CUZ - Cousins Properties: A 6.8% Yield From Class A Sun Belt Offices

2023-10-16 13:39:11 ET

Summary

• Cousins Properties offers a stable quarterly cash dividend with a 6.8% annualized forward dividend yield.
• The REIT is trading at a 35% discount to tangible book value and has positioned itself in the Sun Belt region with trophy Class A office properties.
• Cousins has strong leasing activity, rising rents, and a stable portfolio, making it an attractive investment with a strong dividend outlook.

Sun Belt office property owner Cousins Properties ( CUZ ) last declared a quarterly cash dividend of $0.32 per share , unchanged from its prior payout and for a 6.8% annualized forward dividend yield. Is the yield a buy in a post-pandemic stock market reality where office properties have seemingly become toxic assets? REITs across the subsector have frozen their distributions, instituted dividend cuts, or brought in wholesale suspensions for indefinite time periods. This dividend chaos from a sleepy asset class prior to the pandemic has come against the backdrop of a fast-collapsing stock price and rising office vacancy rates across the US. Cousins is currently trading at a price to trailing 12-month funds from operations of 7.07x , around 37% lower than its peer group median despite what has been stable quarterly dividend distributions.

Cousins can be purchased for a 35% discount to a tangible book value of $4.46 billion, around $29.38 per share, as of the end of its fiscal 2023 second quarter. The REIT has positioned itself at the inspection of two powerful macro trends from the migration to the Sun Belt region and the flight of companies to Class A office properties. The Atlanta-based internally managed REIT is essentially a premier Sun Belt office property owner with a platform described as being built on trophy assets and opportunistic investments. Cousins owned 36 properties spread across 19,155,000 square feet and six states as of the end of its second quarter with Atlanta and Austin forming its largest markets at 37% and 32% , respectively.

Leasing Activity And Rising Rents

Cousins recorded a second-quarter net effective rent of $28.25 per square feet whilst also leasing 40 office leases totaling 435,000 square feet with a weighted average lease term of seven years. The portfolio was 90.5% leased, up 110 basis points from the year-ago period with its weighted average occupancy at 87.3%, up 40 basis points year-over-year. For a REIT operating in a sector described as facing near-apocalyptic conditions, the underlying portfolio metrics are simply terrific with a 7.9% cash rent roll-out set within a stable portfolio, rising rent per square feet, rising portfolio occupancy, and net operating income on the up.

New leases and expansions totaled 343,000 square feet, representing 79% of total leasing activity with revenue for the second quarter of $204.32 million beating consensus estimates by $1.8 million whilst growing 10% over the year-ago period. The growth came against a backdrop of a Fed funds rate that's been hiked to its highest level in more than two decades at 5.25% to 5.50%. This is a tough operating environment for REITs and Cousins held a total debt balance of $2.48 billion at the end of the second quarter. This drove a quarterly interest expense of $26 million, up 57% year-over-year. However, the Fed is leaning towards another pause at the upcoming November 2023 FOMC meeting with the market currently pricing in a nearly 90% chance that rates remain unchanged. This would be the first consecutive rate pause since the Fed embarked on hiking rates and could set the backdrop for the end of further rate hikes.

Dividend Coverage And Debt Maturities

Cousins' tangible book value has remained stable post-pandemic and has actually been pulled higher on both a nominal and per share basis. The bulk of the REIT's Class A office portfolio was mainly built in 2004 with $428 million earmarked for further development. Cousins NOI of $131.8 million was up 7.1% from $123 million in the year-ago period with FOI coming in at $102.95 million, around $0.68 per share and down from $0.70 per share in the year-ago period. The REIT also updated its full-year 2023 guidance for FFO to be between $2.57 and $2.65 per share, up from its previous guidance between $2.55 and $2.65 per share. This would imply 201% coverage at the low end against the annualized figure for its dividend of $1.28 per share.

It's important to stress how stable this renders the current payout with Cousins essentially paying roughly 50% of its FFO to shareholders. Upcoming debt maturities will see around $423.5 million come due in 2024 and another $650 million in 2025. This is set against a minuscule $8 million cash and equivalents balance at the end of the second quarter. Critically, Cousins will exercise what's four six-month extension options on $350 million worth of 2023 debt with the REIT holding the same extension option on $400 million worth of term loans in 2025. Whilst higher interest expenses will continue to pose a headwind to FFO per share growth on a year-over-year basis, the REIT's office portfolio is healthy and the outlook for the dividend looks strong. I'd consider the ticker as a cautious buy here.

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