EastGroup Properties, Inc. — Q2 2018 Form 10-Q
Business context and reporting period
Industrial-property REIT focused primarily on distribution facilities in major Sunbelt markets. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with the same 2017 periods unless noted. Dollar amounts below are in millions except per-share data.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $74.9 | $67.9 | $147.1 | $134.0 |
| Operating income | $26.9 | $23.9 | $53.3 | $45.3 |
| Net income attributable to common stockholders | $18.2 | $36.9 | $46.9 | $49.7 |
| Diluted GAAP EPS | $0.52 | $1.08 | $1.34 | $1.47 |
| FFO per diluted share | $1.16 | $1.05 | $2.32 | $2.04 |
| Operating cash flow | — | $73.7 | $67.2 |
- Revenue rose 10.3% in Q2 and 9.7% for the half year. Operating margin was approximately 35.9% in Q2 versus 35.2% a year earlier, and 36.2% for the half year versus 33.8%.
- Property net operating income (PNOI) increased 9.9% in Q2 to $52.4 million and 9.6% for the half year to $104.0 million. Same-property PNOI increased 6.5% and 4.6%, respectively.
- Net income and GAAP EPS declined substantially in Q2 primarily because the prior-year quarter included $21.9 million of gains on property sales; there were no operating-property sale gains in Q2 2018. Half-year results also reflect lower property-sale gains ($10.2 million versus $21.9 million). FFO, which excludes gains on depreciable property sales, increased 10.5% per share in Q2 and 13.7% for the half year.
- Occupancy was 96.4% at June 30, versus 94.9% a year earlier; leased space was 97.0%. New and renewal lease rates increased an average 11.9% in Q2 and 15.1% for the half year. The filing reports a 97.0% leased rate at June 30 and 3.9% of portfolio area scheduled to expire in the rest of 2018, reduced to 3.3% by July 20.
- Six-month investing cash outflow was $83.0 million, including $61.0 million for development, compared with $60.4 million in 2017. Financing cash flow was positive $9.5 million; cash at period-end was $0.3 million. Dividends paid were $45.4 million.
- Total debt was $1.094 billion at June 30, down from $1.108 billion at year-end; total assets were $2.022 billion and total equity $840.7 million. The company reported compliance with all debt covenants. It had $395 million of unsecured credit facilities, with $80 million of borrowings effectively fixed at 2.020% through August 15, 2018; other stated facility borrowings carried rates of about 3.09% at quarter-end.
Material changes, outlook, risks and unusual items
- During the first half, EastGroup issued 929,783 shares through its continuous equity program for $82.2 million net. It closed $60 million of 10-year unsecured notes at a fixed 3.93%, repaid a $50 million term loan, and refinanced a $65 million loan at an effectively fixed 2.313%. Its credit facilities were amended and expanded from $335 million to $395 million, with maturities extended to July 2022 and extension options.
- The development program comprised 17 projects totaling 2.007 million square feet, collectively 27% leased as of July 20. Estimated total investment was $171 million, with $61 million remaining to be invested at June 30. Seven projects totaling 888,000 square feet began construction in the first half; eight projects totaling 1.052 million square feet were transferred into operating real estate.
- Management said operating cash flow and available credit, together with potential debt and equity issuance, are expected to fund operations, debt service, dividends, acquisitions and development in the short and long term. No quantified earnings or FFO guidance was provided. Moody’s affirmed the company’s Baa2 issuer rating with a stable outlook in June.
- A $1.15 million insurance-related casualty gain was recorded in Q2 after earlier hail damage claims were resolved. No impairment charges or properties held for sale were reported. A July acquisition of a 115,000-square-foot San Diego-area distribution center closed for $14 million; the company was also under contract to sell a Phoenix property for approximately $8 million, expected to close in Q3.
- Risks cited include economic weakness and tenant defaults or early lease terminations; the ability to lease or re-lease space at expected rents; financing availability, credit ratings and rising rates; operating-cost increases; and development, acquisition, insurance and natural-disaster risks. The company noted inflation-related G&A and interest costs may not be passed through to tenants. It expects the 2019 lease-accounting standard to have no material overall effect, while evaluation continued.
Important facts for investors to verify
- Whether strong occupancy and reported leasing-rate increases translate into sustained same-property NOI and cash flow, including after concessions and lease expirations.
- Leasing progress, remaining costs and delivery timing for the development pipeline, particularly the $61 million still to be invested.
- Debt maturities, credit-facility availability and the impact of variable rates; the $80 million swap fixing expired August 15, 2018.
- Future equity issuance and dilution, dividend coverage, and the company’s funding needs for development and acquisitions.
- Whether the July acquisition and proposed property sale closed as expected, and whether the casualty recovery and lower property-sale gains affect comparisons with reported earnings.