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---- Rewind ----
Simon Property Group was the highest-rated REIT in 2009.
Pre-2009, mortgages and real estate bonds were 4-5%.
Simon issued bonds in March 2009 (6 mos after Lehman) at 10%.
The best borrower with unique access to bonds paid 10%.
Real estate debt markets were on life support.
For many capital markets observers, this marked the turning point.
Within 18 months, Simon issued bonds at 4-5% (again).
---- Observations ----
1. Market players underestimate declines on the way down.
2. Turning points are marked by individual milestones (e.g. SPG).
3. Capital yields recover quickly.
---- Back to current ----
Did you catch this announcement last week?
Brand new building (2022)
Trophy quality and location
100% leased to Google
AA credit for 14 years
$522 million
804,000 SF
Top long-term market
6.9% going in cap rate
8.5% unlevered IRR
10% levered IRR
[UIRRs for similar assets were sub 6% 3 years ago. Values are down 50%+.]
---- Office investors ----
Here are the biggest investment managers and office REITs:
Blackstone
Brookfield
PGIM
PIMCO
CBRE IM
Nuveen
Starwood
UBS
Principal
Hines
MetLife
Invesco
JP Morgan
LaSalle
BGO
Clarion
Apollo
KKR
New York Life
Harrison Street
QuadReal
Heitman
Ares
Bridge
AEW
Lone Star
DWS
TPG AG
Stockbridge
Morgan Stanley
CIM Group
EQT Exeter
GID
Barings
Carlyle
Manulife
Affinius
PCCP
Goldman Sachs
Alexandria
Boston Properties
Brandywine
Cousins
Douglas Emmett
Empire State Realty
Highwoods
Hudson Pacific
Kilroy
Paramount Group
Piedmont
SL Green
Vornado
How many of these investors have capital for bullet-proof office at a 10% yield? How many are in a position to buy? The answer probably rounds to zero.
Cousins stole this asset for a very predictable reason...
Since the GFC, Colin Connolly has turned Cousins into a value-creation machine via effective capital allocation. Slowly and steadily, he and his team paid down debt, upgraded quality, downshifted development, and concentrated in strong markets.
From our 2023 predictions: "Cousins Properties had a lot of challenges 10-15 years ago, and was essentially an overleveraged development company, which wasn’t well received by shareholders across multiple cycles. But CUZ is a totally different company now with 40% debt-to-assets and minimal development exposure; they own coupon-clipping office buildings in growth markets, and their rents are 10% above pre-Covid levels. Cousins is trading about 35% below NAV."
CUZ's stock price is up 75% since we made that prediction with near-endless access to cheap debt and equity. The firm just essentially bought a AA bond with real estate upside for 10%.
Gazelle to lion in a cycle.
Like SPG's 10% bonds, this transaction likely marks the worst days of office capital markets.
We also think it marks the start of a momentous buying spree for REITs like Cousins, which will redefine how the industry thinks about "dry powder."
There's no way for others to catch up.
---- Rewind ----
Simon Property Group was the highest-rated REIT in 2009.
Pre-2009, mortgages and real estate bonds were 4-5%.
Simon issued bonds in March 2009 (6 mos after Lehman) at 10%.
The best borrower with unique access to bonds paid 10%.
Real estate debt markets were on life support.
For many capital markets observers, this marked the turning point.
Within 18 months, Simon issued bonds at 4-5% (again).
---- Observations ----
1. Market players underestimate declines on the way down.
2. Turning points are marked by individual milestones (e.g. SPG).
3. Capital yields recover quickly.
---- Back to current ----
Did you catch this announcement last week?
Brand new building (2022)
Trophy quality and location
100% leased to Google
AA credit for 14 years
$522 million
804,000 SF
Top long-term market
6.9% going in cap rate
8.5% unlevered IRR
10% levered IRR
[UIRRs for similar assets were sub 6% 3 years ago. Values are down 50%+.]
---- Office investors ----
Here are the biggest investment managers and office REITs:
Blackstone
Brookfield
PGIM
PIMCO
CBRE IM
Nuveen
Starwood
UBS
Principal
Hines
MetLife
Invesco
JP Morgan
LaSalle
BGO
Clarion
Apollo
KKR
New York Life
Harrison Street
QuadReal
Heitman
Ares
Bridge
AEW
Lone Star
DWS
TPG AG
Stockbridge
Morgan Stanley
CIM Group
EQT Exeter
GID
Barings
Carlyle
Manulife
Affinius
PCCP
Goldman Sachs
Alexandria
Boston Properties
Brandywine
Cousins
Douglas Emmett
Empire State Realty
Highwoods
Hudson Pacific
Kilroy
Paramount Group
Piedmont
SL Green
Vornado
How many of these investors have capital for bullet-proof office at a 10% yield? How many are in a position to buy? The answer probably rounds to zero.
Cousins stole this asset for a very predictable reason...
Since the GFC, Colin Connolly has turned Cousins into a value-creation machine via effective capital allocation. Slowly and steadily, he and his team paid down debt, upgraded quality, downshifted development, and concentrated in strong markets.
From our 2023 predictions: "Cousins Properties had a lot of challenges 10-15 years ago, and was essentially an overleveraged development company, which wasn’t well received by shareholders across multiple cycles. But CUZ is a totally different company now with 40% debt-to-assets and minimal development exposure; they own coupon-clipping office buildings in growth markets, and their rents are 10% above pre-Covid levels. Cousins is trading about 35% below NAV."
CUZ's stock price is up 75% since we made that prediction with near-endless access to cheap debt and equity. The firm just essentially bought a AA bond with real estate upside for 10%.
Gazelle to lion in a cycle.
Like SPG's 10% bonds, this transaction likely marks the worst days of office capital markets.
We also think it marks the start of a momentous buying spree for REITs like Cousins, which will redefine how the industry thinks about "dry powder."
There's no way for others to catch up.
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