EASTGROUP PROPERTIES INC annual report, FY2012

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EastGroup Properties, Inc. — FY 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report; quarterly results are included in the filing.

Business context

EastGroup is an equity REIT focused on owning, developing, acquiring and operating industrial distribution properties, primarily in Sunbelt markets. More than 99% of revenue is rental income. At year-end it owned 275 industrial properties and one office building; the portfolio was 95.1% leased and 94.6% occupied. The company intends to continue qualifying as a REIT.

Financial performance and position

  • Revenue: $186.2 million, up 7.5% from $173.2 million in 2011.
  • Operating income: $60.8 million, up from $56.6 million. Operating margin was approximately 32.7%, versus 32.7% in 2011.
  • Net income attributable to common stockholders: $32.4 million, or $1.13 per diluted share, versus $22.4 million, or $0.83, in 2011. The 2012 result included $6.51 million in gains from real estate sales; 2011 had no property-sale gains.
  • Funds from operations (FFO): $88.2 million, or $3.08 per diluted share, up 4.1% per share from $2.96 in 2011. FFO is a supplemental, non-GAAP measure.
  • Property net operating income (PNOI): $133.1 million, up 7.3%. Same-property PNOI grew 0.8%; acquisitions and developments contributed most of the increase.
  • Leasing and expenses: Average rents on new and renewal leases increased 0.7%. The property expense-to-revenue ratio rose to 28.5% from 28.3%. Year-end leased percentage was 95.1%, compared with 94.7% in 2011.
  • Cash flow: Operating activities generated $91.8 million, compared with $86.5 million in 2011. Investing activities used $119.9 million; financing activities provided $29.2 million. Year-end cash was $1.3 million.
  • Debt and equity: Total debt was $813.9 million, down from $832.7 million. Debt comprised $607.8 million of fixed-rate mortgage debt, $130.0 million of fixed-rate unsecured term loans and $76.2 million of variable-rate bank debt. Total equity was $491.2 million.
  • Distributions: Common distributions were $2.10 per share, versus $2.08 in 2011; $61.3 million was paid during 2012. The company distributed all taxable income and reported no significant income tax provision.

Material changes versus 2011

  • Net income rose substantially, but the increase was significantly affected by the $6.51 million in real estate sale gains. Continuing-operations income increased to $25.9 million from $22.6 million.
  • PNOI growth reflected $6.2 million from acquisitions, $1.8 million from newly developed properties and $1.0 million from same-property operations.
  • Operating cash flow increased to $91.8 million from $86.5 million. Development spending increased to $55.4 million from $42.1 million, while real estate purchases declined to $51.8 million from $88.6 million.
  • Common equity offerings produced $109.6 million in net proceeds; 2.18 million shares were issued. The share count increased, contributing to dilution.
  • Variable-rate bank debt declined from $154.5 million to $76.2 million. The company added an $80 million unsecured term loan, hedged to an effective 2.92% rate, and repaid several mortgages.

Outlook, risks and unusual items

  • Management said operating cash flow and credit lines should provide capacity to fund 2013 operations, and anticipated available cash, operating cash flow, borrowing and potential debt or equity issuance would cover ordinary needs and planned investment. The filing provides no specific earnings or FFO guidance.
  • In January 2013, the company replaced maturing revolving facilities with unsecured facilities totaling $250 million: a $225 million revolver and a $25 million working-capital facility. Fitch affirmed a BBB rating and Moody’s assigned Baa2.
  • Development investment totaled $148.3 million at year-end. Projects under lease-up or construction had projected total costs of $80.4 million, with $29.0 million remaining to invest; projects were collectively 61% leased as of February 15, 2013.
  • Key risks include leasing and renewal outcomes, tenant defaults, local industrial-market conditions, development cost and lease-up risk, geographic and sector concentration, refinancing and interest-rate exposure, access to external capital, and REIT qualification. Leases representing 20.6% of total base rent were scheduled to expire in 2013.
  • Four properties were sold during 2012 for $17.1 million of proceeds, producing $6.51 million of gains. Management reported no known material environmental liability, no material litigation, and no impairment charges at year-end.
  • The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.

Important facts for investors to verify

  • How much of reported earnings growth is recurring operating performance versus property-sale gains; compare GAAP earnings with FFO and same-property PNOI.
  • Lease renewals, occupancy, rent changes and tenant retention, especially the 2013 expiration exposure and the difference between year-end and February 2013 leasing statistics.
  • Development project leasing, remaining commitments and eventual costs, alongside the company’s ability to fund its pipeline without excessive borrowing or further share issuance.
  • Debt maturities, covenant headroom, refinancing terms and exposure to changing interest rates under the replacement credit facilities.
  • Dividend sustainability relative to operating cash flow, capital needs and FFO; also review the effect of 2012 equity issuance on per-share results.