EastGroup Properties, Inc. - 10-Q Summary (Q2 2011)
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2011. EastGroup Properties, Inc. is a real estate investment trust (REIT) focused on acquiring, developing, and operating industrial business distribution properties, primarily in Sunbelt markets including Florida, Texas, Arizona, California, and North Carolina. The company operates a single reportable segment: industrial properties.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 |
|---|---|---|
| Income from Real Estate Operations | $43.2 million | $86.5 million |
| Net Income (GAAP) | $5.6 million | $10.5 million |
| Net Income Attributable to Common Stockholders | $5.5 million | $10.3 million |
| Diluted EPS | $0.20 | $0.38 |
| Funds From Operations (FFO) per Diluted Share | $0.73 | $1.44 |
| Property Net Operating Income (PNOI) | $30.7 million | $61.5 million |
| Total Debt | $748.7 million (Mortgage: $640.0M; Bank Notes: $108.7M) | |
| Cash and Cash Equivalents | $0.1 million | |
| Net Cash Provided by Operating Activities | $40.3 million (Six Months) |
Material Changes vs. Prior Period
- Net Income: Increased 22.7% for the three months and 9.6% for the six months compared to the same periods in 2010. This was driven by increased PNOI and decreased interest expense, partially offset by higher general and administrative expenses.
- Occupancy: Improved to 91.0% at June 30, 2011, from 87.2% at June 30, 2010. Total leased percentage was 92.1%.
- Rental Rates: Average rental rates on new and renewal leases decreased by 12.8% for the six months ended June 30, 2011, reflecting economic headwinds.
- Interest Expense: Decreased due to the refinancing of higher-rate mortgages (repaid at 7.25% and 7.92%) with lower-rate fixed debt (4.75%) and lower variable rates on bank borrowings.
- Development: Investment in development increased to $82.5 million from $73.7 million at year-end 2010. The company acquired 31.5 acres in Chandler, Arizona, and began construction on several projects including World Houston 31, Beltway Crossing VIII, and World Houston 32.
Guidance, Outlook, and Risks
Management Commentary: Management believes the economic slowdown continues to impact operations, specifically through decreased rental rates and difficulty in obtaining financing. However, occupancy has stabilized and is improving. The company expects its current operating cash flow and lines of credit to fund operations for the remainder of 2011 and 2012.
Liquidity: The company maintains a $200 million unsecured revolving credit facility and a $25 million working capital line. In May 2011, it closed a $65 million non-recourse first mortgage loan at 4.75% to reduce variable rate bank borrowings.
Risks and Contingencies:
- Economic Conditions: A significant decline in operational performance could affect the ability to make distributions or service debt.
- Leasing Challenges: The primary challenge remains leasing space; termination fee income dropped significantly compared to 2010.
- Financing Environment: Lenders are tightening standards, reducing loan-to-value ratios, and property values have decreased.
Investor Verification Checklist
- Debt Maturities: Verify the repayment schedule for the $65 million mortgage (2021 maturity) and the $200 million credit facility (January 2012 maturity).
- Lease Expirations: Review the 4.7% of the portfolio scheduled to expire for the remainder of 2011 and the impact of the 12.8% rental rate decrease on renewal income.
- Development Pipeline: Assess the progress and capital requirements for the $16.7 million in active development projects and the 31.5-acre land acquisition in Arizona.
- Dividend Coverage: Confirm that FFO continues to cover the $1.04 per share dividend declared for the six-month period.
- Interest Rate Exposure: Monitor the impact of potential LIBOR increases on the $108.7 million in variable rate bank borrowings.