After spending the last five years shedding retail, industrial, residential and land assets, Cousins Properties Inc. (NYSE: CUZ) is focusing today on creating value within a portfolio of trophy office assets in the Sun Belt.
Since Cousins President and CEO Lawrence Gellerstedt III took over in 2009, the Atlanta-based firm has shifted the bulk of its portfolio from Atlanta to Texas.
“We’ve been busy really transforming the company, and it’s paid off. Our three-year total return (on equity) is over 100 percent and our office peers are under 40,” Gellerstedt said.
The process of repositioning the company is now largely complete, he added.
“We’re certainly in the eighth inning,” he said. “We’re much more focused now on creating value within our current strategy.”
Cousins’ shift in strategy appears to have the approval of investors. The company’s share price has gained 16.4 percent through the first three quarters of 2014. That compares with a 14 percent advance for the FTSE NAREIT Equity REITs Index and an 11.7 percent increase for office REITs during the same period.
Jed Reagan, analyst at Green Street Advisors, said Cousins has worked hard to transform itself. “The result is a leaner, more focused company that has excellent growth prospects, an appealing geographic footprint and one of the healthiest balance sheets in the U.S. office sector,” he noted.
Focus on Strong Urban Submarkets
A key component of the company’s strategy, according to Gellerstedt, is tracking demographic trends, which these days are clearly favoring specific geographic niches within strong metropolitan markets. Cousins’ properties are concentrated in five cities: Houston, Dallas, Austin, Atlanta, and Charlotte, N.C. Atlanta, Houston and Dallas were among the top five national markets in July for year-over-year nonfarm employment growth, according to the Bureau of Labor Statistics.
Last year, Cousins completed the purchase of Greenway Plaza in Houston and 777 Main in Fort Worth for $1.1 billion. Most recently, Cousins closed on the acquisition of Fifth Third Center in Charlotte and signed a definitive agreement to acquire Northpark Town Center in Atlanta in separate transactions for a total of $563 million.
The deals are in line with the company’s goal of buying trophy assets at below replacement cost and creating value through repositioning and re-leasing. Fifth Third Center, for example, was purchased at 15 percent below replacement cost with an occupancy level of 82 percent and in-place rents that were 5 percent below market levels. Northpark Town Center was purchased at 30 percent below replacement costs, with rents 12 percent below market levels.
David Rodgers, senior analyst at Robert W. Baird & Co., observed that for Cousins, “buying vacancy in a time period of above-average demand…and rising effective rents…all makes quite a bit of sense.”
Reagan added that Cousins has made a number of “smart, well-timed acquisitions.”
“They’ve been executing well on those repositioning plays, but there is still some upside to capture there,” he said.
The pace of these acquisitions, however, may be starting to slow, Gellerstedt said.
“We’ve been busy acquiring during the right part of the cycle, but we think that asset prices are getting to the point that we don’t see a lot of opportunity on a go-forward basis for the next year or two on the acquisition side,” he said.
Select Development Making Sense
Cousins has a development pipeline of almost $500 million and sees continued opportunities in this sphere. “Once asset pricing gets to a certain level, then some select development starts to make sense, and we’re seeing those types of opportunities,” Gellerstedt said.
One of Cousins’ development projects is the first office tower to be built in Austin’s central business district in 13 years. Colorado Tower, which will open at the beginning of 2015, is 95 percent leased to a diverse roster of companies, many of which are new to Austin. “Those are the kinds of opportunities that we look for,” Gellerstedt said.
Cousins’ development program also has influenced its capital structure. As Cousins has reshaped its portfolio, it has paid equally close attention to buttressing its balance sheet to make it one of the strongest in its peer group. Gellerstedt explains that when he became CEO, the level of debt to total market capitalization was about 70 percent. Today that stands at 26 percent.
“Our balance sheet is a very intentional strategy on our part,” said Gellerstedt, noting that it reflects the fact that the company is more exposed to risk than its peers because of its development activities and its strategy of purchasing buildings with higher vacancy levels.
“We want to make sure we offset that risk by having the most conservative balance sheet. It’s worked well for us,” he said. Gellerstedt noted that Cousins has used asset sales of non-core properties to lower its cost structure and issued equity when “compelling opportunities” have come along.
According to Rodgers, Cousins has exhibited “a lot of capital discipline. Starting from a fairly lowly-levered standpoint they should have the opportunity to limit equity dilution over time and really create value for investors.”