EastGroup Properties, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. EastGroup is an industrial-property REIT focused primarily on business distribution space in major Sunbelt markets. Financial amounts below are in U.S. dollars; “million” or “billion” is stated explicitly.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $89.7 million | $82.1 million | $178.3 million | $160.9 million |
| Net income attributable to common stockholders | $23.5 million | $27.0 million | $46.8 million | $49.5 million |
| Diluted EPS | $0.60 | $0.73 | $1.20 | $1.35 |
| FFO per diluted share | $1.33 | $1.22 | $2.65 | $2.42 |
| Property net operating income (PNOI) | $64.4 million | $59.1 million | $127.3 million | $115.6 million |
- Revenue increased 9.3% in Q2 and 10.8% for the first half. PNOI increased 9.0% and 10.1%, respectively. Same-property PNOI excluding lease-termination income rose 2.5% in Q2 and 2.1% for the first half.
- Net income and EPS declined year over year, principally because 2019 included real-estate sale gains of $9.1 million in Q2 and $11.4 million in the first half; there were no property sales in the first half of 2020. FFO per share, a supplemental REIT measure, increased.
- New and renewal leases signed in the first half covered 4.187 million square feet; average rental rates were 20.1% above prior leases on the same spaces. The portfolio was 97.5% leased and 97.0% occupied at quarter-end.
- Six-month operating cash flow was $116.7 million, versus $98.4 million in 2019. Investing activities used $146.7 million, and financing activities provided $29.9 million. Cash ended the period at $0.1 million.
- At June 30, total assets were $2.623 billion, total liabilities $1.406 billion, and equity $1.217 billion. Total debt was $1.233 billion, up from $1.183 billion at year-end 2019. Debt comprised $66.0 million of unsecured bank facilities, $1.038 billion of unsecured debt, and $128.7 million of secured debt.
- The company had $328 million of availability under its $395 million revolving facilities and reported compliance with debt covenants. Its $100 million seven-year term loan, closed in March, has an effective fixed rate of 2.39%. The quarterly dividend declared was $0.75 per share; first-half dividends declared totaled $1.50 per share.
Material changes and unusual items
- Operating results benefited from development and value-add properties, acquisitions, and same-property growth; properties sold in 2019 reduced the year-over-year comparison. Depreciation and amortization increased by $5.4 million for the first half.
- Rent-collection reserves rose to $1.22 million for the first half from $0.31 million a year earlier. Cash-flow hedge fair-value changes generated a $17.6 million first-half other comprehensive loss; swap liabilities were $14.8 million at June 30.
- The company issued 349,458 shares under its continuous offering program in the first half, raising $44.4 million net. It also acquired one operating property for $6.2 million and 128.2 acres of development land for $22.3 million. Development and value-add investments totaled $405.3 million at quarter-end.
Outlook, risks and contingencies
- Management said operations, occupancy and collections remained stable through Q2, but stressed that the eventual COVID-19 impact was uncertain. As of July 28, collections were 97.5% for June rent and 95.9% for July rent; July figures were still subject to further payments. Rent deferral agreements totaled $1.5 million, about 0.4% of estimated 2020 revenue; $1.2 million qualified for recognition under the original lease terms.
- Management anticipated an occupancy decline during the rest of 2020. It continued active development projects but started no new projects in Q2 and did not expect to start new speculative development in Q3. The development and value-add program was 30% leased as of July 28, with $44 million remaining to invest at June 30.
- COVID-19, tenant credit deterioration, rent collection and leasing, construction delays, capital-market access, interest rates and refinancing are principal risks. The company also identified LIBOR transition risk; its contracts include replacement-rate provisions it believes should limit material financial-statement impact.
- Subsequent events: the company agreed to a $175 million private placement of senior unsecured notes, expected to close in Q4 2020, at fixed rates of 2.61% and 2.71% for 10- and 12-year terms. After quarter-end it also sold 14,149 shares for $1.7 million gross.
- No material litigation was reported. Management said the recently adopted accounting standards had no material impact. No formal full-year financial forecast is presented in the supplied filing text.
Important facts for investors to verify
- Subsequent rent collections, deferrals and bad-debt reserves, particularly as July collection data matures.
- Whether anticipated occupancy weakness, lease renewals and rent increases develop as management expects.
- Progress, leasing and remaining funding needs for the development and value-add pipeline, and whether the announced $175 million note placement closes as planned.
- Debt maturities, revolving-facility availability, covenant compliance and LIBOR transition terms; cash on hand was low relative to ongoing investment and dividend needs.
- How much reported earnings and cash generation depend on non-cash items and supplemental measures such as FFO and PNOI; these are not substitutes for GAAP net income or cash flow.