Business context and reporting period
EastGroup Properties, Inc. is an equity REIT focused on industrial distribution properties, primarily in Sunbelt markets. This Form 10-K covers the fiscal year ended December 31, 2017; it is an annual report, not a quarterly filing. More than 99% of revenue came from property rentals. At year-end, the company owned 363 industrial properties and one office building. Its portfolio is concentrated in Florida, Texas, Arizona, California, and North Carolina.
Financial and operating performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Revenue | $274.2 | $253.0 | Up 8.3% |
| Operating income | $95.2 | $87.4 | Up 9.0%; operating margin was approximately 34.7%, versus 34.5% |
| Net income attributable to common stockholders | $83.2 | $95.5 | Down 12.9% |
| Diluted EPS | $2.44 | $2.93 | Down 16.7% |
| Property net operating income (PNOI) | $194.2 | $178.7 | Up 8.7%; same-property PNOI rose 2.8% |
| FFO per diluted share | $4.26 | $4.02 | Up 6.0%; company-defined supplemental REIT measure |
| Cash provided by operating activities | $155.0 | $138.9 | Up 11.6% |
| Total assets | $1,953.2 | $1,825.8 | Up $127.5 |
| Total debt | $1,108.3 | $1,101.3 | Up $7.0 |
| Common distributions per share | $2.52 | $2.44 | Up 3.3% |
PNOI increased through development and redevelopment ($10.3 million), same-property operations ($4.8 million), and acquisitions ($3.4 million), partly offset by sold properties ($2.8 million). Net gains on real estate sales were $22.1 million in 2017, compared with $42.9 million in 2016; the smaller gains, along with higher depreciation and general and administrative costs, were principal contributors to lower GAAP net income despite higher PNOI. Interest expense was $34.8 million, slightly below 2016. The filing does not provide a single consolidated cash balance indicating substantial cash liquidity: reported cash was $16,000 at year-end, with funding relying on operating cash flow, revolving credit facilities, debt and equity issuance.
Material changes versus the prior comparable period
- Leasing remained strong but eased modestly: year-end leased space was 97.0%, versus 97.3% in 2016; occupancy was 96.4%, versus 96.8%. Average same-property occupancy improved to 96.8% from 96.5%.
- Leases signed in 2017 averaged a 16.8% increase in rental rates on new and renewal leases. The company renewed or re-leased 85% of 6.475 million square feet with expirations during the year and leased another 2.120 million square feet of vacant space.
- Development and acquisition activity expanded the portfolio: 12 projects totaling 2.197 million square feet were transferred into operating properties at $160.1 million of cost; 12 new projects totaling 1.339 million square feet began construction. The company acquired properties and land for a reported $82 million and sold 514,000 square feet of operating properties.
- Debt composition shifted: the company repaid a $45.1 million mortgage loan, issued $60 million of seven-year unsecured notes at 3.46%, and refinanced a $75 million term loan at an effective 3.452% rate. It also issued 1.370 million common shares for $109.2 million in net proceeds.
Outlook, risks, contingencies and unusual items
Management stated that operating cash flow and credit facilities, together with potential debt and equity financing, should be adequate for operations, debt service, distributions, capital improvements, acquisitions and development in the short and long term. The filing gives no numerical earnings, rent-growth or occupancy guidance. Management intends to favor unsecured fixed-rate debt, including variable-rate borrowings hedged to fixed rates. Moody’s affirmed the company’s Baa2 issuer rating with a stable outlook in May 2017. The company reported compliance with debt covenants.
Key exposures include reliance on leasing and tenant credit, development lease-up and construction costs, refinancing needs, interest rates, and the concentration of assets in Sunbelt industrial markets. Houston and Tampa represented 14.8% and 11.4% of the portfolio by square footage, respectively. At year-end, $116.3 million of variable-rate debt was unhedged; management estimated that a 25-basis-point rate change would affect annual interest expense and cash flows by approximately $294,000. Debt maturities and fixed contractual obligations include $149.9 million due within one year, including interest and other commitments. Lease expirations in 2018 represented 11.0% of portfolio square footage at year-end.
Development projects were collectively 50% leased as of February 13, 2018, with projected total costs of $185 million and $54 million remaining to invest at year-end. A subsequent $60 million private-note issue was expected to close in April 2018 at a fixed 3.93% rate. A 33,000-square-foot property sale closed in January 2018. No material litigation, identified environmental liability expected to have a material adverse effect, or impairment charge was reported. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm current occupancy, leasing spreads, tenant retention, and execution against the 2018 lease-expiration schedule.
- Track lease-up, costs, and returns for the development pipeline, including whether projects meet expected conversion dates and budgets.
- Review debt maturities, refinancing terms, covenant headroom, unhedged rate exposure, and the expected closing and final terms of the subsequent $60 million note issuance.
- Assess the effects of equity issuance and potential remaining at-the-market share sales on per-share growth and dilution.
- Reconcile GAAP earnings with FFO and PNOI, particularly the impact of property-sale gains, depreciation, and development-related costs.
- Note that the filing reports year-end leased space of 97.0% and occupancy of 96.4%, while a separate property disclosure gives February 2018 leased and occupied figures of 96.7% and 96.2%; verify the dates and definitions when comparing these measures.