EastGroup Properties, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are primarily with fiscal 2013. EastGroup is an equity REIT focused on developing, acquiring, and operating industrial distribution properties, principally in Sunbelt markets. More than 99% of revenue is rental income.
Financial and operating highlights
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $219.8 million | $202.2 million |
| Net income attributable to common stockholders | $47.9 million; $1.52 diluted EPS | $32.6 million; $1.08 diluted EPS |
| Property net operating income (PNOI) | $156.9 million | $143.8 million |
| Funds from operations (FFO), diluted per share | $3.47 | $3.23 |
| Net cash provided by operating activities | $117.4 million | $109.8 million |
| Total debt at year-end | $933.2 million | $893.7 million |
| Common distributions per share | $2.22 | $2.14 |
- Revenue rose about 8.7%; PNOI increased 9.1%, while same-property PNOI rose 2.3%. Same-property average occupancy improved to 95.3% from 94.5%.
- Net income growth included a $9.2 million gain on real estate sales, versus $0.8 million of gains reported in 2013. FFO, a supplemental REIT measure, increased 7.4% per diluted share.
- New and renewal lease rates averaged 7.9% higher in 2014. The company renewed or re-leased 88% of the 5.224 million square feet expiring during the year.
- Real estate operating expenses were 28.6% of real estate operating income, compared with 28.7% in 2013. Interest expense was $35.5 million, up $0.3 million.
- Operating cash flow was $117.4 million; investing activities used $159.5 million and financing activities provided $42.1 million. Cash at year-end was $11,000. Cash distributions paid were $70.5 million.
- Year-end assets were $1.576 billion, liabilities $1.000 billion, and total equity $575.6 million. Debt comprised $453.8 million secured, $380.0 million unsecured, and $99.4 million drawn on bank credit facilities.
Portfolio, financing, and material changes
- At December 31, EastGroup owned 307 industrial properties and one office building. Management reported 96.7% leased and 96.3% occupied at year-end; as of February 13, 2015, the portfolio was 96.3% leased and 96.0% occupied.
- During 2014, the company acquired three operating properties totaling 635,000 square feet and 40.1 acres of development land for approximately $56.3 million, began 17 development projects totaling 1.543 million square feet, and transferred 10 completed properties totaling 949,000 square feet into operating properties.
- The active development program included 20 buildings totaling 1.801 million square feet, projected to cost $132.5 million; $38.6 million remained to be invested at year-end. The projects were 31% leased as of February 13, 2015.
- Total debt increased $39.4 million. The company issued a $75 million unsecured term loan, effectively fixed at 2.846% through a swap, and repaid $26.6 million of mortgage debt. It raised $78.9 million net through its continuous common-stock offering, issuing 1,246,400 shares.
- At year-end, $99.4 million of bank-facility borrowings was variable rate and unhedged. The company had $150.6 million of unused capacity on its $250 million revolving facilities, which mature in January 2017. It reported compliance with debt covenants. Secured-debt principal payments due in 2015 total $102.4 million.
Outlook, risks, and unusual items
- The filing gives no specific earnings, revenue, FFO, or occupancy guidance. Management said cash flow, credit facilities, and access to debt and equity markets were expected to fund operations, distributions, capital improvements, acquisitions, and development.
- In January 2015, EastGroup agreed to a further $75 million, seven-year unsecured term loan, expected to close in early March 2015, with an effective fixed rate of 3.03% through a swap.
- Key risks include local-market and industrial-property concentration (Houston represented 18.6% of portfolio square footage), tenant defaults or nonrenewals, leasing and development delays or cost overruns, refinancing and interest-rate exposure, and reliance on external capital. Lease expirations represented 15.2% of year-end base rent in 2015 and 19.2% in 2016.
- EastGroup adopted updated discontinued-operations accounting in 2014; property-sale results and gains that previously might have appeared in discontinued operations are presented in continuing operations when disposals do not constitute a strategic shift. This affects comparability. No impairment charges were recorded, and management reported no material environmental liability known to it.
- The company distributed all taxable income and intends to maintain REIT status, which requires distributions of at least 90% of ordinary taxable income. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of earnings growth reflects recurring property operations versus the $9.2 million property-sale gain, and whether FFO and same-property growth persist.
- Renewal outcomes and rents for the substantial 2015–2016 lease expirations, including whether reported lease-rate increases translate into cash collections.
- Lease-up progress, remaining funding needs, and cost and completion assumptions for the development pipeline.
- Debt maturities and refinancing plans, variable-rate exposure, swap terms, and covenant headroom; the filing does not provide a clear value for covenant headroom.
- Future equity issuance and dilution, the sustainability of distributions relative to operating cash flow and investment requirements, and continued REIT qualification.