EastGroup Properties, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. EastGroup is an industrial-property REIT focused on distribution facilities, primarily in Sunbelt markets. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Income from real estate operations | $118.5 | $99.6 | $231.5 | $197.5 |
| Net income attributable to common stockholders | $46.1 | $27.6 | $109.7 | $54.9 |
| Diluted earnings per share | $1.09 | $0.69 | $2.62 | $1.37 |
| FFO per diluted share | $1.72 | $1.47 | $3.41 | $2.92 |
| Property net operating income (PNOI) | $86.2 | $71.7 | $168.4 | $142.0 |
- Six-month operating cash flow was $176.2 million, versus $141.4 million in 2021. Investing activities used $261.1 million; financing activities provided $86.1 million. Cash at June 30 was $5.6 million.
- At June 30, total assets were $3.852 billion, total liabilities $1.866 billion, and total equity $1.986 billion. Debt, net of issuance costs, was $1.624 billion, up from $1.452 billion at December 31, 2021.
- Debt comprised $206.4 million of variable-rate bank facilities, $1.420 billion of unsecured debt and $2.1 million of secured debt. The company reported compliance with all debt covenants. Its $475 million bank facilities had $206.4 million drawn at quarter-end.
- Quarterly dividends declared were $1.10 per share; six-month dividends declared totaled $93.99 million. The declared May dividend was paid in July.
Material changes versus the prior comparable period
- Q2 real estate operating income increased 19.0%; six-month revenue increased 17.2%. Six-month PNOI rose 18.6%, including a 7.6% increase in same-property PNOI excluding lease-termination income.
- Same-property average occupancy was 98.2% in Q2 and 98.0% for the first half, compared with 97.2% and 97.1%, respectively, in 2021. Portfolio occupancy at June 30 was 98.5% and leased rate was 99.1%.
- New and renewal leases signed in the first half covered 4.968 million square feet; average rental rates increased 35.2% compared with prior leases. Q2 lease rate increases averaged 37.2% on leases covering 4.8% of portfolio square footage.
- Six-month net income included $41.0 million of gains on real estate sales, compared with no gains in the first half of 2021. Excluding real estate gains, FFO attributable to common stockholders was $142.6 million versus $116.6 million; FFO per diluted share increased 16.8%.
- Interest expense increased to $17.1 million for the first half from $16.5 million, reflecting higher average variable borrowings and added unsecured debt, partly offset by refinancing and debt repayments. Depreciation and amortization also increased, primarily from acquisitions and development properties moved into the operating portfolio.
Outlook, management commentary and risks
- Management said operating cash flow, bank facilities and access to debt and equity financing should be adequate for operations, debt service, distributions, capital improvements, acquisitions and development in the short and long term. The filing provides no quantified earnings or FFO guidance.
- The company acquired Tulloch Corporation’s portfolio in June: 14 operating properties totaling 1.706 million square feet and land parcels. Consideration included 1,868,809 common shares valued at approximately $303.8 million and an assumed $60 million loan, which was promptly repaid. First-half acquisitions also included $101.8 million of value-add properties and $54.8 million of development land.
- At June 30, the development and value-add program comprised 28 projects totaling 4.609 million square feet; projected total investment was $557.6 million, with $164.7 million remaining to invest. The projects were collectively 52% leased as of July 26.
- After quarter-end, EastGroup acquired a 299,000-square-foot Greenville property for about $21.1 million and two land parcels for about $6.0 million combined. It also arranged additional term loans and $150 million of long-term notes expected to be issued in October, with fixed or effectively fixed rates of 4.00% to 4.95%.
- Management reported that COVID-19 had not materially disrupted operations, occupancy or rent collections to date, but cited uncertainty around economic conditions and tenant performance. Key risks include rising interest rates, construction-cost inflation and supply-chain disruption, refinancing and covenant risks, occupancy and rent changes, development and acquisition execution, and the transition away from LIBOR. Management expects relevant LIBOR settings to cease or become unrepresentative after June 30, 2023, and believes contractual replacement provisions should limit financial statement impact.
- Interest-rate swaps had a net fair-value asset of $24.0 million at June 30. The company noted that a default under its debt could trigger settlement of derivative obligations at a termination value of $24.3 million.
- No material litigation, material change in risk factors, or material change in internal controls was reported. Management concluded disclosure controls were effective.
Most important facts for investors to verify
- How much of the reported earnings growth came from recurring property operations versus the $41.0 million of property-sale gains; review FFO alongside GAAP results.
- Whether strong rent spreads, occupancy and same-property PNOI growth persist, and whether lease expirations and tenant demand affect future leasing.
- Development project leasing, delivery timing, remaining investment needs and exposure to construction-cost inflation.
- Debt maturity profile, variable-rate exposure, future borrowing costs and LIBOR-to-SOFR transition; assess planned post-quarter financing against liquidity and covenants.
- Execution and integration of the Tulloch acquisition, including the effect of stock issuance on per-share results and the performance of acquired assets.
- Dividend coverage and the effect of continued development, acquisitions and distributions on cash needs and financing capacity.