Cousins Properties (NYSE: CUZ) has undergone several changes over the last three years. It acquired fellow office real estate investment trust TIER REIT, enhanced its portfolio via several smaller deals, and made significant progress on its development pipeline. These moves have improved its balance sheet and expansion prospects, setting it up for future growth.
Here's a closer look at what appears to be ahead for this office-focused REIT over the next three years.
Where Cousins Properties is today
Cousins Properties owns interest in about 20 million square feet of primarily office space, 92.7% leased to tenants across several industries. Most of its properties are newer class A office buildings, with 25% of its portfolio less than five years old and the average one built in 2002.
The REIT operates across the following seven Sun Belt markets:
- Atlanta (35% of its NOI)
- Austin, Texas (27%)
- Charlotte, North Carolina (12%)
- Phoenix (8%)
- Tampa, Florida (8%)
- Dallas/Fort Worth (6%)
- Houston (4%)
The company focuses on these markets because they're benefiting from in-migration trends as companies and people move into the Southeast for its better business climate and weather.
The REIT has grown its portfolio through a combination of asset acquisitions and corporate mergers. In 2019, it joined forces with TIER REIT in a $7.8 billion transaction that combined two highly complementary Sun Belt office portfolios. That transaction also enhanced Cousins' balance sheet and growth prospects.
Meanwhile, last year the REIT reshuffled its Charlotte portfolio, selling two properties for roughly $500 million and acquiring a newly built creative office asset and vacant land for more than $200 million.
Where Cousins Properties seems headed
While M&A has helped drive Cousin's growth in recent years, development projects should be a major story over the next few years. The REIT recently completed Domain 12, a 100% leased, 320,000-square-foot office building in Austin. It has five more projects under construction across the Austin, Atlanta, and Phoenix markets. These projects will see it add 1.5 million square feet of space, 77% of which it has already preleased.
Because Cousins has already secured tenants for most of its development pipeline, the REIT has high visibility into future earnings. It currently expects the six projects (which includes Domain 12) will generate $53 million in annualized NOI upon stabilization at the end of 2022. That implies roughly 11% growth from 2020's level of $486 million in NOI.
The REIT seems likely to start additional development projects over the next few years, given its vast land bank. The company ended 2020 with enough land to support 5.2 million square feet of new developments in Atlanta, Austin, Charlotte, Dallas, and Tampa.
That number includes the South End Station project in Charlotte it acquired in 2020. The REIT purchased 3.4 acres of land and anticipated developing a 600,000- to 700,000-square-foot mixed-use project on the site, which is across the street from the creative office building it also bought in the city last year.
Another growth driver for the REIT is rental increases. Due to the Sun Belt region's growth over the years, many existing rental agreements are at below-market rates. This means Cousins should be able to secure much higher rates when existing contracts expire.
That was the case last year as Cousins signed 1.4 million square feet of office leases, with second-generation rates coming in 13.1% above the prior lease rates on existing space. That was impressive considering the impact the COVID-19 pandemic had on physical occupancy levels in office buildings, as most companies worked remotely to help slow the spread. However, those higher-rate rental agreements suggest most companies plan to return to their offices in a post-pandemic world instead of continuing to work remotely.
Cousins also seems likely to continue acquiring select properties in Sun Belt markets in the coming years. The company took advantage of last year's economic uncertainty to make two deals in Charlotte and could complete additional acquisitions over the next three years if compelling opportunities arise. The REIT could look to purchase stabilized properties or development projects in its existing markets and potentially expand into other fast-growing Sun Belt cities benefiting from strong in-migration dynamics.
Finally, it wouldn't be surprising to see the REIT make another corporate acquisition, given its history of making needle-moving deals. The REIT will also likely recycle capital by selling select assets to maintain its strong balance sheet and help finance development projects and future acquisitions.
This office REIT has a bright future
Cousins Properties owns a large-scale office portfolio across several fast-growing Sun Belt markets. That portfolio should grow significantly over the next few years as the REIT completes its current slate of development projects. And it should benefit from above-average rental growth. Add in the upside potential from additional acquisitions, and this office REIT appears poised to deliver meaningful income growth over the next few years, which could enrich its investors.