016. At quarter-end, the portfolio included 15 operating office properties totaling 14.6 million square feet, two operating mixed-use properties totaling 786,000 square feet, and three active development projects.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $92.7 million | $183.9 million |
| Net income | $7.8 million, or $0.04 per diluted share | $30.6 million, or $0.15 per diluted share |
| Funds from operations | $43.3 million, or $0.21 per diluted share | $86.7 million, or $0.41 per diluted share |
| Net operating income | $52.1 million consolidated property NOI; $59.0 million including reported segment NOI | $104.9 million consolidated property NOI; $118.5 million including reported segment NOI |
| Cash flow from operations | Not separately provided for the quarter | $60.1 million |
| Capital expenditures and development | Not separately provided for the quarter | $75.6 million |
Second-quarter net income margin was approximately 8.4% based on reported revenue; the six-month margin was approximately 16.6%, benefiting from the $13.9 million gain on investment-property sales. Consolidated property NOI margin was approximately 57.4% for the quarter and 58.5% for the six-month period.
At June 30, 2016, total assets were $2.62 billion, notes payable were $777.5 million, equity was $1.67 billion, and cash and cash equivalents were $946,000. The unsecured credit facility had $155.0 million drawn and $344.0 million of additional borrowing capacity. Debt fair value was estimated at $807.5 million. The debt portfolio was primarily fixed-rate and non-recourse, with maturities ranging from 2017 through 2024.
The company paid $33.7 million of common dividends during the first six months, equal to $0.16 per share declared. It repurchased 1.6 million shares for $13.7 million in the first quarter; the repurchase program was suspended in March 2016 pending the Parkway transaction.
Material changes versus the prior comparable period
- Second-quarter revenue declined 5.3% year over year, while six-month revenue declined 3.1%. Rental property revenue declined 5.7% in the quarter and 3.8% for the six months, primarily because of property dispositions.
- Same-property NOI increased 0.2% in the quarter and 2.2% for the six months. Management reported a 1.4% increase in same-property NOI for the quarter in its operating overview.
- Six-month net income doubled from $15.2 million to $30.6 million, principally because of the $13.9 million gain on the sale of 100 North Point Center East, including a reported $14.2 million gain.
- Six-month FFO declined from $91.2 million to $86.7 million, and FFO per share declined from $0.42 to $0.41, despite the increase in GAAP net income.
- Operating cash flow increased $15.0 million to $60.1 million. Investing cash use increased to $73.6 million, reflecting higher joint-venture investment and development spending. Financing cash inflow declined to $12.4 million, primarily because of share repurchases.
- General and administrative expense increased 38% for the six-month period, partly due to higher long-term incentive compensation, while second-quarter general and administrative expense decreased 21%.
- Income from unconsolidated joint ventures increased modestly to $3.6 million for the six months, from $3.4 million.
Guidance, outlook, risks and unusual items
The company did not provide a clear quantitative earnings or FFO outlook in the filing. Management expects future tenant-improvement and leasing costs per square foot to remain generally consistent with the first six months of 2016 and expects to fund future distributions through operating cash flow, asset sales, joint-venture distributions and, if necessary, additional borrowings.
Cousins entered into a merger agreement with Parkway Properties on April 28, 2016. Parkway shareholders were to receive 1.63 Cousins common shares per Parkway share. The transaction also contemplated a spin-off of the combined Houston properties into Parkway, Inc. The merger and spin-off were expected to close in the fourth quarter of 2016, subject to stockholder, regulatory, financing, listing, tax and other conditions. Cousins incurred $2.4 million of merger-related costs in the second quarter.
Material transaction risks include failure or delay of the merger or spin-off, potential termination fees of up to $65 million or expense reimbursement of up to $20 million, dilution of existing stockholders, integration risk, management distraction and restrictions on actions while the transaction is pending. Continuing stockholders were expected to own approximately 53% of the combined company, with former Parkway equity holders owning approximately 47%.
Other commitments included $79.5 million of future tenant-improvement obligations, $144.0 million of ground and office lease obligations, $1.9 million of letters of credit and performance bonds, and $81.5 million of commitments shown in the contractual-obligations disclosure. Unconsolidated joint ventures had $393.8 million of third-party debt; Cousins guaranteed up to $8.6 million of the EP II construction loan and 12.5% of the Carolina Square construction loan.
Management stated that ordinary-course litigation was not expected to have a material adverse effect. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Completion timing and final terms of the Parkway merger and Houston spin-off, including all required stockholder and regulatory approvals.
- Actual post-transaction share dilution, leverage, financing needs, integration costs and ownership of the separated entities.
- Debt maturities, particularly the $128.4 million American Cancer Society Center mortgage maturing in 2017 and the $99.7 million 191 Peachtree Tower mortgage maturing in 2018.
- Availability and covenant compliance under the credit facility, including the impact of the pending transaction and dividend restrictions.
- Whether same-property NOI and leasing momentum can offset revenue declines from asset dispositions.
- Progress, funding requirements and lease-up risks for the three development projects and related joint ventures.
- Reconciliation of GAAP net income to FFO, which declined year over year despite higher reported net income from property-sale gains.