EastGroup Properties, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in millions except per-share data, percentages and where otherwise noted. EastGroup is an industrial-property REIT focused primarily on business distribution space in major Sunbelt markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $82.1 | $74.9 | $160.9 | $147.1 |
| Net income attributable to common stockholders | $27.0 | $18.2 | $49.5 | $46.9 |
| Diluted EPS | $0.73 | $0.52 | $1.35 | $1.34 |
| FFO per diluted share | $1.22 | $1.16 | $2.42 | $2.31 |
| Property net operating income (PNOI) | $59.1 | $52.4 | $115.6 | $104.0 |
- Revenue rose 9.6% in Q2 and 9.4% for the first half. Q2 net income increased 47.9%; first-half net income increased 5.4%. Q2 results included a $9.1 million gain on a property sale.
- FFO per diluted share increased 5.2% in Q2 and 4.8% for the first half. Same-property PNOI, excluding lease-termination income, rose 3.5% in Q2 and 3.6% for the first half.
- Q2 interest expense was $8.8 million, nearly unchanged year over year; first-half interest expense was $17.7 million, up $0.2 million. Depreciation and amortization increased $4.5 million in Q2 and $6.5 million for the first half.
- Operating cash flow was $98.4 million for the first half, versus $73.7 million in 2018. Investing used $184.8 million and financing provided $86.4 million. Cash at June 30 was $0.3 million.
Balance sheet, debt and liquidity
- Total assets were $2.295 billion at June 30, up from $2.132 billion at year-end 2018. Total debt was $1.135 billion, versus $1.106 billion; total equity was $1.009 billion.
- Debt comprised $195.9 million of variable-rate bank facilities, $805.0 million of fixed-rate unsecured debt and $137.9 million of fixed-rate secured debt, before debt issuance costs. The company repaid a $45.7 million mortgage bearing 7.50% in April and issued $80 million of 10-year unsecured notes at 4.27% in March.
- The two bank facilities have aggregate capacity of $395 million and mature in July 2022, with extension options. The company reported compliance with debt covenants. Moody’s affirmed its Baa2 issuer rating with a stable outlook in June.
- First-half common-stock offerings generated $113.4 million net proceeds from 1.02 million shares. Common dividends declared were $1.44 per share for the half-year; cash distributions paid were $53.2 million.
- Management said cash, operating flows, bank facilities, and access to debt and equity markets should be adequate for operating needs, debt service, distributions, capital improvements, acquisitions and development.
Operating trends and material changes
- Portfolio occupancy was 96.5% at June 30; 97.5% was leased. Same-property average occupancy was 96.6% in Q2, versus 96.3% a year earlier. New and renewal lease rates increased 17.2% in Q2 and 15.8% for the first half.
- EastGroup started nine development projects totaling 1.17 million square feet and transferred seven projects totaling 934,000 square feet into operating properties. At June 30, its 20-project development and value-add pipeline covered 2.65 million square feet, with $249 million projected total investment and $68 million remaining to invest; it was 52% leased as of July 25.
- First-half property acquisitions included an operating property in Denver, a Dallas value-add property and development land in Houston and San Diego. Two property sales generated $18.7 million in proceeds and $11.4 million in gains.
- First-half equity increased partly from stock issuance. Dividends declared exceeded attributable earnings by $4.1 million. Cash-flow hedge fair-value changes reduced first-half comprehensive income by $6.1 million.
Outlook, risks and unusual items
- No specific earnings or FFO guidance is provided in the supplied filing text. Management describes continued development, acquisitions and leasing, and expects to fund activity through operating cash flow, bank borrowing, fixed-rate debt and equity issuance.
- Subsequent financing plans included $110 million of private-placement notes expected to close in Q3 2019: $75 million for 10 years at 3.47% and $35 million for 12 years at 3.54%. The company also expected to close acquisitions in Phoenix and Greenville, and a sale of University Business Center 130 was under contract.
- Key risks include economic deterioration, tenant defaults or non-renewals, occupancy and rental-rate declines, interest rates and refinancing, capital-market access, development and acquisition execution, property taxes, natural disasters, insurance, litigation and maintaining REIT qualification. The company noted that LIBOR was expected to cease after 2021 and was evaluating transition risks for LIBOR-linked contracts.
- A land-purchase dispute was mediated and settled, with amounts paid and the case dismissed; however, the plaintiff appealed an order requiring compliance with the settlement, and the company was awaiting the court’s decision. Management reported no other material litigation and no material change to the prior annual report’s risk factors.
- The company adopted lease-accounting standard ASC 842 prospectively from January 1, 2019. It recorded operating-lease right-of-use assets and liabilities, including ground and office leases; management said the combined balances were less than 1% of total assets.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring property operations versus the $9.1 million Q2 sale gain and lease-termination income.
- Leasing, occupancy and rent-growth trends, and whether the development pipeline reaches projected costs, occupancy and conversion dates.
- Funding needs and returns for development and acquisitions, including the planned $110 million notes and subsequent transactions.
- Variable-rate exposure, upcoming debt maturities, covenant headroom and the company’s LIBOR transition plans.
- Resolution of the settlement-related appeal and any resulting financial or legal exposure.