EastGroup Properties, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted. EastGroup is an industrial-property REIT focused primarily on Sunbelt distribution facilities.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Real estate operating income | $88.6 | $78.6; up 12.6% |
| Net income | $23.3 | $22.5 |
| Net income attributable to common stockholders | $23.3 | $22.5 |
| Diluted EPS | $0.60 | $0.62 |
| Funds from operations (FFO) per diluted share | $1.31 | $1.20; up 9.2% |
| Property net operating income (PNOI) | $62.9 | $56.5; up 11.4% |
| Same-property PNOI, excluding lease termination income | Up 1.7% | Comparable period |
| Net cash from operating activities | $51.4 | $41.5 |
| Cash and cash equivalents, March 31 | $0.7 | $0.2 at December 31, 2019 |
- Operating expenses were $25.8 million, versus $22.3 million; depreciation and amortization was $27.9 million, versus $23.7 million. Interest expense declined to $8.5 million from $8.8 million.
- Net income rose, but diluted EPS fell, reflecting higher weighted-average shares and a $2.3 million real-estate sale gain included in Q1 2019 but absent in Q1 2020.
- Other comprehensive income included a $15.8 million loss from changes in cash-flow hedge fair value. This reduced total comprehensive income to $7.5 million from $20.2 million in Q1 2019.
- Common dividends declared were $0.75 per share, versus $0.72 a year earlier. Cash distributions to stockholders were $29.9 million.
Financial position, debt and investment
- Total assets were $2.605 billion at March 31, up from $2.546 billion at year-end. Total liabilities were $1.412 billion; total equity was $1.192 billion.
- Total debt was $1.250 billion, up from $1.183 billion at December 31. It comprised $82 million of unsecured credit-facility borrowings, $1.040 billion of unsecured debt and $131 million of secured debt (before debt issuance costs).
- The $395 million revolving credit facilities had $83 million outstanding and $312 million of available capacity at March 31. The company reported compliance with debt covenants.
- In March, EastGroup closed a $100 million, seven-year unsecured term loan, with interest-only payments and an effectively fixed rate of 2.39% after an interest-rate swap. The company also raised $14.7 million net through its continuous equity offering.
- Operating cash flow was supplemented by financing, while investing activities used $98.6 million, including $69.7 million for development and value-add properties. The company reported $1.25 billion of debt and $0.7 million of cash at quarter-end.
- Development and value-add properties totaled $438.2 million. The portfolio included 25 projects totaling 3.864 million square feet; projected investment was $403 million, with $76 million remaining to invest at March 31. These projects were 35% leased as of May 1.
Operating trends and changes versus prior period
- EastGroup executed new and renewal leases covering 2.469 million square feet; average rental rates on those leases increased 24.6% over prior leases on the same space.
- Portfolio leased percentage was 97.3% at March 31, 2020, versus 97.7% a year earlier; occupancy was 96.7%, versus 96.9%. Same-property average occupancy improved to 97.0% from 96.8%.
- PNOI growth came from newly developed and value-add properties (+$4.4 million), acquisitions (+$2.0 million) and same-property operations (+$1.3 million), partly offset by dispositions (-$1.2 million).
- Rent reserves for uncollectible amounts increased to $495,000 from $129,000. Lease termination income was $444,000, compared with $140,000.
Outlook, risks and unusual items
- Management said COVID-19 had not materially affected Q1 revenue because most March rent was due before the larger U.S. economic disruption. As of May 1, April rent collections were approximately 94% of charges.
- About 26% of customers had requested rent relief as of May 1. Relief granted to date was not material, but management anticipated greater impacts in future months and was assessing requests individually.
- Management expected occupancy to decline during the remainder of 2020. Leasing activity and prospects had slowed; no new speculative development starts were anticipated in Q2, although active projects continued.
- The company expected COVID-19 to negatively affect financial condition, results and cash flows; the scale and duration were uncertain. Risks include tenant payment defaults, vacancies, lower rents, delayed construction and leasing, and less favorable access to capital.
- Management stated that current cash flows and credit facilities, together with potential debt and equity financing, should be adequate for operations, debt service, distributions and planned investment, including after considering COVID-19. No specific earnings or full-year guidance was provided in the supplied filing text.
- Seven interest-rate swaps were outstanding. Their fair value shifted to a $13.0 million net liability from a $2.8 million net asset position at year-end, contributing to the reported hedge loss. The company estimated $4.5 million would be reclassified from accumulated other comprehensive loss to interest expense over the next 12 months.
- LIBOR transition after 2021 was identified as a risk because credit facilities, term loans and swaps are LIBOR-indexed; management said contracts contain replacement-rate provisions and expected no material financial-statement impact.
- No impairment charges or Q1 2020 property sales were reported. The filing disclosed no material litigation; a previously reported land-purchase dispute had been settled and its appeal dismissed.
Important facts for investors to verify
- Subsequent rent collections, customer relief granted, tenant credit deterioration and changes in bad-debt reserves.
- Whether occupancy, lease renewals and rental-rate growth hold up as the 2020 lease expirations and COVID-related disruptions progress.
- Development leasing, project completion schedules, remaining capital commitments and any changes to speculative construction plans.
- Debt maturities, covenant headroom, available revolving capacity and the cost or availability of future financing and equity issuance.
- Effects of the hedge valuation loss and LIBOR transition on future interest expense, cash flows and reported comprehensive income.
- The sustainability of FFO growth and the $0.75 quarterly dividend in light of operating cash flow, investment spending and pandemic-related uncertainty.