Cousins Properties: More Or Less At Fair Value

Summary

• Cousins Properties has proven itself to be an attractive growth prospect over the years.
• The business is certainly not cheap, but it's not overvalued by any means.
• In the long run it could do very well for investors, though it's important to temper expectations appropriately.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

Some investors who buy into the REIT space like to be able to focus on a particular niche. One example would be office REITs. But the opportunity to specify the kind of investment that you are looking for does not stop there. Some firms also provide an emphasis on a particular region. One firm that does just this is Cousins Properties Incorporated (NYSE:CUZ). By buying into Cousins, investors had the opportunity to own a REIT that focuses not only on office properties, but on office properties that are located in the Sun Belt. At this point in time, Cousins does not appear to be a particularly cheap company for investors to buy into, but it doesn't look to be overvalued either. On the whole, for investors interested in the space an interested in a company that has demonstrated consistent attractive growth, Cousins may be a reasonable prospect to buy into.

A look at Cousins

Cousins has a fairly large footprint. In all, the company owns more than 20 million square feet of space. 25% of its portfolio is under five years old, making these assets very new. In addition, the firm has another 1.5 million square feet of space in its development pipeline, 77% of which already is leased despite not being completed. Management also boasts a land bank at its disposal that amounts to 5.2 million square feet that could serve as additional development. Geographically, a lot of the company's business comes from a few specific areas. 35% of its NOI, or net operating income, comes from the 7.2 million square feet of properties leased out in Atlanta, GA. 27% comes from the 4.4 million square feet located in Austin, Texas. And 12% comes from its 2.6 million square feet located in Charlotte, NC. Across its entire portfolio, I counted 38 different properties. However, many of its properties have multiple buildings on them. The size of the properties also vary significantly. This smallest comes in at just 44,000 square feet, while the largest is just over 1.6 million square feet.

*Taken from Cousins Properties Incorporated

Overall, Cousins’ focus, from an industry tenant perspective, varies based on which region we are discussing. For instance, in Atlanta, technology tenants make up 26% of the company's business. Financial services make up a further 18%. In Austin, 31% comes from technology, while 23% comes from professional services. In Charlotte though, financial services account for 38%, followed by legal services at 16%. What this suggests is that management is playing to each region's strengths as opposed to going for a specific industry emphasis. That's not to say though that everything in every market is going great. In Austin, for instance, 94% of its properties are leased. This drops to 91% for Atlanta, and in Charlotte it's only 84%.

When it comes to tenants, Cousins is reasonably diversified. Its top 20 tenants account for just 32.7% of its annualized base rent. The largest of these accounts for just 5.1% of the company's base rent. where this may play in the company's favor, there's an issue with tenants that's a definite weakness. That's when the leases expire. This year alone, 8.5 percent of its leases, as measured by annualized base rent, are due to expire. Between 2021 and the end of 2025, this figure grows to 40.5%. And in the year 2030 and beyond, the figure is just 29.1%. This is not generally a huge concern, but it does expose the company to near-term risks of tenants not renewing their leases.

Over the past few years, management has done really well to grow the company. Back in 2016, revenue was just $259.21 million. This is grown every year since, rising to $740.34 million in 2020. When it comes to growth, management is not afraid to get creative. Over the years, the company has engaged in different mergers. This includes one in 2016 and another in 2019. For management, the ultimate goal appears to be growth. But that shouldn't be surprising, since that is how most REITs seem to be.

As revenue has grown, so to has profitability. FFO, or funds from operations, has nearly tripled from $160.63 million in 2016 to $413.25 million in 2020. NOI, or net operating income, has seen a similar path, rising from $152.91 million in 2016 to $467.20 million in 2020. My personal favorite metric in this space is operating cash flow. Over the same period of time discussed, this has grown from $117.70 million to $351.09 million. And EBITDA, meanwhile, has expanded from $100.91 million to $398.72 million.

This kind of growth should be viewed in an extremely positive light from the perspective of investors. Having said that, the market recognizes the quality of this growth, and as a result demands that investors pay a lofty price. Using the figures from 2020, Cousins is trading at a price to operating cash flow multiple a 14.2. Its price to FFO multiple is a bit lower at 12.1, and its price to NOI multiple is only 10.7. Meanwhile, the company's EV to EBITDA multiple stands at 17.9.

None of these are particularly expensive, but they are far from being cheap. In a review of the top five highest rated office REITs on Seeking Alpha’s Quant platform, I found that firms traded at a price to operating cash flow multiple ranging from 11.2 to 23.1. The 14.2 for Cousins, then, seems appropriate. One company on an EV to EBITDA multiple basis traded at 7.6. The others, though, traded between about 18 and 20.3, with one of them as high as 38.8. This makes Cousins’ reading of 17.9 appear reasonable as well, possibly even coming in on the low end.

Takeaway

Based on the data provided, Cousins has done a phenomenal job growing in recent years. The company seems to have a lot going for it, and management appears to be steering the ship the right way. It's particularly impressive that business fared so well during 2020. Such a high-quality company is certainly one that investors would want to buy into, and shares probably are priced roughly at fair value, or slightly below it, relative to its peer group. But even though the relative valuation is fine, it's valuation on an absolute basis is a bit lofty. This does not mean that investors should not buy into the firm. In fact, if management can continue to grow the business as they have in recent years, there could be a nice bit of upside in this for those who hold for the long run. But the important thing to keep into mind is the need for patience along what could be a bumpy road.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[tlcunninghamcpa]

What Mr. Jones fails to mention is that three very large long-term investors own about 30% of the stock. They are Vanguard, BlackRock, and Principal Global and that has been the stable situation for many years. I’ll believe those three have performed analyses even more thoroughly than Mr. Jones and have regular contact with the outstanding management. To me, this is a very important fact ignored by all pundits on Seeking Alpha. My CUZ shares are not for sale.