EastGroup Properties, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This annual filing includes fourth-quarter results but reports full-year financials. EastGroup is an equity REIT focused on industrial distribution properties, primarily in Sunbelt markets; over 99% of revenue is rental income.
Financial and operating performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $174.6 million | $173.1 million |
| Net income attributable to common stockholders | $22.4 million; $0.83 per diluted share | $18.3 million; $0.68 per diluted share |
| Property net operating income (PNOI) | $125.1 million | $121.9 million |
| Funds from operations (FFO), attributable to common stockholders | $79.7 million; $2.96 per diluted share | $76.6 million; $2.86 per diluted share |
| Cash provided by operating activities | $86.5 million | $76.9 million |
| Debt at year-end | $832.7 million | $735.7 million |
- Same-property PNOI increased 1.2%; total PNOI rose 2.6%. The reported property-expense-to-revenue ratio improved to 28.3% from 29.6%.
- Year-end leased area was 94.7% versus 90.8% in 2010; occupancy was 93.9% versus 89.8%. As of February 21, 2012, the portfolio was 94.0% leased and 93.2% occupied.
- New and renewal lease rates averaged 11.3% below prior rents. The company renewed or re-leased 85% of 4.433 million square feet expiring in 2011 and leased another 2.5 million square feet of previously vacant space.
- Common distributions remained $2.08 per share for the year. Cash dividends paid were $56.0 million; the company reported distributing all taxable income and made no income-tax provision as a REIT.
- At December 31, cash was $0.2 million; assets totaled $1.287 billion, liabilities $880.9 million, and total equity $405.6 million. The filing provides no conventional current-ratio measure.
Material changes and capital allocation
- Common-stockholder net income rose from 2010, while revenue was nearly flat. FFO per diluted share increased 3.5%, supported by higher PNOI and lower bad-debt expense; termination-fee income, net of bad debt, fell to $15,000 from $1.818 million.
- During 2011, the company acquired five warehouse complexes totaling 1.77 million square feet and 164.6 acres of development land. The combined acquisition cost was $101.9 million; $88.6 million related to operating-property purchases and $13.3 million to development land.
- Development investment reached $112.1 million at year-end, compared with $73.7 million a year earlier. Nine buildings totaling 571,000 square feet were in lease-up or under construction; projected total project cost was $44.3 million, with $13.6 million remaining to invest at year-end. These projects were 47% leased as of February 21, 2012.
- Debt increased by $97.0 million year over year. Fixed-rate mortgage debt was $628.2 million, fixed-rate unsecured term debt $50.0 million, and variable-rate bank debt $154.5 million. Variable-rate debt carried a 1.15% weighted-average rate at year-end.
- The company issued 586,977 shares through its continuous offering program for $25.2 million net proceeds. It also closed a $50 million, seven-year unsecured term loan at 3.91% and a $65 million, 10-year mortgage at 4.75%, using proceeds to reduce variable-rate borrowings.
Outlook, risks and unusual items
- Management said occupancy had stabilized and was improving, though rental rates continued to decline. It believed operating cash flow and available credit could fund 2012 operations and anticipated access to debt and equity financing; no specific earnings or FFO guidance was provided.
- The $200 million and $25 million revolving credit facilities both matured in January 2013. At year-end, approximately $70.5 million remained available across them. A $54 million 10-year mortgage at 4.09% closed January 4, 2012, and was used to reduce variable-rate borrowings. The company also reported additional first-quarter 2012 equity issuance.
- Management cited tighter lender underwriting despite continued access to financing at attractive rates. Key risks include refinancing and interest-rate exposure, tenant defaults or nonrenewals, lower rents or occupancy, development and lease-up execution, and concentration in Sunbelt industrial real estate. A 10% change in the variable borrowing rate was estimated to change annual interest expense and cash flow by about $178,000.
- Scheduled mortgage principal payments included $68.7 million in 2012 and $60.2 million in 2013; variable-rate bank debt of $154.5 million was due in January 2013. Debt covenants were satisfied at year-end.
- No material litigation or material environmental liability was reported as known to management; environmental assessments had not identified significant potential liability. No real-estate impairment charges were recorded for 2011 or 2010. KPMG issued unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- Lease expirations and renewal/re-leasing results, particularly the 2012 expiration exposure and whether achieved rents continue to lag prior leases.
- Availability and refinancing terms for the revolving facilities maturing in January 2013, and the plan for the disclosed 2012 and 2013 mortgage maturities.
- Development project leasing, remaining commitments, construction costs and expected contribution to cash flow.
- Whether FFO growth translates into sustainable cash available for distributions; FFO is a supplemental, non-GAAP measure and is not a liquidity measure.
- Post-year-end mortgage and equity proceeds, and the resulting change in variable-rate debt and share dilution.