EastGroup Properties, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are primarily with fiscal 2012. This is an annual filing, not a standalone fourth-quarter report. EastGroup is an equity REIT focused on industrial distribution properties, principally in Sunbelt markets. More than 99% of revenue was rental income.
Financial and operating highlights
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Total revenue | $202.2 million | $185.8 million | Up 8.8% |
| Operating income | $66.6 million | $60.9 million | Up 9.3%; operating margin was approximately 32.9%, versus 32.8% |
| Net income attributable to common stockholders | $32.6 million | $32.4 million | Up 0.7% |
| Diluted earnings per share | $1.08 | $1.13 | Down 4.4%; 2012 included substantially higher property-sale gains |
| Property net operating income (PNOI) | $144.0 million | $132.9 million | Up 8.3%; same-property PNOI increased 1.3% |
| FFO attributable to common stockholders | $97.6 million; $3.23 per diluted share | $88.2 million; $3.08 per diluted share | Per-share FFO up 4.9%; FFO is a non-GAAP measure |
| Net cash from operating activities | $109.8 million | $91.8 million | Up $17.9 million |
| Common distributions | $2.14 per share | $2.10 per share | Up 1.9%; 2013 cash distributions paid were $64.8 million |
At year-end, total assets were $1.473 billion and total debt was $893.7 million, up from $813.9 million in 2012. Debt comprised $499.8 million secured, $305.0 million unsecured and $89.0 million drawn on unsecured bank facilities. Interest expense was $35.2 million, slightly below 2012. Cash was only $8,000; the $250 million revolving facilities had $88.95 million drawn, with approximately $161 million of stated undrawn capacity. Management said operating cash flow and credit facilities were expected to fund operations for the next 12 months. The company reported compliance with debt covenants.
Business developments and comparison with prior year
- Year-end portfolio occupancy was 95.5%, versus 94.6% in 2012; leased area was 96.2%, versus 95.1%. As of February 13, 2014, the portfolio was 95.7% leased and 94.7% occupied.
- Leases expiring in 2013 covered 6.56 million square feet; EastGroup renewed or re-leased 83% of that area. New and renewal lease rates increased an average 2.7%.
- PNOI growth reflected $5.9 million from acquisitions, $3.6 million from newly developed properties and $1.7 million from same-property operations. Property expenses were 28.7% of real estate operating income, compared with 28.5% in 2012.
- Acquisitions included two operating properties totaling 837,000 square feet and 50.9 acres of development land. The company began 13 development projects totaling 1.177 million square feet and transferred 14 completed properties totaling 1.025 million square feet to operating properties.
- Development investment was $148.8 million at year-end. A group of 13 buildings in lease-up or under construction was 58% leased as of February 13, 2014, with projected total cost of $87.4 million and $38.2 million remaining to invest at year-end.
- Common shares issued increased, including 890,085 shares through the continuous equity program, generating $53.2 million net proceeds. Weighted-average diluted shares rose to 30.269 million from 28.677 million, helping explain why EPS declined despite slightly higher net income.
Outlook, risks and unusual items
- No specific 2014 earnings, FFO or occupancy guidance is provided in the filing. Management described continued targeted development and acquisition activity, and expects to rely on operating cash flow, bank facilities, debt and equity capital for funding.
- Management identified leasing and re-leasing space as the primary operating challenge. Lease expirations represent 12.5% of current base rent in 2014 and 22.0% in 2015; as of February 13, 2014, 9.2% of portfolio area remained scheduled to expire during the rest of 2014.
- Key risks include local economic or industrial-property market downturns, tenant defaults and vacancies, leasing concessions, development delays or cost overruns, refinancing and interest-rate exposure, and reliance on external capital. The portfolio is concentrated in Sunbelt markets and industrial properties.
- At December 31, 2013, $89.0 million of variable-rate debt was not protected by interest-rate hedges. Management estimated that a 13-basis-point change in the weighted average rate on variable bank debt would change annual interest expense and cash flows by approximately $119,000. Swaps hedge certain term loans; counterparty and covenant-related termination risks remain.
- Unusual comparison item: gains on real estate sales were $0.8 million in 2013 versus $6.5 million in 2012. 2013 also included $4.7 million of free-rent concessions on 3.787 million square feet, compared with $2.8 million on 2.449 million square feet in 2012.
- EastGroup reported no material litigation, no identified material environmental liability, and no real-estate impairment charges for 2013. KPMG issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether occupancy, renewal/re-leasing results, rent growth and same-property PNOI support continued growth, especially given the 2015 base-rent expiration concentration.
- Whether the development pipeline leases up on schedule and within projected costs, and how much additional capital it requires.
- Debt maturities, refinancing plans, interest-rate exposure and remaining availability under the revolving facilities; note that reported cash at year-end was minimal.
- How much reported earnings and year-over-year comparisons are affected by property-sale gains, share issuance and dilution, straight-line rent, and non-GAAP FFO adjustments.
- Future dividend coverage and funding needs relative to operating cash flow, development spending and REIT distribution requirements.