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Cousins Properties Incorporated CUZ is capitalizing on the favorable migration trend and long-term prospects of the Sun Belt region to strengthen its portfolio through developments and buyouts. However, amid the continuation of work-from-home fears, the company is seeing low leasing levels and an increase in free rent periods offered to tenants.
In December, Cousins Properties shelled out $201 million for the purchase of a 329,000-sq-ft creative office asset. Developed in 2019, this property is known as The RailYard and is located in the South End submarket of Charlotte, NC. It also acquired 3.4 acres of land for $28.1 million in November and plans to develop a 600,000-700,000-sq-ft mixed-use development on the site to be referred to as South End Station. The buyouts will offer substantial long-term value creation opportunities and boost the company’s presence in a thriving Sun Belt submarket.
Notably, the Sun Belt region has been seeing an inbound migration of corporations and people. Moreover, lower taxes and more business-friendly environments are fueling office-job growth in the region.
The trend has been accelerated by the pandemic as urban lifestyles that are heavily dependent on public transportation have become less attractive. Moreover, people and enterprises are seeking more space and greater affordability in the Sun Belt and suburban markets.
These are driving long-term demand for office space and boosting rent growth. In fact, assets in Cousins Properties’ markets are also commanding higher rents than the broader market. Moreover, the company has been witnessing growth in in-place gross rents, while its 19.4-million-sq-ft portfolio was 93.6% leased as of the third-quarter end.
Further, leveraging on this geographic-focus strategy, the company has been undertaking development projects. In fact, as of the third-quarter end, its development pipeline spanned 1.9 million square feet of space and is estimated to cost $566.4 million (at the company’s share). The office pipeline is 82% pre-leased and is expected to contribute $53 million of additional annualized net operating income (NOI) by 2022 end.
However, the coronavirus pandemic has led to an uncertain economic environment. In such a scenario, reduced office space utilization and rental payment collections have become uncertain, and landlords are offering tenant lease extensions, concessions and longer free rent periods.
Amid this, Cousins Properties is likely to face headwinds like a slowdown in new leasing activities and rent deferrals. In fact, the company anticipates muted leasing activity and parking demand in the near term. Additionally, it has executed rent deferral agreements, indicating 1.2% of annualized contractual rents during the first nine months of 2020. Such deferral activities are likely to continue until the pandemic subsides.
Further, while the company’s development pipeline is accretive for value creation, it requires huge capital outlays. Furthermore, an extensive development pipeline increases its operational risks by exposing it to construction cost overruns, entitlement delays and lease-up risks.
Shares of this Zacks Rank #3 (Hold) company have appreciated 15% compared with the industry’s growth of 2.4% over the past three months.
Stocks to Consider
CubeSmart’s CUBE Zacks Consensus Estimate for 2020 funds from operations (FFO) per share has moved up marginally to $1.66 in the past month. The company currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Extra Space Storage Inc’s EXR FFO per share estimates for the current year have been revised 2% upward to $5.10 in the past month. The company carries a Zacks Rank of 2, currently.
City Office REIT, Inc.’s CIO Zacks Consensus Estimate for ongoing-year FFO per share has moved 5.3% north to $1.20 in two months’ time. The company has a Zacks Rank of 2 at present.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Cousins Properties Incorporated (CUZ) : Free Stock Analysis Report
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