EastGroup Properties, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; interim financial statements are unaudited. EastGroup is an industrial-property REIT focused on distribution facilities in major Sunbelt markets.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $75.3 million | $68.7 million | $222.4 million | $202.8 million |
| Net income attributable to common stockholders | $23.0 million | $15.9 million | $70.0 million | $65.6 million |
| Diluted GAAP EPS | $0.64 | $0.46 | $1.98 | $1.93 |
| FFO attributable to common stockholders | $41.9 million | $36.9 million | $123.1 million | $105.8 million |
| Diluted FFO per share | $1.17 | $1.08 | $3.49 | $3.12 |
| Property net operating income (PNOI) | $53.7 million | $48.7 million | $157.7 million | $143.5 million |
- Q3 revenue rose about 9.6%; common-stockholder net income rose about 44.8%, and diluted FFO per share rose 8.3%. Nine-month diluted FFO per share increased 11.9%.
- PNOI increased 10.4% in Q3 and 9.9% year to date. Same-property PNOI, excluding lease-termination income, increased 3.6% and 4.2%, respectively.
- Q3 reported earnings included a $4.1 million gain on the sale of an operating property. Nine-month real-estate sale gains were $14.3 million, versus $21.9 million in 2017.
- Operating cash flow was $142.0 million for the first nine months, compared with $122.7 million. Investing used $178.1 million, primarily for development, acquisitions and improvements; financing provided $36.4 million.
- Cash at September 30 was $0.3 million. Total debt was $1.084 billion, down from $1.108 billion at year-end 2017. Total liabilities were $1.219 billion and total equity was $869.9 million.
- Quarter-end leased percentage was 97.1%, versus 97.4% a year earlier; occupancy was 95.7%, versus 95.6%. New and renewal lease rates increased an average 16.6% in Q3 and 15.6% year to date.
Material changes and capital allocation
- Growth reflected new development and value-add properties, same-property operations and acquisitions; property sales partly offset PNOI growth. Ten projects totaling 1.338 million square feet were transferred from development/value-add to operating properties during the nine months.
- At September 30, 20 development projects totaling 2.506 million square feet were in the program. They were 43% leased as of October 19, with projected total investment of $220 million and $76 million remaining to invest at quarter-end.
- The company issued 1.246 million common shares through its continuous equity program, generating $112.3 million net proceeds. It also issued $60 million of ten-year private placement notes at a fixed 3.93%, refinanced a $65 million term loan at an effectively fixed 2.313%, and repaid a $50 million term loan.
- Common dividends declared for the first nine months totaled $2.00 per share. The filing reports $45.4 million of dividend distributions paid during the period.
Liquidity, outlook and risks
- Unsecured bank facilities total $395 million, with $171.2 million drawn at September 30. The facilities mature in 2022 and include extension options; the larger facility also has a potential $150 million accordion subject to lender agreement. The company reported compliance with debt covenants.
- Management said cash, operating cash flow, credit facilities and potential debt or equity issuance should be adequate for operations, distributions, debt service, acquisitions, development and other normal business needs. No specific earnings or FFO guidance was provided.
- Variable-rate facility borrowings had a 3.22% weighted-average rate at quarter-end. Management estimated that a 32-basis-point change in this rate would change annual interest expense and cash flows by about $551,000, excluding debt effectively fixed by swaps. An $80 million swap matured in August 2018, returning that borrowing to a variable rate.
- Key stated risks include economic weakness, tenant defaults, vacancies and inability to renew or re-lease space at expected rents; financing availability, credit ratings and higher interest rates; operating-cost increases; and development, acquisition, insurance and natural-disaster risks. Management reported no material change to previously disclosed risk factors.
- Other notable items: a $1.15 million insurance-related casualty gain was recorded in Q2; no property impairment or held-for-sale balance was reported. After quarter-end, EastGroup acquired 29 acres of San Antonio development land for $3 million, with development of four buildings totaling 370,000 square feet anticipated to begin in 2019.
Important facts for investors to verify
- How much reported earnings growth came from recurring property operations versus property-sale gains and the casualty-related gain.
- Leasing, occupancy and rental-rate trends, including whether new development reaches stabilization and supports expected PNOI and FFO growth.
- Development commitments, remaining investment, lease-up progress and exposure to construction-cost or schedule overruns.
- Debt maturities, variable-rate exposure, available facility capacity, covenant headroom and the company’s future reliance on equity issuance.
- Cash-flow coverage of dividends and capital spending; reported FFO is a supplemental, non-GAAP measure and is not equivalent to cash available for distributions.