EastGroup Properties, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparison is with the three months ended March 31, 2017, except balance-sheet comparisons, which are with December 31, 2017. Amounts below are in millions unless stated otherwise. EastGroup is an industrial-property REIT focused primarily on Sunbelt markets.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Real estate operating revenue | $72.1 | $66.1 | +9.1% |
| Operating income | $26.4 | $21.4 | +23.0% |
| Net income attributable to common stockholders | $28.7 | $12.8 | +124.0% |
| Diluted earnings per share | $0.83 | $0.38 | +$0.45 |
| Property net operating income (PNOI) | $51.6 | $47.1 | +9.4% |
| FFO attributable to common stockholders per diluted share | $1.16 | $0.99 | +17.2% |
| Net cash from operating activities | $21.7 | $23.8 | -$2.1 |
- Reported operating margin was approximately 36.5%, versus 32.4% a year earlier. Net income growth was substantially boosted by $10.2 million of gains from operating-property sales; FFO, a supplemental non-GAAP measure, excludes those gains.
- Same-property PNOI increased 4.3%; average same-property occupancy was 97.1%, up from 96.2%. Portfolio occupancy at quarter-end was 96.4%, while leased space was 97.0%.
- New and renewal lease rates increased an average 18.7%. EastGroup executed leases covering 1.856 million square feet, about 5.0% of portfolio area.
- Cash was $0.04 million at March 31. Total assets were $1,962.8 million, total liabilities $1,188.1 million, and total equity $774.7 million.
Balance sheet, debt and liquidity
- Total debt was $1,111.5 million, up from $1,108.3 million at year-end 2017. It comprised $201.6 million of unsecured bank facilities, $713.1 million of unsecured debt and $196.8 million of secured debt.
- The $335 million of revolving bank facilities had approximately $202 million drawn at quarter-end, including $80 million effectively fixed through an interest-rate swap. The variable-rate facility borrowings carried a 2.85% weighted-average rate. Management reported compliance with all debt covenants.
- Operating cash flow was $21.7 million. Investing activities used $11.2 million, including $31.2 million for development, partly offset by $16.8 million of net property-sale proceeds. Financing activities used $10.5 million, including $22.7 million in distributions and $14.5 million of net common-stock offering proceeds.
- Quarterly common dividends declared were $0.64 per share. The company issued 179,501 shares through its continuous equity program for $14.6 million net proceeds.
- Seven interest-rate swaps hedged variable cash flows on unsecured loans. Swap fair value was an asset of $9.0 million; the company estimated $1.8 million in swap receipts over the following 12 months. Management estimated a 10% change in the variable-rate facilities’ weighted-average rate would change annual interest expense and cash flows by approximately $0.35 million.
Material changes, outlook and risks
- PNOI rose $4.4 million year over year: contributions included $2.6 million from newly developed and redeveloped properties, $1.9 million from same-property operations and $0.5 million from 2017 acquisitions; property sales reduced PNOI by $0.6 million.
- Q1 sales included two operating properties totaling 214,000 square feet, sold for $14.9 million with $10.2 million in gains, and 11 acres of Houston land sold for $2.6 million with an $86,000 gain. The company said these disposals were not a strategic shift and did not classify properties as held for sale.
- At March 31, the development program comprised 17 projects totaling 1.988 million square feet; projected total investment was $165 million, with $41 million remaining to invest. The projects were collectively 51% leased as of April 20. The company began two projects and transferred three completed properties totaling 347,000 square feet into operating real estate during Q1.
- Management said operating cash flow and credit facilities, together with potential debt and equity financing, should fund operations, distributions, capital improvements, acquisitions and development in both the short and long term. No specific earnings or FFO guidance was provided in the supplied filing text.
- In February, EastGroup refinanced a $65 million term loan, lowering its rate by 55 basis points to an effectively fixed 2.313%; estimated annual savings were approximately $340,000. In mid-April, it closed $60 million of 10-year senior unsecured notes at a fixed 3.93% rate.
- Key disclosed risks include economic weakness and tenant defaults, leasing and re-leasing space at expected rents, industrial-property supply and demand, interest rates, operating-cost increases, financing availability, and development schedule or cost overruns. Management reported no material change to the risk factors in its 2017 Form 10-K.
- The company adopted revenue-recognition and financial-instrument accounting standards in 2018 without material impact. It planned to adopt lease-accounting and updated hedging standards on January 1, 2019; it expected no material overall impact but was still evaluating the lease standard.
Important facts for investors to verify
- How much reported earnings growth reflects recurring property operations versus the $10.2 million property-sale gain; review FFO and same-property results alongside GAAP income.
- Whether development leasing, occupancy and expected completion dates progress as planned, and whether the remaining $41 million investment requirement changes.
- Liquidity and refinancing exposure: facility availability, maturities, borrowing costs and the impact of higher rates, including the July 2019 revolving-facility maturity.
- Whether strong lease-rate increases translate into sustainable rent and PNOI growth, and how tenant credit quality, concessions and bad-debt expense develop.
- Execution and financial effects of the planned 2019 lease and hedging accounting-standard adoptions.