EastGroup Properties, Inc. — Q1 2011 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2011, with comparisons to Q1 2010. EastGroup is an industrial-property REIT focused primarily on distribution facilities in Sunbelt markets, including Florida, Texas, Arizona and California.
Financial and operating performance
- Revenue: Real estate operating income was $43.3 million, down 2.6% from $44.4 million. Total revenue, including other income, was $43.3 million.
- Profit: Net income was $4.9 million versus $5.0 million; net income attributable to common stockholders was $4.8 million versus $4.9 million. Basic and diluted EPS were $0.18 in both periods.
- Property operations: Property net operating income (PNOI) was $30.8 million, down 0.4%; same-property PNOI declined 1.4%. The real-estate expense-to-revenue ratio improved to 28.8% from 30.4%.
- FFO: Funds from operations attributable to common stockholders were $19.0 million, or $0.71 per diluted share, versus $19.6 million, or $0.73 per share. Management attributed the per-share decline primarily to lower termination-fee income.
- Leasing: Leased occupancy was 91.5%, up from 87.6% a year earlier; physical occupancy was 90.5%, up from 86.2%. The company renewed or re-leased 89% of Q1 expirations. Rental rates on new and renewal leases declined an average 20.7%.
- Cash flow: Operating cash flow was $14.1 million, versus $13.5 million. Investing activities used $10.8 million and financing activities used $3.3 million. Cash ended the quarter at $108,000.
- Debt and liquidity: Total debt was $747.3 million, up from $735.7 million at year-end: fixed-rate mortgage debt of $603.1 million and floating-rate bank debt of $144.2 million. The company reported compliance with debt covenants. Cash was limited, with funding dependent on operating cash flows and access to credit and capital markets.
- Distributions: Common dividends declared were $0.52 per share; cash distributions paid to stockholders were $14.0 million.
Material changes versus prior comparable period
- Rental income and PNOI declined modestly, while higher occupancy was offset by lower rental rates. Termination-fee income fell to $455,000 from $1.413 million.
- Bad-debt expense improved to $134,000 from $616,000. PNOI contributions from newly developed properties and 2010 acquisitions partly offset weaker same-property results.
- Bank borrowings rose by $52.9 million net, while mortgage notes declined by $41.3 million, including repayment of $36.1 million of mortgages in January. Total debt increased by $11.6 million from December 31, 2010.
- Capital expenditures on operating properties increased to $6.0 million from $3.0 million. Development investment was $74.9 million at quarter-end; three projects were under construction.
Outlook, risks and notable items
- Management said occupancy had stabilized and was improving but rental rates remained under pressure. It believed existing credit facilities could fund operations through 2011 and 2012, and anticipated adequate resources for operations, debt service, distributions and planned investment.
- The company executed an application for a proposed $65 million, non-recourse, fixed-rate mortgage at 4.75%, with a 10-year term, expected to close in late May 2011. Proceeds were intended to reduce variable-rate borrowings. The filing describes an application and expected closing, not a completed loan.
- A $22.8 million mortgage balloon payment at 7.92% was due in May 2011. The $200 million and $25 million revolving facilities were both scheduled to mature in January 2012; the larger facility had a one-year extension option.
- Management identified economic weakness, tenant defaults, leasing and rent pressure, financing availability, higher interest rates and development risks as potential threats to cash flows. A 10% change in the stated average rate on variable-rate debt was estimated to change annual interest expense and cash flows by approximately $159,000.
- No real estate acquisitions, property sales, properties held for sale, impairment charges or derivatives were reported in Q1. The company said there were no material changes to the risk factors in its 2010 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether the proposed $65 million mortgage closed as expected and whether its proceeds reduced floating-rate debt.
- How the May 2011 $22.8 million mortgage maturity and January 2012 credit-facility maturities were refinanced or repaid.
- Whether occupancy gains translate into improved rents and same-property PNOI, given the 20.7% lease-rate decline.
- Whether operating cash flow and available financing support dividends and development commitments while cash balances remain low.
- Whether reported FFO trends improve after the decline in termination-fee income; FFO is a supplemental, non-GAAP measure and is not a measure of liquidity.