EastGroup Properties, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. EastGroup is an industrial-property REIT focused on business-distribution space in Sunbelt markets. Financial figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Real estate operating revenue | $49.0 | $46.2 | $97.3 | $92.6 |
| Operating income | $16.3 | $14.9 | $32.0 | $29.4 |
| Net income attributable to common stockholders | $7.6 | $8.0 | $14.8 | $13.4 |
| Diluted EPS | $0.25 | $0.28 | $0.49 | $0.48 |
| FFO attributable to common stockholders | $23.9 | $21.7 | $46.7 | $43.0 |
| Diluted FFO per share | $0.80 | $0.77 | $1.56 | $1.53 |
Q2 property net operating income (PNOI) was $35.4 million, up 7.6%; first-half PNOI was $70.0 million, up 5.7%. Same-property PNOI increased 1.8% for the quarter and 0.6% for the half year. The property expense-to-revenue ratio improved to 27.9% in Q2 from 28.9% and to 28.0% for the half year from 28.4%.
Quarter-end occupancy was 94.2%, compared with 93.1% a year earlier; leased space was 95.5%, versus 94.1%. New and renewal lease rates increased an average 4.4% in Q2 on 5.9% of portfolio square footage; the first-half average increase was 1.4% on 11.6% of square footage. First-half lease expirations covered 3.333 million square feet; 81% was renewed or re-leased.
Cash flow, debt and liquidity
- Operating cash flow for the first six months was $52.8 million, versus $41.6 million in 2012. Investing used $122.4 million, chiefly for $40.2 million of development and $70.0 million of property purchases. Financing provided $68.3 million. Cash ended the period at $10,000.
- Total debt was $902.4 million at June 30, up from $813.9 million at year-end 2012. It comprised $595.5 million of fixed-rate mortgages, $130.0 million of fixed-rate unsecured term loans and $176.9 million of variable-rate bank debt.
- Six-month interest expense fell to $17.3 million from $18.4 million. The company reported compliance with debt covenants. Its two revolving facilities totaled $250 million and matured in January 2017; $176.9 million was drawn at quarter-end.
- Dividends declared were $1.06 per share for the first half; cash distributions to stockholders were $31.9 million.
Changes and notable developments
- Revenue and PNOI grew, supported by acquisitions, newly completed developments and modest same-property improvement. FFO per diluted share rose 3.9% in Q2 and 2.0% for the first half.
- Common-stockholder net income declined in Q2 despite stronger operations, principally because Q2 2012 included a $1.9 million property-sale gain and discontinued-operation income. First-half 2012 also included property-sale gains; there were no property sales in the first half of 2013.
- The company acquired the 788,000-square-foot Northfield Distribution Center in Dallas for $70.0 million and 43.3 acres of Charlotte development land for $5.8 million. It began seven development projects totaling 519,000 square feet and transferred eight completed properties totaling 577,000 square feet into operating real estate.
- At June 30, the development program included 13 projects totaling 998,000 square feet; projects were 51% leased as of July 19. Estimated total project cost was $72.4 million, with $26.7 million remaining to invest at June 30.
Outlook, risks and contingencies
- No quantified earnings or FFO guidance is provided. Management said operating cash flow and credit lines should fund operations for the next 12 months and that anticipated funding sources should support both near- and long-term needs.
- The company expected to issue $100 million of senior unsecured notes at 3.8%, subject to due diligence and final documentation, with closing expected August 30, 2013. Subsequent to quarter-end, it raised $7.8 million net through its equity program and used the proceeds to reduce variable-rate borrowings.
- Subsequent events also included a $2.4 million acquisition in Charlotte, a $1.4 million Orlando land sale with a small gain, and the start of two Orlando and Houston developments with projected costs totaling $12.5 million.
- Interest-rate, tenant-credit, leasing, occupancy, rent, operating-cost, financing and development risks could affect results and cash flows. A 10% change in the June 30 weighted-average variable borrowing rate was estimated to change annual interest expense and cash flows by approximately $242,000. The $80 million interest-rate swap was valued as a $1.7 million asset; the company estimated $567,000 would be reclassified from other comprehensive income as an increase to interest expense over the next 12 months.
- Management reported no real-estate impairment charges and no material changes to the risk factors in the 2012 Form 10-K. Disclosure controls were assessed as effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the planned $100 million note issuance closed on the stated terms and whether subsequent equity proceeds and debt repayments changed leverage.
- Leasing, occupancy and rent trends, including renewals and re-leasing of remaining 2013 expirations and the effect of free-rent concessions.
- Development leasing, completion timing, remaining investment and project cost estimates, alongside acquisition performance.
- Liquidity and refinancing capacity given the very low reported cash balance, rising bank borrowings and covenant requirements.
- Interpretation of earnings comparisons: Q2 2012 included property-sale gains, while FFO is a supplemental non-GAAP measure and is not a measure of liquidity.