On Jul 19, 2013, we reiterated our long-term recommendation on real estate investment trust (:REIT) - Cousins Properties Incorporated (CUZ) at Neutral. The decision is based on the company’s opportunistic acquisitions, decent leasing activity and top-line growth. Yet, rise in expenses and the precariousness of the office sector are our concerns. Also, increase in online shopping could lower the demand for its retail properties.
Why the Neutral Stance?
Cousins Properties has a diversified portfolio of office and retail properties that mitigate operating risks associated with the economic down cycles involved in operating a single business segment. Moreover, the portfolio is primarily concentrated in the high-growth Sun Belt markets, which due to their long-term demographic trends, should exhibit above-average job growth.
Cousins Properties is focused on building its business on a simpler platform and targets trophy assets and opportunistic investments. The company aims at increasing the value in its current portfolio through inking lease deals with high-end tenants. It also maintains a conservative and flexible balance sheet with ample liquidity that enables it to capitalize on potential acquisition opportunities to fuel its growth engine.
Yet, the continuous acquisitions involve significant upfront costs, which limit its near-term profitability. In addition, we expect volatility in the office sector to continue with job cuts, which in turn is anticipated to lower the tempo of its top-line growth. Also, the escalation in customer buyouts through catalogs as well as online through the Internet, mobile phones and tablets arising out of technological advancements could lower the demand for the company’s retail properties.
The Zacks Consensus Estimate for 2013 FFO (funds from operations) per share remained unchanged at 50 cents while for 2014, it moved north slightly to 57 cents, over the last 60 days.
Cousins Properties is scheduled to release its second-quarter 2013 earnings results after the market closes on Aug 8. The Zacks Consensus Estimate for FFO per share for the upcoming quarter is pegged at 11 cents per share. The earnings ESP (Read: Zacks Earnings ESP: A Better Method) for Cousins Properties is +9.09% for the second quarter. This, along with its Zacks Rank #3 (Hold), makes us confident of a positive earnings surprise call.
Other Stocks to Consider
Other REITs that are performing better and deserve a look are Diamondrock Hospitality Co. (DRH), Winthrop Realty Trust (FUR) and W. P. Carey Inc. (WPC). All of these carry a Zacks Rank #1 (Strong Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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