EastGroup Properties, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. EastGroup is an industrial-property REIT focused primarily on business-distribution space in major Sunbelt markets.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $83.9 million | $75.3 million | $244.8 million | $222.4 million |
| Net income attributable to common stockholders | $22.6 million | $23.0 million | $72.1 million | $70.0 million |
| Diluted earnings per share | $0.60 | $0.64 | $1.94 | $1.98 |
| FFO per diluted share | $1.28 | $1.17 | $3.71 | $3.48 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $170.7 million | $142.0 million |
- Revenue increased 11.4% for the quarter and 10.1% year to date. Net income attributable to common stockholders declined 1.9% in Q3 but rose 3.0% for the nine-month period; diluted EPS declined in both comparisons.
- FFO per diluted share, a supplemental REIT measure and not a substitute for GAAP earnings or liquidity, increased 9.4% for Q3 and 6.6% year to date.
- Property net operating income (PNOI) rose 12.3% in Q3 and 11.6% year to date. Same-property PNOI excluding lease-termination income increased 4.7% and 4.0%, respectively.
- At September 30, assets were $2.40 billion, total liabilities $1.29 billion, and total equity $1.11 billion. Cash was only $130,000.
- Total debt was $1.11 billion: $140.0 million of variable-rate bank facilities, $840.0 million of unsecured fixed-rate debt, and $135.7 million of secured fixed-rate debt, before unamortized issuance costs. The company reported compliance with debt covenants.
- Cash from operations was $170.7 million; investing used $308.0 million and financing provided $137.0 million. Development and value-add spending was $191.9 million. Dividends paid were $80.1 million for the nine months.
Material changes and operating activity
- Portfolio leasing remained strong: 97.9% of space was leased at September 30, versus 97.1% a year earlier; reported occupancy was 97.4%. New and renewal lease rates increased an average 17.0% for the first nine months, on 12.5% of portfolio square footage.
- The company issued 1.87 million shares through its continuous equity program in the first nine months, generating $217.3 million net proceeds. It also closed $190 million of private-placement notes. Shares outstanding increased from 36.5 million at year-end 2018 to 38.4 million at September 30.
- EastGroup acquired operating and value-add properties and land, began 14 development projects, and transferred eight projects totaling 988,000 square feet into operating properties. Its development and value-add program comprised 26 projects and 3.823 million square feet, was 47% leased as of October 24, and had $107 million remaining to invest against $359 million projected total cost.
- Two operating properties sold during the nine months for $18.7 million, producing $11.4 million in gains. Three additional properties, with $15.9 million carrying value, were classified as held for sale and expected to sell in Q4.
Outlook, risks, and unusual items
- No specific earnings or FFO guidance is provided in the filing. Management said operating cash flow, credit facilities, debt issuance, and equity issuance are expected to fund operations, debt service, distributions, improvements, acquisitions, and development in the short and long term.
- Management cited economic conditions, tenant defaults or non-renewals, occupancy and rental-rate changes, interest rates, access to financing and equity, development and acquisition execution, property taxes, disasters, insurance, environmental matters, and REIT qualification as risks.
- LIBOR-linked debt and swaps create transition risk as LIBOR was expected to cease after 2021. The company was monitoring the transition and stated that replacement-rate provisions were intended to limit financial-statement impact. A 10% change in the variable-facility rate, approximately 30 basis points, was estimated to change annual interest expense and cash flow by about $426,000.
- After quarter-end, EastGroup closed a $100 million seven-year term loan, swapped to an effective fixed rate of 2.75%, and acquired two properties. It also had additional property acquisitions and sales under contract for Q4.
- A previously settled land-purchase lawsuit remained subject to the plaintiff’s appeal; settlement funds had been paid. The company reported no other material litigation and no material changes to its previously disclosed risk factors.
- GAAP earnings comparisons reflect property-sale gains: Q3 2018 included $4.1 million in gains, while Q3 2019 had none. Year-to-date gains were $11.4 million in 2019 versus $14.4 million in 2018. Depreciation and amortization also increased, partly reflecting portfolio growth.
Investor verification priorities
- Verify the sustainability of leasing momentum, rent increases, occupancy, and same-property PNOI growth, including the effect of lease concessions and straight-line rent.
- Track development and value-add leasing, completion costs, the $107 million remaining investment, and the projected timing of stabilization.
- Assess debt maturities, variable-rate exposure, refinancing access, covenant headroom, and the LIBOR-to-successor-rate transition.
- Confirm completion and gains on the three held-for-sale properties and the other announced Q4 acquisitions and dispositions.
- Evaluate share issuance and dilution alongside FFO-per-share growth and dividend funding; cash on hand was minimal and nine-month dividends exceeded GAAP net income attributable to common stockholders.
- Monitor the appeal relating to the settled land-purchase litigation and any resulting developments.