EastGroup Properties, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet figures are as of March 31, 2016. EastGroup is an industrial-property REIT focused primarily on Sunbelt markets. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and operating metrics
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Real estate operating revenue | $61.568 | $57.575 | Up 6.9% |
| Operating income | $19.295 | $18.499 | Up 4.3% |
| Net income attributable to common stockholders | $21.711 | $9.930 | Includes $11.332 gain on property sales in 2016 |
| Diluted EPS | $0.67 | $0.31 | Increase substantially reflects property-sale gains |
| Funds from operations (FFO), diluted per share | $0.91 | $0.87 | Up 4.6% |
| Property net operating income (PNOI) | $43.777 | $41.159 | Up 6.4%; same-property PNOI up 2.2% |
| Operating expenses / real estate revenue | 28.9% | 28.5% | Property expense ratio increased |
| Net cash from operating activities | $18.653 | $21.096 | Down $2.443 |
Leasing indicators: 96.7% of total space was leased at quarter-end, versus 97.0% a year earlier; occupancy was 95.7%, versus 96.2%. The company renewed or re-leased 89% of 2.155 million square feet of leases expiring during the quarter. New and renewal rents averaged 16.5% above prior rents on the space leased.
Quarter-end assets were $1,659.282 million and total equity was $556.283 million. Total debt, net of issuance costs, was $1,039.605 million, up from $1,027.909 million at year-end 2015. Debt consisted of $345.444 million secured debt, $528.312 million unsecured debt and $165.849 million drawn on unsecured bank facilities. Cash was only $12,000.
Cash flow, investment and distributions
Operating cash flow was $18.653 million. Investing activities used $6.764 million, including $16.598 million of development spending and $5.804 million of real estate improvements, partly offset by $18.974 million of sale proceeds. Financing activities used $11.925 million; the company paid $20.413 million in common-stock distributions. The board declared common dividends of $0.60 per share for the quarter.
Development investment totaled $161.659 million at quarter-end. The 13-project program covered 1.737 million square feet, was 37% leased as of April 21, and had a projected total investment of $124 million, with $52 million still to invest as of March 31. The company began three projects and transferred four completed or substantially completed properties, totaling 363,000 square feet, into operating properties.
Material changes and unusual items
- EastGroup sold two operating properties totaling 292,000 square feet for $18.850 million and recorded $11.332 million in gains. It also sold a small land parcel and recorded a $10,000 gain. These gains are included in continuing operations and materially lifted GAAP net income and EPS; FFO excludes the operating-property gain.
- Interest expense rose to $9.065 million from $8.805 million, primarily due to higher average borrowings on bank facilities; average facility borrowings increased to $154.122 million from $100.279 million.
- General and administrative expense rose to $5.312 million from $4.538 million, primarily due to accelerated restricted-stock vesting and CEO succession-related costs.
- Unrealized interest-rate swap losses reduced other comprehensive income by $5.397 million. Swap liabilities were $9.222 million at quarter-end; management estimated another $3.7 million would be reclassified to interest expense over the next 12 months.
- After quarter-end, the company closed a $65 million, seven-year unsecured term loan, swapped to an effective fixed rate of 2.863%. It also sold three operating properties for aggregate proceeds of $29.1 million and land for $644,000; gains were expected in Q2 2016.
- The company adopted new debt-issuance-cost presentation rules retrospectively, reducing reported December 2015 assets and liabilities by $4.328 million without changing equity.
Outlook, risks and contingencies
Management said current operating cash flow and unsecured credit facilities, together with potential debt and equity financing, should be adequate for operations, debt service, distributions, improvements, acquisitions and development in both the short and long term. This is management’s expectation, not quantitative earnings or FFO guidance; the filing provides no specific full-year earnings guidance.
The two revolving facilities total $335 million and mature in July 2019. At March 31, $167.173 million was drawn, implying approximately $167.8 million of undrawn capacity before other restrictions. The company reported compliance with debt covenants. Moody’s affirmed its Baa2 issuer rating with a stable outlook in March.
Key risks identified include weaker economic conditions, tenant defaults, difficulty renewing or re-leasing space, lower rents or occupancy, higher interest rates and operating costs, financing availability, development delays or cost overruns, and natural disasters or other events affecting properties or insurance. A 10% change in the reported variable borrowing rate was estimated to affect annual interest expense and cash flow by approximately $241,000. Management reported no necessary real-estate impairment charges and no material change in risk factors from the 2015 Form 10-K. Disclosure controls were assessed as effective, with no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the $11.332 million sale gain to reported GAAP earnings; assess underlying operating and FFO growth separately.
- Check subsequent property-sale closings, realized gains, and the effect of asset dispositions on Houston exposure and future PNOI.
- Monitor occupancy, lease expirations, renewal spreads and development leasing; quarter-end leased percentage and occupancy were lower year over year.
- Review debt maturities, facility availability, covenant headroom, interest-rate swap valuations and the impact of refinancing or rate changes.
- Assess whether planned development spending and distributions remain supportable given operating cash flow and the very low quarter-end cash balance.