EastGroup Properties, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. EastGroup is an industrial-property REIT focused on distribution facilities in Sunbelt markets, primarily Florida, Texas, Arizona and California. Unless stated otherwise, dollar amounts below are in millions; financial statements are unaudited.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $43.1 | $43.2 | $131.2 | $129.6 |
| Operating income | $12.8 | $14.7 | $39.7 | $44.8 |
| Net income attributable to common stockholders | $4.0 | $6.1 | $13.4 | $21.0 |
| Diluted EPS | $0.15 | $0.24 | $0.50 | $0.82 |
| Funds from operations (FFO) per diluted share | $0.70 | $0.76 | $2.14 | $2.39 |
| Property net operating income (PNOI) | $29.9 | $30.5 | $91.3 | $91.6 |
- Same-property PNOI declined 4.8% in Q3 and 4.5% for the nine-month period. Total PNOI declined 1.7% and 0.3%, respectively.
- Q3 property expense-to-revenue ratio rose to 30.6% from 29.4%; nine-month ratio rose to 30.3% from 29.3%.
- Interest expense was $8.8 million in Q3 and $26.5 million for nine months, up from $8.5 million and $23.9 million. Lower capitalized interest as development slowed contributed to the increase.
- Nine-month operating cash flow was $63.8 million, versus $68.3 million a year earlier. Investing cash use was $51.5 million; financing cash use was $13.2 million. Cash at quarter-end was $154,000.
- At September 30, total debt was $722.4 million: $588.1 million of fixed-rate mortgage debt and $134.2 million of floating-rate bank debt. Total debt was $692.1 million at December 31, 2009. Total assets were $1,185.5 million and equity $420.3 million.
Changes and operating context
- Common-stockholder net income fell 34.6% in Q3 and 36.1% for the first nine months; FFO per share declined 7.9% and 10.5%, respectively. Management attributed FFO declines mainly to lower occupancy and rents, and reduced capitalized interest; higher termination-fee income and lower bad-debt expense partly offset these effects.
- Quarter-end occupancy was 88.3%, compared with 88.9% a year earlier; leased percentage was 90.0%, compared with 90.8%. Average rents on new and renewal leases declined 8.5% in Q3 and 11.3% for the nine months.
- Of 4.448 million square feet expiring during the first nine months, 74% was renewed or re-leased; the company also leased 2.202 million square feet of other vacant space.
- EastGroup acquired three properties totaling 499,000 square feet for $23.6 million. Five developments totaling 426,000 square feet, with $30.5 million of costs, were transferred to operating properties; these were 57.2% leased as of November 1.
Outlook, risks and notable items
- Management cited the economic downturn, weaker occupancy and rental rates, reduced property values and more difficult access to financing. It had no 2010 development starts planned; development investment was $71.9 million at September 30, down from $97.6 million at year-end.
- Management believed existing credit lines would fund operations through 2010 and 2011 and expected available cash, operating cash flow, credit facilities, mortgage financing and/or equity issuance to meet obligations and planned needs. These are forward-looking expectations, not guarantees.
- The company had $225 million in unsecured revolving facilities maturing in January 2012, with $134.2 million drawn at quarter-end and $2.389 million of letters of credit reducing availability. It reported compliance with debt covenants.
- A $74 million non-recourse mortgage application, at a fixed 4.39% rate for 10 years with 20-year amortization, was expected to close in late December 2010. Proceeds were intended to repay about $4 million of other mortgage debt and reduce variable-rate borrowings; closing was not yet assured.
- After quarter-end, EastGroup repaid the $8.77 million Tower Automotive Center mortgage on October 1, 2010, and terminated its related interest-rate swap. No property sales or properties held for sale were reported for the first nine months of 2010; no real-estate impairment charge was recorded.
- The company declared common dividends of $1.56 per share for the nine months. Dividends declared exceeded common-stockholder earnings during that period. Management expected to distribute all 2010 taxable income to maintain REIT status.
- Management reported effective disclosure controls. A new enterprise management system went live July 1, 2010; the company said the transition did not negatively affect financial-information quality. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Track occupancy, lease renewals, rent changes and same-property PNOI for evidence of stabilization or continued deterioration.
- Confirm whether the proposed $74 million mortgage closed on expected terms and how the proceeds affected bank borrowings and debt costs.
- Review revolving-credit availability, January 2012 maturities, covenant headroom and refinancing access in light of low cash balances and higher debt.
- Assess dividend sustainability against operating cash flow, distributions, capital needs and REIT taxable-income requirements.
- Monitor leasing and occupancy at recently completed developments, acquisition performance, and whether management resumes development spending.