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Will Portfolio-Repositioning Efforts Buoy Cousin Properties?


Cousins Properties, Inc.’s CUZ focus on high-growth Sun Belt markets has enabled the company’s Class A office properties to command higher rents compared with the broader market. However, competition from developers, owners and operators of office properties, and other commercial real estate firms leave less scope for the company to rent retain tenants at favorable terms.

The company enjoys significant presence in the best urban submarkets, exhibiting above-average job growth. In fact, per management, job growth in the company’s markets remains 100 basis points higher than the U.S. average. Also, more than 70% of the company’s leasing activity comprised new and expansion leases, further cementing this view.

Also, demand for office spaces is expected to shoot up because as the economy revives, business grows and therefore, corporate sectors seek expansion, renting more space to accommodate the increased workforce.

Moreover, opportunistic acquisitions and developments in high-barrier-to-entry submarkets will likely keep the company’s growth momentum going. Particularly, the company is recycling capital by selling assets in non-core markets and funding trophy asset acquisitions. This has enabled it to built a stronger platform, and experience robust net growth and positive net absorption in its markets.

The company’s strong balance sheet and decent liquidity position also support its investment activity. In fact, in January 2018, the company expanded borrowing capacity under this credit facility from $500 million to $1 billion, and extended the maturity date from 2019 to 2023.

Over the past year, shares of this Zacks Rank #3 (Hold) company have edged down 0.7% as compared with the industry’s decline of 1.8%.

Notably, the June-end quarter witnessed increased construction completions in the office real estate space. This will result in higher supply of office space in many of the company’s markets, and lesser scope for rent and occupancy growth. Also, since the company is mainly focused on office properties, prevailing office-space efficiency trends are limiting any robust recovery in the sector fundamentals.

Additionally, its development pipeline, with an estimated project cost of $571 million, increases capital outlay requirements. Moreover, it escalates the company’s operational risks by exposing it to construction cost overruns, entitlement delays and lease-up risks. Pressure on construction cost over the last five years is anticipated to dent development returns. In addition, the company’s strategy focuses on increasing its land bank, straining investment funds.

Lastly, rising interest rates poses a challenge for Cousins Properties. This is because the company’s ability to refinance existing debt would be restricted, while the interest cost on new debt would increase. This may affect the company’s financial results and consequently hurt its dividend payout.

Key Picks

Better-ranked stocks from the REIT space include VICI Properties VICI, Park Hotels and Resorts, Inc. PK and W.P. Carey Inc. WPC. All three stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

VICI Properties’ Zacks Consensus Estimate for 2018 funds from operations (FFO) per share has been revised upward by a cent over the past 60 days. Its shares have gained 8.4% in the past six months.

Park Hotels and Resorts’ FFO per share estimates for third-quarter 2018 witnessed marginal upward revision in a month’s time. Its shares have appreciated 23.7% over the past six months.

W.P.Carry’s FFO per share estimates for the current year moved up marginally in the past 30 days to $6.39. The stock has rallied 5.7% in six months’ time.

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