Cousins ​​Properties: Recent Earnings Confirm It’s a Different Kind of Office REIT (CUZ)

As many of my readers have probably noticed, I am quite skeptical about office REITs, with the exception of two players: Alexandria Real Estate Equities Inc. (ARE) and Cousins ​​properties enabled (NYSE:CUZ). In my opinion, both of these REITs show strong fundamentals, but have also been punished by the market along with the rest of the office segment. It is clear that valuations should be lower than they were pre-pandemic, when monetary policy was extremely accommodative, but in my opinion the discount has gone too deep, which in turn presents an opportunity for investors.

In the case of CUZ, specifically, I have been following it since mid-2023, when I published my first article on this REIT. Since then, the stock has delivered above-average total returns, beating the entire REIT index, despite being a pure play office player.

However, if we step back a bit more and evaluate the total return over the last 5 years, we see that there is still a noticeable gap between the broader REIT market and CUZ. Again, at least theoretically, this provides additional opportunity.

CUZ recently published its Q2 2024 earnings report, which, in short, confirms my thesis about CUZ’s fundamentals and thus its potential to achieve high profits in the future.

Now let me analyze the earnings report and explain why I think CUZ is worth having in your portfolio.

Review of the diploma thesis

Q2 2024 earnings data came in strong, with flat real estate net operating income on a cash basis up 5.1% and second-generation net rent per square foot on a cash basis up 18.2% compared to Q2 2023. As a result of this momentum and the overall improved outlook, Management has strengthened its funds from operations (“FFO”) guidance to $2.63 to $2.68 per share from the previous guidance of $2.60 to $2.67 per share.

If we look at the table below, we will notice several important elements:

• As of 2022, CUZ has not made any acquisitions or sales; instead, it has retained 34 consolidated trophy properties on its books while allocating a portion of FFO revenues to renovations and maintenance.
• These key properties (including two unconsolidated, joint venture-owned properties) have posted consistent NOI growth each quarter since the beginning of 2023.
• Meanwhile, the occupancy rate remained high at around 88%, which is also in line with the level seen before the pandemic.

All of this confirms that the quality and location of office buildings matter and that CUZ is inherently more protected from adversity than other companies in the industry that own Class B properties in poor locations.

In the case of FFO generation, which is basically a key indicator determining the condition of REITs, we can also notice quite favorable dynamics.

FFO per share has increased from $0.65 per share in the prior quarter to $0.68 currently, which implies an FFO payout level of around 48%. However, for office REITs, it is typically better to assess distribution coverage or actual cash payout level based on FAD, which primarily takes into account second-generation capital expenditures associated with new tenants moving in. In FAD terms, the payout level is 62%, which is still conservative, leaving plenty of liquidity on the books.

Finally, one of the main (if not the most important) advantages that CUZ embodies is its fortress capital structure. In times like these, having a solid balance sheet and access to a huge pool of fresh liquidity can be considered an asset in its own right.

As I mentioned earlier in the article, the fact that CUZ did not venture into new and significant M&A transactions allowed the management to keep the balance sheet under control. This, combined with the consistent maintenance of FAD (after dividend coverage), creates further opportunities to reduce the balance sheet risk from already conservative levels (e.g. net debt to annual EBITDAer 5.12x).

In July, however, we saw the first small moves by the Board, which allocated some of the retained FAD to new investment opportunities. Namely, CUZ injected approximately $27 million into two separate mezzanine loans that yield SOFR +8.25% (and 9.00% for the other) and are already contributing to their earnings growth.

The image above shows properties in which CUZ has acquired an indirect interest through mezzanine loan investments. Both of these properties are located in the Sun Belt market and are aligned with a high-quality strategy.

Summary

In short, the latest quarterly earnings report proves once again that CUZ is a different kind of office REIT. It is more resistant to structural headwinds and even has a strong enough fundamental to consistently post comparable NOI numbers.

In addition, the balance sheet remains strong as cash is gradually retained in-house each quarter (from prudent FAD payments), which, when carefully managed, helps to keep financial risk low.

Given that the multiple here is rather low — with a P/FFO of 9.5x — and the dividend yield is still attractive at ~5% despite the cautious FAD payout, Cousins ​​Properties Incorporated is still a no-brainer buy for me.