EastGroup Properties, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2014, for this industrial-property REIT focused on distribution facilities in major Sunbelt markets. Financial amounts below are in U.S. dollars; “million” figures are rounded.
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 / comparator |
|---|---|---|
| Real estate operating revenue | $52.8 million | $48.2 million |
| Property net operating income (PNOI) | $37.8 million | $34.6 million; up 9.1% |
| Net income attributable to common stockholders | $8.4 million; $0.27 per diluted share | $7.2 million; $0.24 per diluted share |
| FFO attributable to common stockholders | $25.4 million; $0.82 per diluted share | $22.7 million; $0.76 per diluted share |
| Operating cash flow | $17.6 million | $17.3 million |
| Capital investment in development | $21.2 million | $17.3 million |
- Property expenses were 28.4% of real estate operating revenue, versus 28.1% a year earlier. Same-property PNOI increased 1.4%; same-property average occupancy was 94.9%, versus 93.4%.
- At March 31, total leased area was 96.0% (94.4% a year earlier), while occupancy was 95.1% (93.6% a year earlier). New and renewal lease rates increased an average 6.2%.
- Cash was $1.9 million. Total debt was $898.6 million: $494.3 million secured, $305.0 million unsecured debt, and $99.4 million on bank credit facilities. Total debt was $893.7 million at December 31, 2013.
- Assets totaled $1.481 billion, liabilities $952.1 million, and equity $528.8 million at quarter-end. The company paid $17.3 million in stockholder distributions and declared $0.54 per share in common dividends.
Changes versus the prior comparable period
- Revenue rose 9.6%; net income attributable to common stockholders rose 17.0%, and diluted EPS increased from $0.24 to $0.27. FFO per diluted share increased 7.9%.
- PNOI growth included $1.5 million from newly developed properties, $1.2 million from 2013 acquisitions, and $0.5 million from same-property operations. Interest expense increased $0.4 million to $9.0 million; depreciation and amortization increased $1.6 million to $17.2 million.
- Cash flow from operations increased modestly, while investing cash use decreased to $20.9 million from $23.5 million. The company issued 321,645 shares through its continuous equity program for $19.6 million net proceeds.
Liquidity, outlook, risks, and unusual items
- Management said operating cash flow and available credit facilities, together with potential debt and equity financing, should be adequate for operating needs, debt service, distributions, capital improvements, acquisitions, and development. No earnings or FFO guidance was provided.
- The $250 million unsecured revolving credit facilities mature in January 2017; $99.4 million was drawn at quarter-end. The company reported compliance with debt covenants. Moody’s affirmed its Baa2 issuer rating with a stable outlook.
- Development included 21 projects totaling 1.836 million square feet. The projects’ estimated total cost was $133.0 million, with $71.9 million remaining to invest; they were 33% leased as of April 18, 2014. The company began 11 projects totaling 894,000 square feet during the quarter.
- Three interest-rate swaps hedged $155 million of variable-rate unsecured loans. Management estimated $2.251 million would be reclassified from accumulated other comprehensive income as an increase to interest expense over the next 12 months. A 10% change in the facilities’ variable interest rate (about 13 basis points) would change annual interest expense and cash flow by approximately $132,000.
- The company sold one 58,000-square-foot property for $3.6 million and recognized a $95,000 gain. It adopted ASU 2014-08 prospectively; accordingly, the 2014 sale is reported in continuing operations, while certain 2013 property-sale results remain presented as discontinued operations.
- Management cited economic weakness, tenant defaults, leasing and renewal conditions, vacancies, rent levels, financing availability and interest rates, operating-cost inflation, and development execution as risks. It reported no real-estate impairment and no material change to the risk factors in its 2013 Form 10-K. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Review FFO and same-property PNOI definitions and reconciliations; these supplemental measures are not substitutes for GAAP results and may not be comparable across REITs.
- Track leasing, occupancy, rent increases, concessions, and lease expirations; 7.9% of portfolio area was scheduled to expire during the remainder of 2014 as of March 31 (6.8% as of April 18).
- Assess development lease-up, remaining project costs, and funding needs, alongside the company’s use of bank borrowings and continued equity issuance.
- Monitor debt maturities, covenant headroom, interest-rate exposure, and swap values. The filing does not provide a clear numerical measure of covenant headroom.
- Consider the effect of the prospective discontinued-operations accounting change when comparing property-sale results across periods.