The highest-performing real estate investment trusts (REITs) over the past two years have been almost exclusively in commercial real estate (CRE) sectors that were hit hard by the pandemic. Industries like hotel, retail, senior care, and housing, as well as office space, plummeted initially because of the effects COVID-19 had on their business.
A number of REITs in these industries still sit below pre-pandemic levels, meaning that as demand returns and performance improves, the growth opportunities could be great. Office REIT Cousins Properties (CUZ -6.26%) in particular could make patient investors significantly richer. Here's why.
Sun Belt-centric office space
Cousins Properties is a relatively small office REIT, with a market cap of $5.6 billion, that specializes in the ownership and development of class A office buildings in high-growth markets of the Sun Belt. As of the fourth quarter of 2021, the company had 19.5 million square feet of office space under management in eight core markets:
- Austin, Texas
- Charlotte, North Carolina
- Tampa, Florida
- Chapel Hill, North Carolina
Office space may not seem like a smart investment in the current climate, but Cousins' specific market exposure makes it a strategic and potentially profitable buy.
Several of the markets where Cousins operates are among the fastest-growing in the United States. They are experiencing huge inward migration and are becoming hubs for Fortune 500 companies as they relocate from more expensive states like California or New York. Aside from the Sun Belt's favorable weather, these markets have reliable job opportunities and less stringent COVID-19 protocols, allowing workers to return to office space sooner than other states may have allowed.
Cousins' net effective rent growth for 2021 was 3.5%, with its occupancy sitting at 88.1% at the end of the year. Revenue and net operating income (NOI) have risen steadily since 2019 despite coronavirus-related challenges. Funds from operation (FFO) per share, a metric used to indicate a REIT's profitability, is still 8% above 2019 levels (while down 1% from 2020) and is trending in the right direction. The company also has a fairly low debt ratio of 4.86 times its earnings before taxes, interest, depreciation, and amortization (EBITDA).
It's not without risk
I purchased shares in several retail REITs back in mid-2020 and was handsomely rewarded as demand in this sector returned. It's likely office space will follow suit, but there are still a lot of unknowns. Cousins has the benefit of being in the right markets, where migration is accelerating at a rapid pace. Other office operators, such as Boston Properties, will likely face far greater headwinds because of the markets they operate in. But the return to office isn't guaranteed.
Occupancy has steadily declined quarter over quarter since 2019, indicating less demand for office space -- which is definitely not ideal. Cousins also has around $86 million in debt maturities coming due in 2022. Since the company has $8.9 million in cash and cash equivalents, it's going to have to strategically raise capital by issuing shares; renegotiate or secure new financing; or sell properties to pay off the balances due. This isn't a deal-breaker, but how the REIT ends up restructuring or paying off its debt could affect its funds from operations per share for investors moving forward.
At recent prices, Cousins' stock is trading around 11% below pre-pandemic highs, putting its share price at less than 14 times its FFO (funds from operations) -- an indicator it's trading at a discount. Coupled with its stable and attractive 3.3% dividend return, it's a value buy. Cousins Properties could make you significantly richer, but it may take five to 10 years to do so. Personally, I see office demand returning, but not overnight. If you choose to invest in Cousins, make sure you understand the risks and have patience. It will likely be a bumpy ride before any riches are rewarded.