EastGroup Properties, Inc. — 2012 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. EastGroup is an industrial-property REIT focused on distribution facilities in Sunbelt markets, particularly Florida, Texas, Arizona, California, and North Carolina.
Financial and operating performance
Unless noted otherwise, amounts are in millions. Comparisons are with the corresponding 2011 period.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Real estate operating revenue | $47.0 | $43.8 | $140.1 | $130.1 |
| Operating income | $15.4 | $14.3 | $45.0 | $42.0 |
| Net income attributable to common stockholders | $6.8 | $5.7 | $20.1 | $16.0 |
| Diluted EPS | $0.23 | $0.21 | $0.71 | $0.59 |
| PNOI | $33.3 | $31.2 | $100.0 | $92.6 |
| FFO attributable to common stockholders per diluted share | $0.76 | $0.75 | $2.30 | $2.18 |
- Operating cash flow for the nine months was $73.2 million, up from $68.9 million. Investing used $58.4 million; financing used $13.9 million. Cash ended the period at $1.0 million, compared with $0.2 million at year-end 2011.
- Total debt was $790.2 million, down from $832.7 million at December 31, 2011. It comprised $613.8 million of mortgage debt, $130.0 million of unsecured term loans, and $46.5 million of variable-rate bank debt. Total assets were $1,299.1 million and total equity was $457.9 million.
- Property expense was 29.0% of real estate operating revenue in Q3 and 28.6% year to date, versus 28.7% and 28.8%, respectively, in 2011.
Changes versus the prior comparable period
- Q3 common-stockholder net income rose to $6.8 million from $5.7 million; nine-month net income rose to $20.1 million from $16.0 million. Nine-month 2012 results included $2.036 million of property-sale gains; 2011 had no such gains.
- PNOI increased 6.7% in Q3 and 8.0% year to date. Management attributed the nine-month increase mainly to acquisitions ($5.0 million), newly developed properties ($1.3 million), and same-property operations ($1.2 million). Same-property PNOI grew 0.1% in Q3 and 1.2% year to date.
- FFO per diluted share increased 1.3% in Q3 and 5.5% year to date. Total leased area was 95.0%, versus 93.9% a year earlier; period-end occupancy was 94.3%, versus 93.0%.
- Average rental rates on new and renewal leases increased 0.9% for the first nine months, while same-property average rental rates were lower year over year. Average bank borrowings decreased, but the company added term-loan interest expense; nine-month reported interest expense increased $0.7 million.
Liquidity, capital allocation, and outlook
- In August, EastGroup closed an $80 million, six-year unsecured term loan, interest-only, and used proceeds to reduce variable-rate bank borrowings. A swap fixed its effective rate at 2.92% as of September 30. In January, it obtained a $54 million, 10-year fixed-rate mortgage at 4.09% and repaid several existing mortgages during the year.
- Two unsecured revolving facilities totaling $225 million were scheduled to mature in January 2013; $46.5 million was drawn at quarter-end. The company said it was negotiating replacement facilities. It reported compliance with debt covenants.
- EastGroup issued 1.51 million shares in the first nine months for $74.9 million net proceeds. After quarter-end, it sold a further 357,692 shares for $18.9 million net proceeds, used to reduce variable-rate borrowings. It declared $1.57 per share in common dividends for the nine-month period and paid $45.0 million in distributions.
- Development investment was $130.5 million at quarter-end. The development program comprised 13 projects totaling 870,000 square feet; collectively, the projects were 51% leased as of October 19, with projected total costs of $65.9 million. Subsequent to quarter-end, construction began on two Houston buildings with projected combined costs of $16.9 million and expected completion early in Q3 2013.
- Management said operating cash flow and available credit could fund operations for the remainder of 2012 and expected cash, operating flows, borrowing capacity, new debt, and equity issuance to support anticipated business needs. The filing provides no specific earnings or FFO guidance.
Risks, contingencies, and unusual items
- The company identifies economic conditions, tenant defaults, leasing and renewal performance, rents, vacancies, financing availability, interest rates, operating costs, and development execution as key risks. It warned that adverse economic conditions could reduce collections, occupancy, rents, and cash flows. No material changes to the risk factors in its 2011 Form 10-K were reported.
- The $80 million interest-rate swap had a fair-value liability of $0.871 million at September 30. Swap-related mark-to-market and ineffectiveness expense was $0.269 million for Q3; the company estimated a further $0.596 million would be reclassified to interest expense over the next 12 months. A counterparty default provision is linked to defaults on company indebtedness.
- Three properties were sold during the first nine months: one Phoenix operating property and two small Tampa properties. The filing reported $2.036 million in combined gains, including an after-tax gain on the Tampa sales.
Important facts for investors to verify
- Progress and terms for refinancing or replacing the revolving facilities due in January 2013.
- Whether occupancy, lease renewals, rental-rate trends, and same-property PNOI sustain operating growth.
- Development leasing, costs, completion timing, and expected contribution to cash flow.
- Debt levels, interest-rate exposure, swap accounting, and covenant compliance as financing changes.
- Effects of common-share issuance and dividends on per-share results and capital requirements.