CUZ - Cousins Properties: Good Company In A Troubled Sector

2023-10-16 23:19:15 ET

Summary

• Cousins Properties is a rare office REIT that is worth taking a look at.
• The company has strong financials and impressive metrics, including higher rent prices and occupancy rates compared to other office REITs.
• The company's stock price dropped 55%, while its fundamentals didn't change much.
• It has an impressive dividend history, and current earnings support further hikes.

Cousins Properties ( CUZ ) is an interesting REIT play. On one side, it's an office REIT which is one of the most troubled sub-sectors of the REIT kingdom so it's out of favor by investors but on the other hand, it's a very well-run company that has strong financials and it's worth taking a look at despite being part of a troubled sector.

Office REITs have been in trouble since the COVID pandemic and new work trends that include employees working from home (also known as remote work arrangements). Many employees have been working remotely either part-time or full-time and just about when several large companies announced "return to office" policies, they also announced large layoffs, including technology giants like Amazon ( AMZN ), Meta ( META ), Microsoft ( MSFT ) and Netflix ( NFLX ). Currently, office occupancy rates are near all-time lows and investors have been selling off office REITs, many of which are seen as in deep trouble.

The fact that interest rates have been rising didn't help matters either and this hurt office REITs from two fronts. First, rising rates made it difficult for these companies to roll their debt and made it more expensive for them to reach liquidity which they need desperately because operating office buildings is a very capital-intensive business. Second, rising rates also made bonds more attractive and risky REITs less attractive since investors can now get 5.5% yields from risk-free bonds instead of taking risks with volatile stocks. Thus, office REITs sold off big time.

Meanwhile, not all office REITs are the same. Just as every sector, this sector also has some good quality companies that are well-run and they also get punished along with the bad ones which often creates buying opportunities. It is often said that when an entire sector sells off you want to buy the good quality stocks within that sector so that you can take advantage of it when the sector eventually comes back. Currently, CUZ is down -55% from prices it saw a couple years ago even though the company's fundamentals didn't change much during this time which could signal some sort of a buying opportunity.

Despite being in a troubled sector, Cousins Properties has some very impressive metrics. For example, the company reports that it is now collecting almost 10% higher rent on average as compared to pre-COVID levels when most office REITs actually saw their rent prices drop significantly since then. The company is reporting very strong numbers in terms of price increases as well as occupancy rates. How does it do it when other office REITs are struggling so much?

One possible answer is location. While the whole work-from-home thing is a nationwide (if not a global) trend, it's affecting different locations differently. We are seeing this trend much stronger in West Coast cities like San Francisco, Seattle, and Portland where many trendy tech companies are located as well as northeast cities like New York City, Boston, and DC. These cities are also famous for having high home prices which entices many employees to move away and work remotely. In the Sun Belt region, this seems to be less prevalent and people tend to work both from home and from their offices. Almost all properties owned and operated by Cousins Properties are located in places where working from home may not be as trendy as San Francisco, New York City, or Seattle.

Another thing that seems to set this company apart is that it owns either newer buildings or newly renovated buildings with a lot of upgrades that have a lot of amenities that may make people more likely to want to go to the office such as gyms and wellness centers. The company reports that more than 40% of the company's properties have been renovated, upgraded, or redeveloped in the last 7 years. These upgrades could also allow the company to charge its tenants higher rent prices. This must be working well for the company as it boasts an occupancy rate of 91% despite raising its prices by 33% since 2017.

The company's buildings fall into three different categories called Class A, Class B, and Class C. Basically Class A facilities are considered premier office spaces that include huge spaces, state-of-the-art facilities, a central location within a city that is accessible, the newest technologies, and high-quality architecture both inside and outside. Most if not all of Cousin's facilities are considered Class A facilities. What is more impressive is that the company is able to charge a rent price (by square feet) that's on average 23% higher than the average Class A property in each major city it operates. For example in Atlanta the average Class A property commands a price of $35.07 per SF whereas Cousin's is able to chart $41.91 per SF. In Dallas and Phoenix, the difference seems even more dramatic.

One thing I particularly like about this company is its relatively low leverage ratio. Currently, the company's debt to EBITDA leverage stands at 5.1x which is significantly below the sector average of 7.3x and one of the lowest in the entire office REIT industry. One of the biggest threats in the REIT industry is overleverage and this company seems to be in good shape in that regard.

The company currently enjoys a dividend yield of 6.75%. More importantly, the company's dividend has been growing at a decent rate in recent years. More specifically, CUZ was able to increase its dividend per share from $0.51 to $1.27 in the last decade which is an increase of 249%. Notice that the dividends didn't rise in a steady fashion though. There were years where dividends stayed the same or even dropped from the previous year but the long-term trend is definitely upward. In 2020 the company paid one of its biggest dividends ever when many REITs actually suspended paying dividends or cut their dividends significantly due to pandemic-related issues they were experiencing. The company's current AFFO of $2.52 easily covers its current dividend which is about half of its AFFO. In fact, there is plenty of room for a possible dividend hike.

The stock trades at a relatively cheap valuation. Its Price to (trailing) AFFO ratio is 10.48 versus the sector average of 12.68 indicating a discount of 17%. On a forward basis, the discount is even wider at almost 20% as the company enjoys a forward P/AFFO of 10.49 versus a sector average of 13.04. On P/FFO basis, the company trades at a multiple of 7 which represents a 35% discount against the sector average of 11. The company's valuation looks attractive based on both current and forward metrics.

Of course, no investment is risk-free. Two major risks for this company are interest-rate risk and widening of work-from-home trend risk. It is possible that interest rates could rise even further from their current level and this could hurt the bottom line of the company or make it difficult for the company to access capital even though its leverage is one of the lowest in the industry. Also, we could see further increases in the number of people working from home and we could see this trend turning into something permanent which could hurt this company's business model.

All in all, despite the troubles we are seeing in office REITs this stock seems like a good long-term buy and hold for income-oriented investors with a long-term focus.

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