EastGroup Properties, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with 2018. EastGroup is an internally managed REIT focused on industrial distribution properties in major U.S. Sunbelt markets.
Business context and portfolio
- At year-end, the company owned 399 industrial properties and one office building; its portfolio, including development and value-add projects, totaled approximately 45.4 million square feet.
- The operating portfolio was 97.6% leased at December 31, 2019, up from 97.3% a year earlier. Year-end occupancy was 97.1%, versus 96.8% in 2018. The portfolio served approximately 1,500 tenants; no tenant contributed more than approximately 1% of real estate operating income.
- Houston and Tampa were the largest markets, representing 13.9% and 10.5% of operating portfolio square footage, respectively.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Income from real estate operations | $330.8 million | $299.0 million |
| Net income attributable to common stockholders | $121.7 million; $3.24 diluted EPS | $88.5 million; $2.49 diluted EPS |
| FFO attributable to common stockholders | $186.9 million; $4.98 per diluted share | $165.4 million; $4.66 per diluted share |
| Property net operating income (PNOI) | $238.3 million | $213.2 million |
| Net cash provided by operating activities | $195.9 million | $164.7 million |
| Total debt, at year-end | $1.183 billion | $1.106 billion |
| Total assets / total equity, at year-end | $2.546 billion / $1.202 billion | $2.132 billion / $904.7 million |
| Cash, at year-end | $224,000 | $374,000 |
Same-property PNOI excluding lease termination income rose 3.7%; average same-property occupancy increased to 96.9% from 96.3%. New and renewal leases signed during 2019 achieved average rental-rate increases of 17.3% over prior leases on the same space. A conventional operating margin is not separately highlighted in the filing.
Changes versus 2018 and capital allocation
- Real estate operating income increased about 10.6%, while PNOI increased 11.8%. Management attributed PNOI growth principally to newly developed and value-add properties, same-property operations, and acquisitions.
- Net income rose substantially, in part because gains on real estate sales increased to $41.1 million from $14.3 million. The gain is a material nonrecurring contributor to reported earnings. FFO, which excludes real estate sale gains under the company’s stated methodology, increased 6.9% per diluted share.
- Depreciation and amortization increased $13.0 million to $104.7 million. Interest expense declined modestly to $34.5 million from $35.1 million.
- Operating cash flow was $195.9 million; investing activities used $443.3 million, including $318.3 million for development and value-add properties. Financing activities provided $247.3 million.
- Acquisitions of operating and value-add properties and land totaled approximately $269 million. The company began 18 development projects totaling 2.7 million square feet and transferred 13 projects totaling 1.8 million square feet into operating real estate. Year-end development and value-add investment was $420.0 million, with $104 million remaining to invest; those projects were 41% leased as of February 12, 2020.
- Sales of operating properties and land generated gross proceeds of $68.7 million. Common-stock issuance raised $284.7 million net, and the company issued $190 million of senior unsecured notes and a $100 million unsecured term loan.
Debt, liquidity, distributions and outlook
- Year-end debt comprised $112.7 million of variable-rate bank borrowings, $940.0 million of fixed-rate unsecured debt and $133.4 million of fixed-rate secured debt. The company reported compliance with its debt covenants. Moody’s affirmed its Baa2 issuer rating with a stable outlook in June 2019.
- Unsecured bank credit facilities totaled $395 million and mature in July 2022, with extension options. The filing reports $112.7 million outstanding at year-end. Unhedged variable-rate debt was also reported as $112.7 million; management estimated a 10% change in its weighted-average rate would change annual interest expense and cash flow by approximately $313,000.
- Management stated that cash, operating cash flow, credit facilities, and potential debt or equity issuance should be adequate for operating needs, debt service, distributions, capital improvements, acquisitions and development, in both the short and long term. No specific earnings or FFO guidance is provided in the supplied filing text.
- Declared common distributions were $2.94 per share in 2019, versus $2.72 in 2018. The company distributed all taxable income and stated that no significant income-tax provision was necessary, consistent with its REIT status.
- Leases covering 14.6% of total base rent were scheduled to expire in 2020. Separately, management reported that 2020 expirations represented 13.7% of portfolio square footage at year-end, declining to 11.8% by February 12, 2020.
Risks, contingencies and unusual items
- Key risks include Sunbelt and industrial-sector concentration, local economic weakness or oversupply, tenant defaults and nonrenewals, leasing and development execution, construction costs, refinancing and access to external capital, interest-rate changes, environmental exposure, and severe weather or other uninsured losses.
- LIBOR-indexed loans and derivatives require transition to a replacement benchmark. The company said its contracts contain replacement-rate provisions and it did not expect a material financial-statement impact, but transition risks remain.
- There was no material litigation reported as pending. A previously disclosed land-purchase dispute was settled in 2019; the appeal was dismissed and settlement payments were made.
- The company adopted the new lease accounting standard in 2019. It recorded $411,000 of indirect leasing costs as expense under the revised definition of initial direct costs. The filing reports no property impairment charge for 2019.
- The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- How much of reported net-income growth depended on the $41.1 million property-sale gain, and whether FFO and same-property operating trends support ongoing growth.
- Lease-up progress and expected returns on the $420 million development and value-add program, including the $104 million still to be invested and 41% lease rate reported in February 2020.
- The scale and terms of near-term lease expirations, renewal spreads, tenant concessions and collections; verify the filing’s different rent- and square-foot-based expiration measures.
- Debt maturities, covenant headroom, refinancing access, exposure to variable rates, and the transition plan for LIBOR-linked debt and swaps.
- Future equity issuance and dilution: the new continuous offering program permits up to $750 million of gross share sales; no shares had been sold under it as of February 13, 2020.