EastGroup Properties, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011. EastGroup is a REIT focused on acquiring, developing and operating industrial distribution properties, primarily in Sunbelt markets. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $43.96 | $43.14 | $130.51 | $131.19 |
| Operating income | $14.29 | $12.79 | $41.87 | $39.69 |
| Net income attributable to common stockholders | $5.67 | $4.02 | $15.95 | $13.40 |
| Diluted EPS | $0.21 | $0.15 | $0.59 | $0.50 |
| PNOI | $31.31 | $29.94 | $92.78 | $91.33 |
| FFO per diluted share | $0.75 | $0.70 | $2.18 | $2.14 |
- Revenue increased 1.9% in Q3 but declined 0.5% for the nine-month period. Common-stockholder net income rose about 41% in Q3 and 19% year to date.
- PNOI margin was approximately 71.3% in Q3 versus 69.4% a year earlier; the nine-month margin was approximately 71.1% versus 69.6%. Property expense-to-revenue ratios improved to 28.7% for Q3 and 28.9% year to date, from 30.6% and 30.3%.
- Operating cash flow was $68.9 million for nine months, versus $63.8 million in 2010. Investing activities used $69.2 million; financing activities provided $0.6 million. Cash at September 30 was $0.45 million. Common dividends paid were $41.9 million; dividends declared were $42.4 million, or $1.56 per share.
- At September 30, total debt was $778.4 million: $634.1 million fixed-rate mortgage debt and $144.3 million floating-rate bank debt. Total debt was $735.7 million at year-end 2010. Total assets were $1,212.2 million; total liabilities were $824.2 million and total equity $388.0 million. The filing reports compliance with debt covenants.
Material changes and operating trends
- Quarterly same-property PNOI increased 3.6%; nine-month same-property PNOI increased 0.5%. Overall PNOI growth also reflected development and acquisitions.
- Leased percentage improved to 93.9% from 90.0% at September 30, 2010; reported occupancy was 93.0% versus 88.3%. The filing uses these as separate measures.
- Rental rates on new and renewal leases fell 13.8% on leases representing 6.1% of portfolio square footage in Q3; year-to-date rates fell 13.1% on 17.1% of square footage. The company renewed or re-leased 85% of space expiring in the first nine months.
- EastGroup acquired three operating properties totaling 451,000 square feet for $23.45 million and acquired development land for $13.29 million. Development investment rose to $99.3 million from $73.7 million at year-end. Six active projects totaled 411,000 square feet, were 65% leased as of October 21, and had $14.0 million of projected costs remaining.
- Interest expense declined to $8.68 million in Q3 and $26.10 million year to date, mainly reflecting refinancing of higher-rate mortgages. A $65 million, 10-year fixed-rate mortgage at 4.75% closed in May, partly replacing variable-rate borrowings.
Outlook, risks and notable items
- Management said occupancy had stabilized and was improving, while rental rates continued to decline. It believes operating cash flow and credit lines can fund operations through the remainder of 2011 and 2012, and expects current resources, debt financing and/or equity issuance to support normal operations, distributions, acquisitions and development.
- An October 2011 application for a $54 million non-recourse mortgage at 4.09%, with a 10-year term, was expected to close in January 2012; proceeds are intended to reduce variable-rate bank debt. This was not yet a completed loan.
- The $200 million revolving credit facility, originally scheduled to mature in January 2012, was extended one year. The separate $25 million working-capital line was scheduled to mature in January 2012. Both lines bore variable rates; total bank borrowings were $144.3 million at period-end.
- Management cites economic weakness, tenant defaults, vacancy, lower achievable rents, financing availability and interest-rate increases as risks. A 10% change in the weighted average rate on variable debt was estimated to change annual interest expense and cash flow by about $157,000.
- No real estate impairment was recorded, and no properties were held for sale. The company reported no derivatives or hedging instruments at September 30. Management reported no material changes to the risk factors in its 2010 Form 10-K.
Important facts for investors to verify
- Clarify the distinction between 93.9% leased and 93.0% occupied, and monitor whether occupancy gains offset continuing rent declines.
- Review maturity and refinancing plans for the $25 million working-capital line and the outstanding variable-rate borrowings; confirm the expected January 2012 closing of the $54 million mortgage.
- Track leasing, remaining spending and delivery of the development pipeline, particularly given the $14.0 million still to invest in the six active projects and the larger prospective land program.
- Assess dividend coverage alongside cash flow and investment needs: nine-month dividends declared exceeded net income attributable to common stockholders, while FFO was $2.18 per diluted share.
- Evaluate whether same-property PNOI and FFO growth can persist if rental rates remain under pressure and termination-fee income remains below 2010 levels.