EastGroup Properties, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; this is an annual filing, not a standalone fourth-quarter report. EastGroup is an equity REIT focused on developing, acquiring and operating industrial distribution properties, primarily in Sunbelt markets. More than 99% of revenue is rental income.
Financial and operating performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $235.0 million | $219.8 million | +6.9% |
| Operating income | $79.1 million | $73.8 million | +7.2% |
| Net income attributable to common stockholders | $47.9 million | $47.9 million | Nearly flat |
| Diluted GAAP EPS | $1.49 | $1.52 | Down 2.0% |
| FFO per diluted share | $3.67 | $3.47 | +5.8% |
| Property net operating income (PNOI) | $167.5 million | $156.9 million | +6.8% |
| Net cash from operating activities | $131.4 million | $117.5 million | +11.9% |
| Total debt at year-end | $1,032.2 million | $933.2 million | +10.6% |
- Property expenses were 28.7% of real estate operating revenue, versus 28.6% in 2014. Same-property PNOI increased 2.0%; same-property average occupancy rose to 96.0% from 95.5%.
- At December 31, portfolio leased percentage was 97.2% versus 96.7% a year earlier; occupancy was 96.1% versus 96.3%. New and renewal lease rates averaged 11.9% higher than prior rents.
- Annual common distributions increased to $2.34 per share from $2.22. The company distributed all taxable income for 2015 and reported no significant income tax provision.
- Year-end assets were $1.666 billion, total liabilities $1.107 billion and total equity $559.2 million. Cash was $48,000; operating cash flow, credit facilities and access to debt and equity markets are the company’s principal liquidity sources.
Material changes and financing
- PNOI growth reflected $6.3 million from newly developed properties, $3.0 million from same-property operations and $2.6 million from acquisitions, partly offset by dispositions and redevelopment.
- Net income was essentially unchanged despite higher revenue and PNOI, principally because gains on real estate sales fell to $2.9 million from $9.2 million. Diluted EPS also reflects a larger weighted-average share count.
- Debt composition shifted: secured debt declined by $102.4 million, while unsecured debt increased by $150.0 million and bank credit-facility borrowings rose by $51.4 million. New 2015 financing included a $75 million term loan and $75 million of senior unsecured notes; the company repaid $81.9 million of mortgages.
- Amended unsecured bank facilities total $335 million and mature in July 2019, with extension and expansion options. Year-end borrowings were $150.8 million; the company reported compliance with debt covenants. Moody’s affirmed Baa2 and Fitch affirmed BBB, each with a stable outlook.
Outlook, commentary and risks
- Management said operating cash flow and credit facilities, together with potential debt and equity issuance, should fund operations, debt service, distributions, improvements, acquisitions and development. The filing provides no specific earnings, FFO or occupancy guidance.
- Development remained a major growth investment: 11 projects totaling 1.283 million square feet began construction in 2015, and 17 properties totaling 1.419 million square feet were transferred to operating real estate. At year-end, 14 buildings totaling 1.665 million square feet remained in lease-up or under construction; the program was 33% leased as of February 12, 2016. Estimated total project cost was $113.9 million, with $34.2 million remaining to invest at year-end.
- Management identified leasing and tenant credit as core operating challenges. Risks include lease expirations and re-leasing costs, development delays or weak lease-up, local industrial-market downturns, refinancing and interest-rate exposure, and reliance on external capital. The portfolio is concentrated in Sunbelt industrial properties; Houston represented 19.1% of portfolio square footage.
- At year-end, $150.8 million of variable-rate debt was not protected by interest-rate hedges. The filing estimates a 10% change in the weighted-average rate on bank facilities would change annual interest expense and cash flow by about $211,000, excluding swapped debt.
- Unusual items included higher general and administrative expense, partly due to accelerated restricted-stock vesting for the retiring CEO and succession costs. A $65 million seven-year unsecured term loan was committed after year-end and expected to close April 1, 2016, at an effective fixed rate of 2.863%. The company also sold a Houston property in February 2016 for approximately $15.6 million and expected to recognize a gain in the first quarter.
- No material litigation or known material environmental liability was reported. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether high leasing levels and the reported 11.9% rent increases persist as leases renew; 2016 expirations represented 13.5% of year-end portfolio square footage.
- Development lease-up, completion timing and remaining funding needs, particularly given the 33% leased rate reported in February 2016.
- Debt maturities and refinancing capacity: contractual secured-debt payments due in 2016 were $92.8 million, and total debt rose during 2015.
- Unhedged variable-rate exposure, swap terms and counterparties, and continued compliance with debt covenants.
- Underlying earnings trends apart from property-sale gains, including same-property PNOI, bad debt and general and administrative costs.
- Post-year-end execution and terms of the planned $65 million loan and the results of the Houston property sale.