EastGroup Properties, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. EastGroup is an industrial-property REIT focused primarily on Sunbelt markets. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2015 | Comparable / prior |
|---|---|---|
| Real estate operating revenue | $57.6 | $52.8; up 9.1% |
| Operating income | $18.5 | $17.2 |
| Net income | $10.1 | $8.5 |
| Net income attributable to common stockholders | $9.9; $0.31 per diluted share | $8.4; $0.27 per diluted share |
| Funds from operations (FFO), attributable to common stockholders | $28.1; $0.87 per diluted share | $25.4; $0.82 per diluted share |
| Property net operating income (PNOI) | $41.2 | $37.7; up 9.1% |
| Operating cash flow | $21.4 | $17.6 |
| Investing cash flow | $(26.4) | $(20.9) |
| Financing cash flow | $5.2 | $5.2 |
| Cash at period-end | $0.2 | $0.01 at December 31, 2014 |
| Total assets / total equity | $1,581.3 / $564.8 | $1,575.8 / $575.6 at December 31, 2014 |
| Total debt | $960.0 | $933.2 at December 31, 2014 |
Property operating expenses were 28.5% of real estate operating revenue, compared with 28.4% a year earlier. Interest expense declined to $8.8 million from $9.0 million. The company declared common dividends of $0.57 per share and paid $19.0 million in common-stock dividends during the quarter.
Business trends and changes versus Q1 2014
- Same-property PNOI increased 2.9%; same-property average occupancy rose to 96.1% from 95.0%, and average rent increased to $5.33 per square foot from $5.13.
- At March 31, 97.0% of portfolio space was leased, versus 96.0% a year earlier; occupancy was 96.2%. The company renewed or re-leased 95% of 2.197 million square feet with leases expiring during the quarter. New and renewal rents averaged 11.1% above prior rents.
- Overall PNOI growth included $1.730 million from newly developed properties, $1.061 million from same-property operations, and $0.968 million from 2014 acquisitions. No operating properties were acquired in Q1 2015.
- Net income attributable to common stockholders rose 18.6%, diluted EPS rose from $0.27 to $0.31, and diluted FFO per share increased 6.1%. General and administrative expense increased to $4.5 million from $3.4 million. Bad-debt expense rose to $355,000 from $13,000.
Debt, liquidity, development, and outlook
- Debt comprised $390.6 million secured, $455.0 million unsecured, and $114.4 million drawn on unsecured bank facilities. Secured debt fell by $63.1 million, principally after repayment of a $57.45 million mortgage bearing 5.5%; unsecured debt rose by $75 million.
- The new $75 million unsecured term loan has a seven-year term, interest-only payments, and a 3.031% effective fixed rate after an interest-rate swap. The two revolving facilities total $250 million and mature in January 2017; $114.36 million was drawn at quarter-end. The company reported compliance with debt covenants.
- Operating cash flow, bank facilities, debt financing, and potential equity issuance are management’s stated funding sources. Management expects these sources to be adequate for operating needs, debt service, distributions, capital improvements, acquisitions, and development. No numerical earnings or FFO guidance is provided.
- The development program included 19 projects totaling 1.75 million square feet; projected investment was $128.5 million, with $37.7 million remaining to invest. These projects were 27% leased as of April 17. Three projects totaling 282,000 square feet began construction in Q1, and four projects totaling 333,000 square feet were transferred to operating properties.
- Subsequent to quarter-end, EastGroup sold the 185,000-square-foot Ambassador Row Warehouse for $5.25 million, with an estimated gain of approximately $2.9 million expected in Q2. It also bought development land in San Antonio and Phoenix for $4.4 million and $1.5 million, respectively.
Risks, contingencies, and unusual items
- Interest-rate swaps generated a $2.535 million other-comprehensive loss in Q1; swap liabilities were $5.121 million at March 31. The company estimated that $3.980 million of accumulated swap losses would be reclassified as increased interest expense over the following 12 months.
- A 10% change in the weighted-average rate on the variable-rate bank facilities—approximately 14 basis points—would change annual interest expense and cash flows by an estimated $154,000, excluding debt fixed through swaps.
- Management identifies economic weakness, tenant defaults, leasing and renewal conditions, vacancies and rents, financing availability and rates, operating costs, and development execution as risks. Most leases provide for rent increases and tenant recovery of operating costs, but general and administrative and interest-cost increases are not passed through.
- No real-estate impairment was recorded. The company reported no material change to the risk factors in its 2014 Form 10-K, and management stated that disclosure controls were effective.
Important facts for investors to verify
- Confirm the trend in occupancy, same-property PNOI, rent spreads, and bad-debt expense in subsequent quarters.
- Review development leasing, remaining capital commitments, project completion timing, and whether the stated development outlook is achieved.
- Assess debt maturities, revolving-facility availability, covenant headroom, and the cost and effectiveness of interest-rate hedges.
- Verify recognition of the Ambassador Row sale gain and the impact of subsequent land purchases on funding needs.
- Compare reported GAAP earnings with FFO, and consider the effect of dividends exceeding Q1 net income attributable to common stockholders.