Cousins Properties Incorporated — Q3 2013 Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the period ended September 30, 2013. Cousins is a self-managed REIT focused primarily on acquiring, developing, leasing and operating Class-A office properties in Sunbelt markets, particularly Georgia, Texas and North Carolina. At quarter-end, the portfolio included 18 operating office properties totaling 14.8 million square feet, six operating retail properties totaling 566,000 square feet, and two development projects.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | Change |
|---|---|---|---|
| Consolidated revenue | $52.1 million | $39.3 million | 34% increase |
| Net income | $65.0 million | $13.3 million | Significant increase |
| Net income available to common stockholders | $59.4 million | $9.4 million | Significant increase |
| EPS, basic and diluted | $0.36 | $0.09 | Increase |
| Funds from operations available to common stockholders | $17.2 million | $25.7 million | 33% decrease |
| FFO per share | $0.11 | $0.25 | Decrease |
| Net cash provided by operating activities | $98.7 million for nine months | vs. $52.4 million |
- Rental property revenue increased 58% to $49.2 million, primarily from the Texas Acquisition, Post Oak Central, 816 Congress and prior acquisitions.
- Consolidated property NOI was $26.5 million, compared with $17.2 million in the prior-year quarter. Total NOI, including joint ventures and discontinued operations, was $34.8 million, compared with $27.6 million.
- Same-property NOI increased 4.5% in the quarter and 5.1% for the first nine months. Office new-lease rents increased 8% in the quarter and 8% year to date; office renewal rents increased 12% and 5%, respectively.
- Net income benefited substantially from $63.1 million of income from unconsolidated joint ventures and $3.8 million of gains on sales of investment properties. These included significant gains from joint-venture interest sales and asset dispositions.
- Q3 2013 FFO declined despite higher rental operations because FFO excludes gains on asset sales and was affected by lower fee income, increased share count, and other corporate costs.
- At September 30, total assets were $2.26 billion, cash and cash equivalents were $5.4 million, restricted cash was $3.0 million, and total equity was $1.47 billion.
Debt, Liquidity and Cash Flow
- Notes payable totaled $642.8 million at September 30, compared with $425.4 million at December 31, 2012. Estimated fair value was $746.4 million.
- Debt included $577.3 million of fixed-rate mortgage debt and $65.5 million of variable-rate debt. The weighted average rates were approximately 4.72% for fixed-rate debt and 1.71% for variable-rate debt.
- The Company had $51.1 million outstanding under its unsecured Credit Facility and reported $297.9 million of remaining availability.
- Nine-month operating cash flow was $98.7 million. Investing cash flow was negative $1.25 billion, primarily because of property acquisitions and related expenditures of $1.50 billion. Financing cash flow was positive $976.3 million, driven mainly by equity offerings and new borrowings.
- Debt to total market capitalization declined from 32% at June 30, 2013 to 30% at September 30, 2013, according to management.
- Contractual obligations totaled $949.0 million, including $642.8 million of debt and interest commitments, plus $111.9 million of commitments primarily for tenant improvements, letters of credit and performance bonds.
- Future tenant-improvement obligations were $109.5 million; future ground and office lease obligations were approximately $148.4 million.
Material Changes Versus the Prior Comparable Period
- The Company acquired Greenway Plaza, a 4.3 million-square-foot Houston office complex, and 777 Main, a 980,000-square-foot Fort Worth office building, for an aggregate purchase price of approximately $1.1 billion.
- It issued 69.0 million common shares in August for $661.3 million of net proceeds and had issued 16.5 million shares in April for $165.1 million. The substantial increase in weighted-average shares materially affects per-share comparisons.
- The Company entered into $188.8 million of fixed-rate debt secured by Post Oak Central and $114.0 million secured by Promenade.
- The Company sold Tiffany Springs MarketCenter and interests in several joint ventures and retail assets. Management expected additional asset sales before year-end generating approximately $50 million.
- The portfolio shifted materially toward Texas and office properties: Texas assets increased from 20% to 51% of total square footage, while office assets increased from 70% to 94%.
- The Company redeemed all outstanding Series A preferred stock for $74.8 million and continued to pay quarterly common dividends of $0.045 per share.
- Income from unconsolidated joint ventures increased to $63.1 million in the quarter from $2.3 million, largely because of gains on sales of venture interests and underlying properties. This increase is not representative of recurring operating income.
Outlook, Commentary, Risks and Unusual Items
- Management stated that long-term prospects for its core markets remained strong, with projected job growth above the national average and expected declines in vacancy and increases in net rents, particularly in Austin and Houston.
- The Company may pursue additional acquisitions and opportunistic investments through asset sales, Credit Facility borrowings, mortgage financing, equity issuance and joint ventures. No explicit earnings or FFO guidance was provided in the filing text.
- Management expects tenant-improvement and leasing costs to increase as the operating portfolio expands, although per-square-foot costs had generally stabilized or declined in some markets.
- Material unusual items included the Texas Acquisition, joint-venture disposition gains, the $4.5 million earn-out gain related to the previously sold management and leasing business, and $6.9 million of Q3 acquisition-related costs.
- Unconsolidated joint ventures had $230.3 million of third-party debt, including $14.4 million recourse to Cousins. The Company also provided guarantees relating to certain joint-venture borrowings.
- Key risks include refinancing and capital availability, interest-rate volatility, leasing and tenant-credit risk, geographic concentration in Sunbelt markets, development cost overruns, asset-sale execution, debt covenant compliance, joint-venture obligations, litigation and continued qualification as a REIT.
- Management stated that pending litigation was not expected to have a material adverse effect, individually or in aggregate. Disclosure controls and procedures were determined to be effective.
Important Facts for Investors to Verify
- Whether gains from joint-venture and property dispositions are masking weaker recurring FFO and operating earnings.
- The leasing, occupancy and same-property NOI performance of the newly acquired Houston, Fort Worth and Austin assets.
- The timing, pricing and use of proceeds from the expected additional asset sales.
- Refinancing requirements, Credit Facility availability, variable-rate exposure and compliance with debt covenants.
- The effect of the 85.5 million shares issued in 2013 on future FFO per share, dividends and shareholder dilution.
- The Company’s ability to fund approximately $109.5 million of tenant-improvement obligations and other commitments while maintaining its dividend and acquisition strategy.
- The recurring earnings contribution and leverage implications of unconsolidated joint ventures and related guarantees.