EastGroup Properties, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; this is an annual filing, not a standalone fourth-quarter report. EastGroup is an internally managed equity REIT focused on industrial distribution properties, primarily in Sunbelt markets. Its portfolio included approximately 41.5 million square feet; the operating portfolio was 97.3% leased at year-end.
Financial and operating performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Real estate operations revenue | $299.0 million | $274.0 million | +9.1% |
| Total revenue | $300.4 million | $274.2 million | +9.6% |
| Operating income | $108.6 million | $95.2 million | +14.0% |
| Net income attributable to common stockholders | $88.5 million | $83.2 million | +6.4% |
| Diluted GAAP EPS | $2.49 | $2.44 | +2.0% |
| FFO per diluted share | $4.67 | $4.26 | +9.6% |
| Operating cash flow | $164.7 million | $155.0 million | +6.3% |
| Total debt at year-end | $1,105.8 million | $1,108.3 million | Down $2.5 million |
Operating margin was approximately 36.1% of total revenue, versus 34.7% in 2017. Property net operating income (PNOI), a supplemental measure, rose 9.8% to $213.2 million; same-property PNOI excluding lease-termination income increased 3.8%. New and renewal leases achieved average rental-rate increases of 15.8% over prior leases on the same space.
Year-end total assets were $2.132 billion, total liabilities $1.227 billion, and total equity $904.7 million. Debt was approximately 51.9% of total assets. Cash was $0.4 million; the company reported $195.7 million of variable-rate credit-facility borrowings. Its expanded credit facilities had aggregate capacity of $395 million, implying nominal unused capacity of about $199 million before considering letters of credit and other availability conditions.
Common distributions declared were $2.72 per share for 2018. Cash distributions paid during the year were $71.3 million; the difference includes a declared December distribution paid in January 2019. The company stated it distributed all 2018 taxable income.
Material changes versus the prior year
- Real estate operations revenue increased 9.1%, while operating expenses from real estate operations rose 7.8% to $86.4 million. Depreciation and amortization increased 9.3% to $91.7 million, reflecting acquisitions and completed developments.
- Net gains on sales of real estate investments fell to $14.3 million from $21.9 million. This moderated reported net-income growth; gains on 2018 property sales were $14.3 million.
- Development and value-add investment reached $263.7 million at year-end. The company started 12 projects totaling 1.7 million square feet and transferred 14 projects totaling 1.7 million square feet to operating properties.
- EastGroup issued 1.71 million common shares through its continuous equity program for $157.3 million net proceeds. It also issued $60 million of 10-year unsecured notes at 3.93%, refinanced a $65 million term loan at a lower effective rate, and repaid a $50 million term loan.
- Interest expense increased slightly to $35.1 million. Average variable-rate facility borrowings and their weighted-average rate both increased; the weighted-average variable rate was 2.64% in 2018 versus 2.07% in 2017.
Outlook, risks and unusual items
- Management outlook: Management expects cash, operating cash flows, credit facilities, and access to debt and equity markets to be adequate for operations, debt service, distributions, capital improvements, acquisitions and development in the short and long term. No numerical earnings or FFO guidance is provided in the supplied filing text.
- Development pipeline: Seventeen projects totaling 2.264 million square feet were in the development program at year-end, with projected total cost of $206 million and $56 million remaining to invest. The program was 45% leased as of February 13, 2019.
- Debt and rates: $195.7 million of variable-rate debt was unhedged at year-end. Management estimated a 35-basis-point rate change would alter annual interest expense and cash flow by approximately $687,000. Scheduled principal payments on unsecured and secured debt total $130.6 million in 2019; credit facilities mature in July 2022, subject to extension options.
- Concentration and property risks: Houston and Tampa represented 14.1% and 10.7% of portfolio square footage, respectively. The company highlights local economic and industrial-property conditions, leasing and tenant-credit risk, development and acquisition execution, competition, natural disasters, insurance adequacy, environmental exposure and real-estate illiquidity.
- Contingency: A lawsuit concerning a 2016 land purchase alleges breach of contract and other claims. The company disputes the claims and had reserved $497,000 for a settlement offer as of year-end; mediation and discovery were ongoing.
- Other items: EastGroup recognized a $1.245 million gain on casualties and involuntary conversion. It reported no material impairment charges, no properties held for sale, and no material off-balance-sheet arrangements. A 2019 sale of a Houston property and a planned $80 million private-note issuance at 4.27% were disclosed as subsequent events.
- Controls and audit: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls at December 31, 2018.
Important facts for investors to verify
- Reconcile declared distributions of $2.72 per share with cash paid and the year-end dividend payable; separately confirm the tax characterization of 2018 distributions.
- Review development leasing, remaining commitments, completion timing and projected returns, including the 45% lease-up level reported in February 2019.
- Check debt maturities, credit-facility availability, covenant headroom, refinancing plans and sensitivity to higher interest rates.
- Assess tenant rollover: leases representing 12.6% of annualized base rent were scheduled to expire in 2019, and 16.3% in 2020.
- Monitor the land-purchase litigation, the $497,000 reserve, and the realization of proceeds and gains from subsequent property sales and planned financing.