EastGroup Properties, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. EastGroup is an industrial-property REIT focused on distribution facilities in major Sunbelt markets, including Florida, Texas, Arizona, California and North Carolina. This unaudited filing covers the quarter and six months ended June 30, 2012; financial amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Real estate operating revenue | $46.5 million | $43.1 million | $93.1 million | $86.3 million |
| Operating income | $15.0 million | $14.0 million | $29.6 million | $27.6 million |
| Net income attributable to common stockholders | $8.0 million | $5.5 million | $13.4 million | $10.3 million |
| Diluted net income per share | $0.28 | $0.20 | $0.48 | $0.38 |
| FFO attributable to common stockholders per diluted share | $0.77 | $0.73 | $1.53 | $1.44 |
| Operating cash flow | Not reported separately | Not reported separately | $41.6 million | $40.3 million |
- Property net operating income (PNOI) increased 8.0% to $33.1 million in Q2 and 8.6% to $66.7 million for the first half. Same-property PNOI rose 1.0% and 1.8%, respectively.
- Quarter-end occupancy was 93.1%, compared with 91.0% a year earlier; 94.1% of total space was leased, versus 92.1%. Average rates on new and renewal leases increased 3.3% in Q2 and 1.8% in the first half.
- Depreciation and amortization was $15.5 million in Q2 and $31.4 million for six months. Interest expense was $9.0 million and $18.4 million, respectively.
- At June 30, total assets were $1.296 billion, total liabilities $835.1 million, and equity $461.2 million. Total debt was $794.9 million, down from $832.7 million at December 31, 2011. Cash was $118,000.
- Six-month investing cash use was $37.6 million and financing cash use was $4.0 million. The company paid $29.7 million in common dividends; declared dividends were $1.04 per share for the six-month period.
Material changes versus prior period
- Revenue grew 7.7% in Q2 and 7.9% in the first half. Net income attributable to common stockholders increased 45.2% and 30.0%, respectively; FFO per diluted share rose 5.5% and 6.3%.
- PNOI growth came from acquisitions, recently completed developments and same-property operations. For the first half, contributions were $3.4 million from acquisitions, $1.1 million from same-property operations and $0.8 million from new developments.
- Q2 and first-half reported earnings included a $1.9 million gain on sale of a Phoenix property. First-half discontinued operations also included a $167,000 after-tax gain from two Tampa property sales.
- The company issued 1.413 million shares through its continuous equity program, receiving $69.8 million net, and used the proceeds to reduce variable-rate bank borrowings. The program’s full two-million-share authorization was completed.
Outlook, risks and notable items
- Management said operating cash flow and credit lines should fund operations for the remainder of 2012, and expected cash, operating cash flow, borrowing capacity, new debt and/or equity to cover normal business needs in the short and long term. No specific earnings or FFO guidance was provided.
- Development investment was $120.4 million at June 30. Eight projects totaling 591,000 square feet were in the program; projects were 55% leased as of July 23, with estimated total costs of $44.6 million. Management described development starts as responsive to leasing activity.
- Two unsecured revolving credit facilities totaling $225 million mature in January 2013. Outstanding balances at June 30 were $111.0 million and $9.945 million, with stated rates of 1.100% and 1.896%. Management noted tighter lender underwriting, while reporting compliance with debt covenants.
- Debt includes $674.9 million of fixed-rate borrowings and $120.9 million of variable-rate debt. Management estimated that a 10% change in the variable-rate debt interest rate would change annual interest expense and cash flows by approximately $142,000.
- Key risks include tenant defaults, leasing and re-leasing conditions, occupancy and rents, financing availability, interest rates, operating-cost inflation, and development delays or cost overruns. Management reported no real estate impairment charges and no material change in previously disclosed risk factors.
Investor facts to verify
- Reconcile the Q2 diluted EPS presentation: the financial statements report $0.28, while the MD&A narrative states $0.27. The six-month diluted EPS is reported as $0.48.
- Review the January 2013 maturity and refinancing plan for the $225 million revolving facilities, including availability and covenant headroom.
- Assess whether occupancy, leasing spreads and same-property PNOI can sustain growth, particularly given the decline in same-property average rental rates disclosed for the first half.
- Separate recurring operating performance from property-sale gains when evaluating reported earnings and FFO.
- Track development leasing, completion costs and funding needs; verify progress against the reported 55% leased level and estimated project costs.