EGP

Business Context and Reporting Period

Company: EastGroup Properties, Inc. (EastGroup)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: EastGroup is an equity real estate investment trust (REIT) focused on the development, acquisition, and operation of industrial properties in major Sunbelt markets (Florida, Texas, Arizona, California). The portfolio consists primarily of business distribution space (77%), bulk distribution space (18%), and business service space (5%). As of December 31, 2008, the company owned 222 industrial properties and one office building.

Key Financial Metrics

Liquidity: The company maintained $293,000 in cash and cash equivalents at year-end. It holds $225 million in unsecured revolving credit facilities ($200 million maturing Jan 2012; $25 million maturing Jan 2012). As of February 25, 2009, approximately $73.5 million remained available on these lines.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12.3% to $168.6 million, driven by a 12.2% increase in income from real estate operations.
• Profitability: Net income available to common stockholders rose 18.5% to $32.1 million. FFO per share increased 5.8% to $3.30.
• Debt Structure: Total debt increased $94.9 million. The company closed two new fixed-rate mortgage loans totaling $137 million ($78 million and $59 million) to replace variable-rate bank borrowings. Fixed-rate debt now comprises the majority of the debt portfolio.
• Portfolio Activity:
  • Acquisitions: Purchased five operating properties (669,000 sq ft), one redevelopment property, and 125 acres of land for $58.2 million.
  • Development: Transferred 16 completed properties (1,391,000 sq ft) with costs of $84.3 million from development to real estate operations.
  • Dispositions: Sold two operating properties (North Stemmons I and Delp Distribution Center III) and recognized a gain of $2.0 million.
• Occupancy: Leased percentage decreased slightly to 94.8% (from 96.0% in 2007), and occupancy was 93.8% at year-end (down from 95.4%).
• Preferred Stock: Redeemed all 1,320,000 shares of Series D Preferred Stock in July 2008 for approximately $33 million, eliminating preferred dividend obligations.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Economic Impact: Management expects the economic slowdown to affect operations, projecting a decrease in occupancy. There are no plans for new development starts in 2009.
• Financing Environment: The company notes that obtaining financing is more difficult due to the economic situation, with loan-to-value ratios decreasing and long-term interest rates increasing. However, management believes current credit lines are sufficient to fund operations and debt maturities for 2009 and 2010.
• Leasing: Average rental rates on new and renewal leases increased 11.1% in 2008. The company successfully renewed or re-leased 83% of the 4.2 million square feet of space that expired during the year.

Risks and Contingencies:

• Market Risk: Exposure to interest rate fluctuations on approximately $110 million of variable-rate debt (weighted average rate 1.23% at year-end).
• Refinancing Risk: Significant "balloon payments" on mortgages may require refinancing at potentially less favorable terms.
• Concentration Risk: Substantially all properties are located in the Sunbelt region, exposing the company to regional economic downturns.
• REIT Status: Failure to qualify as a REIT would subject the company to corporate income tax, significantly reducing cash flow available for distribution.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of fixed-rate debt maturities, particularly the $49.2 million due in 2009 and $84.8 million due in 2011, to assess refinancing needs.
• Occupancy Trends: Monitor the decline in occupancy (93.8% at year-end) and the ability to re-lease expiring space in a slowing economy.
• Development Pipeline: Confirm the status of the $150.4 million in development assets and the timeline for lease-up, given the halt on new development starts.
• Interest Rate Exposure: Review the impact of rising LIBOR rates on the remaining $110 million of variable-rate bank debt.
• Dividend Sustainability: Assess the ability to maintain the $2.08 per share common dividend given the projected decrease in occupancy and potential increase in interest costs.