EastGroup Properties, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. EastGroup is an industrial-property REIT focused primarily on distribution facilities in major Sunbelt markets.
Financial performance and position
Amounts in millions, except per-share data and where stated.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $92.0 | $83.9 | $270.4 | $244.8 |
| Net income attributable to common stockholders | $24.4 | $22.6 | $71.2 | $72.1 |
| Diluted EPS | $0.62 | $0.60 | $1.82 | $1.94 |
| FFO per diluted share | $1.36 | $1.28 | $4.00 | $3.71 |
| Property net operating income (PNOI) | $65.9 | $60.4 | $193.2 | $175.9 |
- Q3 revenue rose about 9.6% year over year; PNOI rose 9.1%. Nine-month PNOI rose 9.8%, while FFO per share increased 7.8%.
- Nine-month GAAP net income declined year over year, principally because 2019 included $11.4 million in real-estate sale gains; there were no property sales in the first nine months of 2020.
- Same-property PNOI excluding lease-termination income increased 2.3% in Q3 and 2.2% for the nine-month period. New and renewal lease rates averaged 28.0% higher in Q3 and 23.1% higher year to date versus prior leases on the same space.
- Operating cash flow was $179.6 million for the nine months, versus $170.7 million in 2019. Investing activities used $189.7 million; financing activities provided $9.9 million. Cash at quarter-end was $19,000.
- Total assets were $2.636 billion at September 30, versus $2.546 billion at year-end 2019. Total debt was $1.211 billion, up from $1.183 billion; total equity was $1.245 billion.
- Quarter-end debt comprised $76.5 million of unsecured bank facilities, $1.008 billion of unsecured debt and $126.5 million of secured debt. The company reported compliance with debt covenants.
- Dividends declared were $0.75 per share in each of the first two quarters and $0.79 in Q3; nine-month declared common dividends totaled $90.2 million.
Operating context, changes and outlook
- At September 30, the portfolio was 97.8% leased and 96.4% occupied, compared with 97.9% leased and 97.4% occupied a year earlier. At October 27, occupancy was 96.9% and leased percentage was 98.0%.
- During the first nine months, EastGroup transferred 17 projects totaling 2.164 million square feet into operating properties, acquired one 50,000-square-foot Austin property for $6.2 million, and acquired 157.1 acres of development land for $25.6 million. It made no property sales.
- At September 30, development and value-add investment was $324.8 million. The program comprised 13 projects totaling 2.198 million square feet; it was 26% leased as of October 27, with $25 million remaining to invest against projected total investment of $227 million.
- Management said operations, occupancy and collections had remained stable amid COVID-19. As of October 27, rent relief requests represented about 28% of customers by rental revenue; executed deferrals totaled $1.7 million, approximately 0.5% of estimated 2020 revenue. All deferred payments due through September 30 had been collected. October rent collection was 97.9% as of October 27; collections for earlier months were generally 98.7%–99.8%.
- Management anticipated beginning new development projects in Q4 2020 after not starting new projects in Q2 or Q3; further starts would depend on market conditions. No earnings or FFO guidance was provided in the supplied filing text.
- Management expected cash, operating cash flow, credit facilities and access to debt and equity markets to fund operations, distributions and investment needs, including after considering COVID-19 effects. It said the impact of the pandemic remained uncertain and could not be predicted.
Financing, risks and unusual items
- In March, the company closed a $100 million seven-year unsecured term loan, swapped to an effective fixed rate of 2.39%. In August it repaid $30 million of notes bearing 3.80% interest.
- After quarter-end, EastGroup issued $175 million of senior unsecured notes on October 14: $100 million at 2.61% for 10 years and $75 million at 2.71% for 12 years. Proceeds were used to repay revolving credit borrowings; availability on the $395 million revolvers was reported at full capacity on October 27.
- Also after quarter-end, the company repaid a $45.9 million mortgage bearing 4.39% and acquired a 162,000-square-foot Los Angeles-area distribution building for $27.8 million.
- COVID-19 risks include tenant financial deterioration or defaults, reduced leasing demand, lower rents or occupancy, construction delays, and less favorable access to capital. The company recorded $1.7 million of uncollectible-rent reserves for the first nine months, versus $0.3 million in 2019.
- Seven interest-rate swaps hedged variable-rate unsecured loans. Their net liability fair value was $13.4 million; the company estimated a further $4.4 million would be reclassified from accumulated other comprehensive loss to interest expense over the next 12 months. LIBOR transition after 2021 remains a monitored risk.
- The company reported no material litigation and no real-estate impairment charges for the periods presented. Nine-month comprehensive income was affected by a $16.3 million adverse change in cash-flow hedge fair value.
Important facts for investors to verify
- Whether tenant collections, rent relief requests and uncollectible-rent reserves remain manageable as the pandemic and tenant conditions evolve.
- Whether occupancy and leasing-rate gains persist, and whether development projects lease up on schedule and within projected costs.
- How post-quarter debt issuance and repayment activity affect interest expense, maturities, liquidity and covenant headroom.
- Whether reported FFO growth continues to translate into sustainable per-share performance after equity issuance and higher depreciation.
- How LIBOR replacement and cash-flow hedge valuation changes affect financing costs and reported comprehensive income.