Cousins Properties Incorporated — Q2 2023 Form 10-Q Summary
Business context and reporting period
Cousins Properties is a self-managed REIT focused primarily on Class A office properties and opportunistic mixed-use developments in Sun Belt markets, including Atlanta, Austin, Tampa, Charlotte, Phoenix, Dallas and Nashville. The filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. At June 30, 2023, the portfolio included approximately 18.8 million square feet of office space and 310,000 square feet of multifamily space.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $204.3 million | $185.7 million | $407.0 million | $372.6 million |
| Rental property revenue | $204.0 million | $183.2 million | $404.0 million | $366.4 million |
| Net income available to common stockholders | $22.6 million | $34.1 million | $44.8 million | $62.0 million |
| Diluted EPS | $0.15 | $0.23 | $0.29 | $0.42 |
| Funds from operations | $103.0 million | $104.7 million | $201.0 million | $204.2 million |
| FFO per diluted share | $0.68 | $0.70 | $1.32 | $1.37 |
| Net operating income | $131.8 million | $123.1 million | $262.0 million | $242.7 million |
| Cash flow from operations | Not separately provided | Not separately provided | $161.1 million | $157.7 million |
Q2 net income available to common stockholders declined 33.6% year over year, while total revenue increased 10.0%. The implied net income margin was approximately 11.1%, compared with 18.3% in Q2 2022. Six-month net income declined 27.7%, while revenue increased 9.2%.
- Same-property rental revenue increased 6.3% in Q2 and 6.4% for the first six months.
- Same-property NOI increased 6.3% in Q2 and 6.0% year to date.
- Total NOI increased 8.1% in Q2 and 9.1% year to date.
- The company leased or renewed 435,000 square feet of office space during the quarter; straight-line net rent per square foot increased 19.6% for spaces under lease within the prior year.
- Cash and cash equivalents were $8.0 million at June 30, 2023, compared with $5.1 million at December 31, 2022.
Debt, liquidity and capital allocation
- Notes payable totaled $2.424 billion at June 30, 2023, up from $2.335 billion at December 31, 2022.
- Debt had a weighted-average maturity of 3.5 years. Approximately 86% of consolidated debt was fixed-rate and 14% was floating-rate based on SOFR.
- The $1.0 billion credit facility had $148.5 million outstanding and $851.5 million of available borrowing capacity at quarter-end.
- The company reported compliance with all secured and unsecured debt covenants.
- In April 2023, the company entered into an interest-rate swap covering $200 million of its $400 million 2022 Term Loan, effectively fixing the underlying SOFR rate at 4.298%. The existing $350 million 2021 Term Loan was also hedged.
- Operating, development and tenant-asset expenditures were $134.3 million for the first six months, versus $172.2 million in the prior-year period.
- Common dividends paid were $97.3 million in the first six months, and the declared quarterly dividend was $0.32 per share.
- Future unfunded tenant-improvement and construction obligations were $153.1 million at June 30, 2023. Management stated that available liquidity should be sufficient for foreseeable obligations.
Material changes versus the prior comparable period
- Revenue growth was driven by higher economic and physical occupancy, tenant-funded improvements, stabilized properties including 100 Mill and Heights Union, and operations following the Promenade Central redevelopment.
- Operating expenses increased 7.8% in Q2 and 8.8% year to date, primarily because of higher real estate taxes, inflation and increased physical occupancy.
- Interest expense increased 56.9% in Q2 and 59.0% year to date, due to the 2022 Term Loan, higher-rate Terminus mortgage refinancing, higher variable interest rates and increased credit-facility borrowings.
- Fee income declined 84.7% in Q2 and 80.3% year to date because Norfolk Southern-related consulting and development contracts were completed in 2022.
- Income from unconsolidated joint ventures declined 85.7% in Q2 and 77.7% year to date. The prior-year period included a $4.5 million company share of gain from a joint-venture land sale, and 2022 also included income from the Carolina Square venture, which was sold in September 2022.
- Cash flow from operations increased modestly by $3.4 million year to date. Investing outflows decreased by $43.7 million, while financing cash flow shifted from $30.8 million of inflows to $8.5 million of outflows, primarily because 2022 included proceeds from ATM forward-equity settlements.
Guidance, outlook, risks and unusual items
- Management expects physical occupancy to continue gradually increasing during the remainder of 2023, which may support parking revenue but also increase operating expenses. No quantitative earnings guidance is provided in the filing text.
- The company plans to remove Hayden Ferry I in Phoenix from operations in the fourth quarter for redevelopment. Following SVB Financial’s bankruptcy and lease rejection, Cousins recorded a $1.6 million reduction in revenue related to the write-down of associated net assets and expects to recognize rent on a cash basis through lease rejection.
- The company reported no real estate acquisitions or dispositions during the periods presented and no impairment charges on held-for-investment buildings, land or development projects. Future impairments remain possible if office-market conditions weaken, property results underperform, or expected holding periods change.
- Key risks include hybrid and remote work trends, office demand and leasing rates, tenant credit quality, inflation, interest-rate volatility, refinancing and covenant compliance, capital-market availability, development costs and delays, joint-venture partner liquidity, regulatory and REIT qualification requirements, cyber risk and uninsured losses.
- Unconsolidated joint ventures had $248.6 million of third-party debt at June 30, 2023, generally non-recourse to Cousins, although certain non-recourse carve-out guarantees may apply.
- Outstanding performance bonds totaled $684,000. The company disclosed ordinary-course litigation but does not expect current matters to have a material adverse effect.
Most important facts for investors to verify
- Reconcile revenue and NOI growth with occupancy, leasing volume, rent spreads and the effect of tenant-funded improvements.
- Assess the impact of higher interest expense, floating-rate exposure and debt maturities in 2024–2025, including the 2024 mortgage and term-loan maturities.
- Monitor availability under the credit facility relative to the $153.1 million of unfunded tenant-improvement and construction obligations.
- Evaluate the redevelopment plan and leasing outlook for Hayden Ferry I after the SVB Financial lease rejection.
- Distinguish recurring operating performance from nonrecurring termination fees, prior-year joint-venture gains and other unusual items.
- Review office-market conditions, hybrid-work effects, tenant credit risk and potential future impairment exposure.