Cousins Properties Incorporated — Form 10-Q Summary
Business context and reporting period
Cousins Properties Incorporated is a self-managed REIT focused primarily on acquiring, developing, leasing, managing and owning Class-A office and retail properties in Sunbelt markets, particularly Georgia, Texas and North Carolina. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013.
At June 30, 2013, the portfolio included interests in 16 operating office properties totaling approximately 9.5 million square feet, 16 operating retail properties totaling approximately 3.7 million square feet, and two projects under active development.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $44.2 million, versus $32.5 million | $84.1 million, versus $65.9 million |
| Net income attributable to controlling interest | $0.3 million, versus $9.6 million | $56.7 million, versus a $0.3 million loss |
| Net income available to common stockholders | $5.6 million loss, or $0.05 per share | $47.6 million, or $0.43 per share |
| Funds from operations available to common stockholders | $14.2 million, or $0.12 per share | $25.6 million, or $0.23 per share |
| Same-property NOI growth | 4.7% | 4.9% |
| Cash flow from operating activities | Not separately provided for the quarter | $21.2 million, versus $35.2 million |
Rental property revenues increased 34% in the second quarter and 28% year to date, primarily from the Post Oak Central, 2100 Ross and 816 Congress acquisitions and the commencement of Mahan Village operations. Consolidated property NOI was $20.2 million in the second quarter and $39.1 million for the first six months, while total NOI including joint ventures and discontinued operations was approximately $28.6 million and $54.7 million, respectively.
Interest expense declined 28% in the quarter and 24% year to date. Depreciation and amortization increased 58% in the quarter and 38% year to date, largely because of recently acquired properties. The six-month net income improvement was driven primarily by a $57.6 million gain on investment property sales, including gains related to the Terminus transactions.
Balance sheet, debt and liquidity
| Metric | June 30, 2013 | December 31, 2012 |
|---|---|---|
| Total assets | $1.20 billion | $1.12 billion |
| Cash and cash equivalents | $4.9 million | $176.9 million |
| Notes payable | $340.4 million | $425.4 million |
| Total equity | $773.6 million | $643.0 million |
| Credit Facility balance | $51.0 million | None outstanding |
Consolidated debt had a weighted-average interest rate of 4.56%, excluding loan amortization, and debt to undepreciated assets was 24%. The estimated fair value of notes payable was $359.6 million at June 30, 2013. Most mortgage debt was non-recourse and fixed rate, although variable-rate exposure remained through the Credit Facility and construction facility.
First-half cash flow from investing activities was a $242.4 million use, primarily reflecting $410.8 million of property acquisition, development and tenant-asset expenditures. Financing activities provided $49.3 million, including $165.1 million of net common-stock offering proceeds, partially offset by the $74.8 million redemption of Series A preferred stock and debt repayments.
Material changes versus the prior comparable period
- Revenue increased $11.7 million, or 36%, in the second quarter and $18.2 million, or 28%, for the first six months.
- Same-property NOI increased 4.7% in the quarter and 4.9% year to date, supported primarily by higher occupancy and rental rates.
- Fee income declined substantially because the third-party management and leasing business was sold in 2012; other income increased because of $1.9 million of lease termination income from a tenant at 2100 Ross.
- The Company acquired Post Oak Central in Houston for $230.9 million, acquired 816 Congress Avenue in Austin for $102.4 million, and acquired the remaining 80% interest in Terminus 200 for $53.8 million.
- The Company contributed its Terminus interests to a 50-50 joint venture and sold 50% of the resulting venture to institutional investors. The transactions generated significant gains and changed Terminus 100 from consolidated accounting to the equity method.
- The Company issued 16.5 million common shares for net proceeds of $165.1 million and redeemed all outstanding Series A preferred shares for $74.8 million.
- Cash and cash equivalents fell sharply because acquisition and capital expenditures exceeded operating cash flow, asset-sale proceeds and financing inflows.
- Quarterly FFO increased 8% from $13.2 million to $14.2 million, but first-half FFO declined 4% from $26.6 million to $25.6 million.
Guidance, outlook, risks and unusual items
Management stated that it expects acquisitions and development in Texas to improve portfolio quality and geographic diversification. The Company began construction of the 371,000-square-foot Colorado Tower in Austin, with estimated total costs of $126.1 million. Management expects the sale of Tiffany Springs MarketCenter and The Avenue Murfreesboro in the second half of 2013, providing capital for additional investments.
Subsequent to quarter-end, the Company contracted to acquire Greenway Plaza in Houston and 777 Main Street in Fort Worth for an aggregate purchase price of approximately $1.1 billion. The anticipated third-quarter closing was expected to be funded through equity issuance, asset sales, new secured property-level debt and a proposed $950 million term loan facility, with a potential $150 million accordion feature. Closing and funding were subject to customary conditions, including covenant compliance and the absence of a material adverse change.
- At June 30, 2013, estimated development commitments were $120.3 million, unfunded tenant-improvement and leasing obligations were $26.8 million, and future ground and office lease obligations were approximately $146.1 million.
- Unconsolidated joint ventures had $562.9 million of third-party debt, including $40.6 million recourse to the Company or subject to guarantees. The Company guaranteed $26.2 million of CF Murfreesboro debt, $2.9 million of Cousins Watkins debt and $11.5 million of EP I construction debt.
- CF Murfreesboro’s $97.5 million facility, with $91.9 million drawn, matured December 31, 2013 and was subject to a $26.2 million Company repayment guarantee.
- The Company’s capital strategy depends on operating cash flow, asset sales, debt financing, equity issuance and joint-venture formations. Failure to obtain capital on acceptable terms could limit acquisitions and development.
- Key ongoing risks include leasing and occupancy, tenant credit quality, interest-rate volatility, refinancing and covenant compliance, asset-sale execution, development costs and delays, joint-venture liquidity, real estate market conditions and continued REIT qualification.
- Management reported no material change in previously disclosed risk factors, no material adverse effect expected from ordinary-course litigation, and effective disclosure controls.
Important facts for investors to verify
- Whether the proposed $1.1 billion Texas Acquisition closed on schedule and the final mix and cost of equity, secured debt and term-loan financing.
- The effect of the Texas Acquisition and related financings on leverage, fixed-charge coverage, liquidity and covenant compliance.
- Actual proceeds and timing from the planned sales of Tiffany Springs MarketCenter and The Avenue Murfreesboro.
- Leasing progress, occupancy and renewal spreads at Post Oak Central, 816 Congress, 2100 Ross and the broader office portfolio.
- Refinancing or repayment of joint-venture debt, particularly the CF Murfreesboro facility and related Company guarantees.
- Whether operating cash flow and recurring FFO support common and preferred distributions after acquisition, development and tenant-improvement requirements.
- The sustainability of reported earnings, given that first-half results included substantial gains on property transactions and other unusual items.