EastGroup Properties, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. EastGroup is an industrial-property REIT focused primarily on Sunbelt markets, with rental income as its principal revenue source.
Key financial metrics
| Metric | Q2 2017 | Six months 2017 | Comparison |
|---|---|---|---|
| Real estate operating revenue | $67.9 million | $134.0 million | Up 9.7% and 8.5%, respectively, year over year |
| Net income attributable to common stockholders | $36.9 million; diluted EPS $1.08 | $49.7 million; diluted EPS $1.47 | Down from $43.9 million/$1.35 and $65.6 million/$2.03 |
| Funds from operations (FFO) attributable to common stockholders | $35.9 million; diluted FFO/share $1.05 | $68.9 million; diluted FFO/share $2.04 | FFO/share up 6.1% and 7.4%, respectively |
| Property net operating income (PNOI) | $47.7 million | $94.8 million | Up 8.1% and 7.9%, respectively |
| Operating cash flow | Not stated separately | $67.2 million | Compared with $64.4 million in first-half 2016 |
Property operating expenses were 29.8% of real estate operating revenue in Q2 and 29.3% for the first half, versus 28.7% and 28.8% in 2016. Interest expense was $9.0 million in Q2 and $17.7 million for the first half, both lower year over year.
At June 30, total assets were $1.871 billion, total liabilities $1.150 billion, and total equity $720.8 million. Total debt was $1.071 billion, down from $1.101 billion at year-end 2016. Cash was $78,000. The company reported $335 million in unsecured bank credit facilities and compliance with debt covenants. It declared common dividends of $1.24 per share for the first six months and paid $42.7 million in stockholder distributions.
Operating performance and changes
- Leasing remained strong: 87% of 4.077 million square feet of leases expiring in the first half were renewed or re-leased. New and renewal rental rates increased an average 15.9% for the period.
- Total leased space was 96.8% at June 30, 2017, versus 97.2% a year earlier; occupancy was 94.9%, versus 95.7%. Same-property average occupancy improved to 96.5% in Q2 and 96.6% for the first half.
- Same-property PNOI increased 2.5% in Q2 and 2.6% in the first half. Overall PNOI growth also reflected development completions and acquisitions, partly offset by property sales.
- GAAP net income declined despite higher operating revenue and PNOI, primarily because gains on property sales were lower: $21.9 million in the first half of 2017 versus $42.3 million in 2016. Q2 gains were $21.9 million versus $31.0 million.
- Development investment was $197.2 million at quarter-end, down from $293.9 million at year-end after ten projects totaling 1.919 million square feet transferred into operating properties. The 14-project development program was 47% leased as of July 26; projected total investment was $152 million, with $66 million remaining to invest at June 30.
- First-half investing cash flow was a $60.4 million use, including $47.8 million for development and $36.7 million for property purchases, partly offset by $39.9 million of real-estate sale proceeds. Financing activities used $7.3 million; the company also raised $69.1 million net through a common-stock offering.
Outlook, risks and unusual items
Management stated that cash, operating cash flows, bank facilities, and expected access to debt and equity capital should be adequate for operations, debt service, distributions, acquisitions, development and other normal activities. The filing provides no specific earnings, FFO or occupancy guidance. Management expects future debt issuance to be primarily unsecured and fixed-rate or effectively fixed-rate.
Key risks include economic weakness affecting tenant payments, occupancy, rental rates and leasing of development space; availability and cost of financing; interest-rate changes; operating-cost increases; and execution, timing and cost risks for development and acquisitions. Seven interest-rate swaps hedged variable-rate borrowings; management considered the hedges highly effective. A 10% change in the stated variable borrowing rate would affect annual interest expense and cash flows by approximately $195,000. The company reported no material risk-factor changes from its 2016 Form 10-K and no impairment charges or properties held for sale.
Notable items include the sale of two operating properties in Dallas and Houston for $38.0 million, producing $21.9 million in gains, and a $40,000 loss on a land sale. Moody’s affirmed the company’s Baa2 issuer rating with a stable outlook. New revenue and lease accounting standards were still under evaluation; the company expected lease accounting adoption in 2019 and anticipated certain lease-negotiation costs would be expensed rather than capitalized.
Investor facts to verify
- Whether rent growth and lease retention continue to support same-property PNOI as occupancy and leased percentage were below the prior-year levels at quarter-end.
- How much of reported GAAP earnings reflects property-sale gains, and whether FFO and recurring property performance continue to grow.
- Development leasing, completion timing, remaining investment needs and returns on projects transferred to operating properties.
- Debt maturities, borrowing costs, facility availability and covenant headroom, particularly as development and acquisition funding needs evolve.
- The eventual financial and disclosure effects of adopting the new revenue and lease accounting standards.