EastGroup Properties, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. EastGroup is an industrial-property REIT focused primarily on Sunbelt distribution facilities.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Real estate operating revenue | $46.8 million | $43.3 million |
| Property net operating income (PNOI) | $33.7 million | $30.8 million |
| Net income attributable to common stockholders | $5.4 million; $0.20 basic and $0.19 diluted EPS | $4.8 million; $0.18 basic and diluted EPS |
| FFO attributable to common stockholders | $21.3 million; $0.77 per diluted share | $19.0 million; $0.71 per diluted share |
| Operating cash flow | $12.4 million | $14.1 million |
| Total debt at period end | $841.3 million | $832.7 million at Dec. 31, 2011 |
| Cash at period end | $0.2 million | $0.2 million at Dec. 31, 2011 |
| Total assets / total equity | $1,292.6 million / $414.5 million | $1,286.5 million / $405.6 million at Dec. 31, 2011 |
Revenue increased 8.1%, PNOI 9.4%, common-stockholder net income 12.7%, and FFO per diluted share 8.5% year over year. Same-property PNOI rose 2.8%; acquisitions contributed $1.7 million of the PNOI increase, same-property operations $0.9 million, and newly developed properties $0.3 million. The property expense-to-revenue ratio improved to 28.0% from 28.8%.
Quarter-end occupancy was 94.0%, up from 90.5% a year earlier; leased percentage was 94.5%, versus 91.5%. Of 1.523 million square feet with leases expiring during the quarter, 86% was renewed or re-leased. New and renewal lease rates declined 0.1% on average. Bad-debt expense was $223,000, compared with $134,000; termination-fee income was $170,000, compared with $455,000.
Cash used in investing activities was $21.7 million, including $12.6 million of development spending and $3.9 million of property improvements. Financing activities provided $9.4 million. The company paid $14.9 million in common dividends and ended the quarter with $205,000 in cash.
Debt, liquidity and capital allocation
Debt consisted of $672.4 million of fixed-rate mortgage debt, a $50.0 million fixed-rate unsecured term loan, and $118.9 million of variable-rate bank borrowings. The company obtained a $54 million non-recourse mortgage in January at 4.09%, with a 10-year term, and used proceeds to reduce bank borrowings. Debt covenants were met at quarter end.
Two revolving credit facilities total $225 million and mature in January 2013. At March 31, $118.9 million was drawn; the filing does not state a separate available-borrowing figure. Management said operating cash flow and credit lines should fund operations for the remainder of 2012 and anticipated access to mortgage financing and common or preferred equity. First-quarter common-share sales generated $17.5 million net proceeds, used to reduce variable-rate borrowings.
Developments, outlook and risks
EastGroup began construction on an 88,000-square-foot Orlando project and transferred two Houston properties totaling 184,000 square feet from development to operating properties. At March 31, the development program comprised eight projects totaling 475,000 square feet, with $38.4 million projected total cost and $10.3 million remaining to invest; the projects were 19% leased as of April 24. The company also acquired a Tampa operating property and development land in Tampa and Chandler, Arizona.
Management reported improving occupancy but continued pressure on rental rates and stricter lender underwriting. It adjusts development starts based on leasing activity and uses a board-approved limit on development land. Economic weakness could impair tenant payments, leasing and rents; other stated risks include higher interest rates and costs, financing availability, and development or acquisition delays and cost overruns. Management reported no material change to the risk factors in the 2011 Form 10-K. No specific earnings or FFO guidance was provided.
Unusual and subsequent items: two Tampa properties were sold for $578,000, generating a $167,000 after-tax gain. On April 2, the company repaid an $8.7 million mortgage bearing 7.98%. Through April 25, it sold another 143,213 shares under its equity program for $7.2 million net, using the proceeds to reduce variable-rate bank debt. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track January 2013 maturities of the $225 million revolving facilities and the company’s refinancing or repayment plans.
- Verify occupancy, renewal retention, rental-rate trends and collections, particularly given higher bad-debt expense and lower termination fees.
- Monitor development leasing and remaining funding needs, including the 19% leased rate reported as of April 24.
- Assess debt growth, interest expense and exposure to variable rates; the filing estimates a 10% change in the variable-rate borrowing rate would change annual interest expense by about $133,000.
- Review reliance on share issuance and confirm dividend coverage against operating cash flow and REIT distribution requirements.