Cousins Properties Incorporated — Q3 2015 Form 10-Q Summary
Business Context and Reporting Period
Cousins Properties is a self-administered and self-managed REIT focused primarily on Class A office properties and opportunistic mixed-use projects in Sunbelt markets, particularly Georgia, Texas and North Carolina. The filing covers the three and nine months ended September 30, 2015, with unaudited financial statements.
At quarter-end, the portfolio included 16 operating office properties totaling 15.2 million square feet, two operating mixed-use properties totaling 786,000 square feet and three projects under active development.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $98.1 million | $89.1 million | $288.0 million | $255.3 million |
| Rental property revenue | $96.0 million | $86.9 million | $282.2 million | $244.4 million |
| Income from continuing operations | $53.6 million | $6.1 million | $69.3 million | $8.0 million |
| Net income available to common stockholders | $53.6 million | $19.3 million | $68.8 million | $22.3 million |
| FFO available to common stockholders | $52.5 million | $41.7 million | $143.6 million | $113.6 million |
| FFO per diluted share | $0.24 | $0.20 | $0.66 | $0.57 |
| Net cash from operating activities | Not separately reported | Not separately reported | $103.0 million | $94.6 million |
Q3 total revenue increased approximately 10% year over year, while nine-month revenue increased approximately 13%. The Q3 net income margin was approximately 54.7%, compared with 21.7% in the prior-year quarter; the increase was driven primarily by the $37.1 million gain on sale of investment properties. Excluding the gain, Q3 income from continuing operations before the gain was $16.5 million.
Same-property net operating income increased 1.1% in Q3 and 2.6% for the first nine months. Consolidated rental property revenue increased 11% in Q3 and 15% for the nine months, while rental property operating expenses increased 7% and 10%, respectively.
Office leasing totaled 770,009 square feet during Q3 and 1.7 million square feet year to date. Net effective rent was $17.59 per square foot in Q3 and $15.80 per square foot for the first nine months, excluding the NCR lease. Average net rental rates for new and renewal office leases were $20.66 per square foot for the nine months, up 11.6% from the comparable period.
Balance Sheet, Debt and Liquidity
- Total assets were $2.64 billion at September 30, 2015, compared with $2.67 billion at December 31, 2014.
- Notes payable totaled $779.6 million, down from $792.3 million at year-end 2014. Estimated fair value of debt was $806.0 million.
- Debt included $134.0 million drawn under the unsecured Credit Facility, with $365.0 million of additional borrowing capacity reported at quarter-end.
- Cash and cash equivalents were $5.3 million, with restricted cash of $4.5 million.
- Net cash provided by operating activities was $103.0 million. Investing activities used $14.6 million, and financing activities used $83.1 million.
- Quarterly common dividends were $0.080 per share; $52.0 million of common dividends were paid during the first nine months.
- The company repurchased approximately 2.0 million shares for $18.7 million through September 30 under a newly authorized $100 million repurchase program.
Material Changes Versus the Prior Comparable Period
- Q3 net income available to common stockholders rose to $53.6 million from $19.3 million, primarily because of the 2100 Ross disposition and its related $36.2 million gain.
- Nine-month FFO increased 26% to $143.6 million from $113.6 million, or $0.66 per diluted share versus $0.57.
- General and administrative expense declined 41% in Q3 and 24% for the nine months, primarily because of lower long-term incentive compensation expense.
- Nine-month interest expense increased 11% to $23.2 million, reflecting the 816 Congress mortgage and higher average Credit Facility borrowings, partially offset by higher capitalized interest.
- Property acquisition, development and tenant asset expenditures declined to $151.4 million from $351.7 million, primarily because the prior-year period included significant acquisitions.
- Cash flow from investing activities improved substantially because of property-sale proceeds and lower acquisition and development spending.
- Preferred stock was fully redeemed in 2014; no preferred dividends were recorded in 2015.
Transactions, Outlook, Risks and Unusual Items
- In July 2015, the company acquired a 4.16-acre Atlanta site for $27.0 million, intended for development of an approximately 485,000-square-foot NCR office building and an additional potential office building.
- In September 2015, the company sold the 844,000-square-foot 2100 Ross office tower in Dallas for $131.0 million and recognized a $36.2 million gain.
- North Point Center East and The Points at Waterview, totaling 743,000 square feet, were classified as held for sale at quarter-end. Management stated that anticipated sales would not represent a strategic shift and therefore remained in continuing operations.
- Management expected to fund the NCR development with proceeds from 2100 Ross and potentially other property sales, including transactions that could close in late 2015 or 2016.
- Management expected operating cash flow and joint-venture distributions to fund the remaining 2015 common dividend.
- Contractual obligations totaled $1.09 billion, including $779.6 million of company debt, $160.8 million of interest commitments and $145.1 million of ground leases. Unfunded tenant-improvement and other commitments totaled $87.6 million.
- Unconsolidated joint ventures had $227.2 million of third-party debt. Cousins guaranteed $2.9 million of EP II construction debt at quarter-end and guaranteed 12.5% of the Carolina Square construction loan, which had no outstanding balance.
- Key risks include refinancing and debt-covenant compliance, interest-rate volatility, leasing and tenant-credit risk, geographic concentration in Atlanta and Houston, energy-industry exposure, development delays or cost overruns, property-sale execution, joint-venture liquidity and continued REIT qualification.
- On October 1, 2015, the company prepaid the $14.2 million Points at Waterview mortgage note without penalty. Subsequent to quarter-end, it repurchased an additional 17,000 shares for $152,000.
Important Facts for Investors to Verify
- Reconcile reported net income with FFO and isolate the effect of the 2100 Ross gain and other property-sale activity.
- Review leasing occupancy, tenant concentration and exposure to major tenants, including the NCR development commitment.
- Confirm the timing and pricing of anticipated property dispositions and the intended use of proceeds.
- Assess debt maturities, refinancing assumptions, Credit Facility capacity, interest-rate exposure and covenant headroom.
- Evaluate the funding requirements for development, tenant improvements, leasing costs and ground leases.
- Review guarantees and debt obligations of unconsolidated joint ventures, including EP II and Carolina Square.
- Monitor the $100 million share-repurchase authorization and its effect on liquidity and per-share results.
- Confirm that subsequent-period results support management’s expectation that operating cash flow and joint-venture distributions will fund dividends.