Benzinga - by Zacks, Benzinga Contributor.
Cousins Properties' (NYSE: CUZ) portfolio of class A office assets, concentrated in the high-growth markets in the Sun Belt region, positions it well to ride the growth curve amid the improving demand for premium office assets. Its capital-recycling efforts and a healthy balance sheet bode well. However, high supply in the office real estate market is fueling competition and affecting pricing power. High interest rates add to its concerns.
What's Aiding CUZ? Cousins Properties' unmatched portfolio of Class A office assets in the high-growth Sun Belt markets is poised to benefit as the region is experiencing a population influx. Amid favorable migration trends and a pro-business environment, corporate relocations and expansions in the Sun Belt markets have gained pace, and this is driving the demand for office space.
Properties in these markets are also expected to command higher rents compared with the broader market. Per the company's May 2024 Investor Presentation, it witnessed a 39% increase in in-place gross rents from the first quarter of 2017 to the first quarter of 2024. The company also has a well-diversified, high-end tenant roster.
Cousins Properties is seeing a recovery in demand for its high-quality, well-placed office properties, as highlighted by a rebound in the new leasing volume. For the first quarter of 2024, the company executed 37 leases for a total of 403,604 square feet of office space with a weighted average lease term of 7.1 years. This included 187,938 square feet of new leases, 117,165 square feet of renewal leases and 98,551 square feet of expansion leases.
In 2023, it executed 140 leases for a total of 1.69 million square feet of office space with a weighted average lease term of 7.5 years. The company's lease expirations through 2025 are among the lowest in the office sector. With modest lease expirations lined up, the company is well-positioned for growth.
Cousins Properties' capital-recycling moves to enhance its portfolio quality with trophy assets' acquisitions and opportunistic developments in high-growth Sun Belt submarkets seem encouraging for long-term growth. It also makes strategic dispositions for a better portfolio mix.
Cousins Properties focuses on maintaining a robust balance sheet, with ample liquidity and limited near-term debt maturities to capitalize on improving market fundamentals. The company exited the first quarter of 2024 with cash and cash equivalents of $5.5 million. As of the same date, it had $292.2 million drawn under its $1 billion credit facility, with an ability to borrow the remaining $707.8 million. Thus, with considerable liquidity and access to capital markets, it enjoys ample flexibility to pursue compelling growth opportunities.
Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and CUZ has remained committed to that. The company has increased its dividend four times in the last five years. The five-year annualized dividend growth rate is 11%. Given the company's strong financial position, its dividend payment is likely to be sustainable in the upcoming period.
Over the past six months, shares of this Zacks Rank #2 (Buy) company have risen 20.4% compared with the industry's upside of 5.4%.
Image Source: Zacks Investment Research
What's Hurting CUZ? There is competition from developers, owners and operators of office properties and other commercial real estate. This affects Cousins Properties' ability to retain tenants at relatively higher rents and dents its pricing power.
In addition, higher construction activity is expected to increase the new supply of Class A office space in the company's market. Given the competitive landscape, it might become increasingly challenging for the company to backfill near-term tenant move-outs, resulting in lesser scope for rent and occupancy growth. Also, with the continuation of the hybrid working environment, it is expected that near-term demand for office spaces will remain choppy.
Further, a high interest rate environment is a concern for Cousins Properties. Elevated rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. Moreover, with high interest rates still in place, the dividend payout might seem less attractive than the yields on fixed-income and money market accounts.
Other Stocks to Consider Some other top-ranked stocks from the REIT sector are Public Storage (NYSE: PSA) and SL Green Realty Corp. (NYSE: SLG), each carrying a Zacks Rank #2 at present.
The Zacks Consensus Estimate for Public Storage's 2024 FFO per share is pegged at $16.92, which suggests marginal year-over-year growth.
The Zacks Consensus Estimate for SLG's 2024 FFO per share stands at $7.33, which indicates an increase of 48.4% from the year-ago period's actual.
Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.
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