Cousins Properties Incorporated — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
Cousins is a self-managed REIT focused on developing, acquiring, leasing and managing Class A office and mixed-use properties in Sunbelt markets. The filing covers the three and six months ended June 30, 2017. At quarter-end, the portfolio included 31 operating office properties totaling 15.5 million square feet and five projects under active development.
Results remain significantly affected by the October 2016 Parkway merger and subsequent Houston-property spin-off. Prior-period Houston operations are presented as discontinued operations, limiting direct comparability.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Rental property revenues | $114.0 million | $46.5 million | $226.5 million | $91.8 million |
| Net operating income | $72.5 million | $26.9 million | $143.5 million | $54.5 million |
| Net income | $170.9 million | $7.8 million | $175.8 million | $30.6 million |
| Net income available to common stockholders | $168.1 million | $7.8 million | $172.8 million | $30.6 million |
| FFO | $66.4 million | $43.3 million | $133.4 million | $86.7 million |
| Diluted EPS | $0.40 | $0.04 | $0.42 | $0.15 |
| Diluted FFO per share | $0.16 | $0.21 | $0.32 | $0.41 |
Reported net income was dominated by property-sale gains, particularly the $119.8 million gain on the sale of the American Cancer Society Center. FFO excludes gains on sales and is therefore a more relevant recurring operating measure, although per-share FFO declined because the share count more than doubled following the Parkway transaction and equity issuance.
Same-property NOI increased 6.8% in the second quarter and 6.5% for the first six months. Q2 leasing activity totaled 341,008 square feet, with weighted-average net effective rent of $21.16 per square foot; leases previously occupied within the prior year achieved a 28.5% increase in net effective rent.
Cash Flow, Balance Sheet, Debt and Liquidity
- Net cash provided by operating activities was $126.2 million for the first six months, compared with $60.1 million in the prior-year period.
- Investing activities provided $47.9 million, including $167.1 million of property-sale proceeds, partially offset by $151.2 million of property acquisition, development and tenant expenditures.
- Financing activities used $193.4 million, primarily reflecting mortgage repayments and other debt reduction, partly offset by $211.8 million of net common-stock issuance and debt proceeds.
- Cash and cash equivalents totaled $16.4 million at June 30, 2017, versus $35.7 million at December 31, 2016.
- Total notes payable were $1.020 billion, down from $1.381 billion at year-end 2016. Debt reduction included repayment of the One Eleven Congress, San Jacinto Center and Two Buckhead Plaza mortgages, as well as debt associated with the ACS Center sale.
- The $500 million unsecured credit facility had $94.0 million outstanding and $405.0 million of available borrowing capacity at quarter-end. It matures in 2019.
- The company issued a $100 million tranche of senior unsecured notes in April 2017 at 4.09%. A further $250 million tranche at 3.91% was issued in July 2017, after quarter-end.
- Total equity was $2.830 billion at June 30, 2017, compared with $2.514 billion at December 31, 2016. The increase primarily reflected net income and a $211.8 million common-stock offering.
- The common dividend was $0.06 per share for the second quarter and $0.18 per share for the first six months. Management stated that future dividends are expected to be funded primarily by operating cash flow, asset-sale proceeds, joint-venture distributions and, if necessary, borrowings.
Material Changes Versus the Prior Comparable Period
- Rental revenues and NOI increased substantially because the Parkway merger expanded the consolidated portfolio. Same-property NOI also improved, primarily from higher occupancy at Fifth Third Center and Promenade.
- Q2 2017 included the $119.8 million gain on the ACS Center sale; Q2 2016 included a $7.5 million contribution from discontinued operations.
- Income from unconsolidated joint ventures increased to $40.3 million from $1.8 million in Q2 2016, including a $37.9 million gain from the sale of properties held by EP I and EP II.
- Interest expense increased 59% in the quarter and 69% for the first six months, primarily because of debt assumed in the Parkway merger and the $250 million term loan.
- Depreciation and amortization increased 201% in the quarter and 216% year to date, largely because of the merger-related increase in real estate assets.
- General and administrative expense increased 84% in the quarter, primarily due to long-term compensation expense. Acquisition and transaction costs declined, and management indicated that substantially all material Parkway transaction costs had been paid.
- The company invested $102.5 million in development during the first six months, compared with $29.1 million in the prior-year period.
Outlook, Commentary, Risks and Unusual Items
Management intends to create value through continued portfolio lease-up, execution of its development pipeline and opportunistic investments in core Sunbelt markets. It expects tenant-improvement and leasing costs per square foot to remain generally consistent with first-half 2017 levels.
- Capital recycling remains important: management expects to use asset sales, refinancing, unsecured debt, equity and joint-venture capital to fund development, acquisitions and obligations.
- The company has $180.9 million of future obligations as a lessor for tenant improvements and other construction obligations, and $210.1 million of future ground and operating lease obligations as a lessee.
- Unconsolidated joint ventures had $434.6 million of third-party debt. Cousins guaranteed 12.5% of the Carolina Square construction loan; its guaranteed amount outstanding was $6.3 million.
- Key risks include refinancing and capital availability, interest-rate volatility, leasing and occupancy performance, tenant credit quality, development delays and cost overruns, property-market concentration in Atlanta, Charlotte and Austin, joint-venture performance, debt-covenant compliance, REIT qualification and integration or liabilities related to the Parkway transactions.
- Outstanding letters of credit and performance bonds totaled $3.9 million. Management said existing litigation is not expected to have a material adverse effect, although litigation outcomes remain uncertain.
- The company expects to adopt the new revenue-recognition standard in 2018 and the new lease standard in 2019; the potential effects were still being assessed.
- Subsequent to quarter-end, the company repaid the $77.9 million 3344 Peachtree mortgage and expected to recognize a $429,000 gain on debt extinguishment.
Important Facts for Investors to Verify
- Separate recurring operating performance from substantial property-sale and joint-venture gains when evaluating earnings and valuation.
- Reconcile diluted FFO per share with the significantly larger post-merger and post-offering share count.
- Review debt maturities, variable-rate exposure, credit-facility covenants and the company’s ability to refinance or recycle assets.
- Assess leasing momentum, occupancy trends and same-property NOI across the concentrated Atlanta, Charlotte and Austin markets.
- Evaluate the funding requirements for development, tenant improvements and leasing obligations against cash, available credit and expected asset-sale proceeds.
- Confirm the effect of the Parkway merger and Houston spin-off on future-period comparability and reported segment results.