EastGroup Properties, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. EastGroup is an industrial-property REIT focused primarily on distribution facilities in Sunbelt markets.
Financial performance
Amounts are in millions except per-share data. Statements are unaudited.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $125.7 | $104.6 | $357.2 | $302.1 |
| Net income attributable to common stockholders | $37.8 | $30.8 | $147.5 | $85.7 |
| Diluted GAAP EPS | $0.87 | $0.76 | $3.48 | $2.13 |
| FFO per diluted share (non-GAAP) | $1.77 | $1.55 | $5.18 | $4.47 |
| Operating cash flow | Not separately stated | Not separately stated | $276.6 | $241.2 |
- Q3 revenue rose about 20% year over year; common-stockholder net income rose about 23%. Nine-month net income includes a $41.0 million gain on property sales; excluding that gain, reported GAAP income growth would be substantially lower.
- Property net operating income (PNOI) increased 20.8% in Q3 and 19.3% for nine months. Same-property PNOI excluding lease-termination income grew 6.6% and 7.2%, respectively. The filing does not present a conventional operating-margin figure.
- Same-property average occupancy was 98.3% in Q3 and 98.1% for nine months, versus 97.8% and 97.3% in the comparable 2021 periods. New and renewal leases signed in the first nine months achieved average rental-rate increases of 36.4% over prior leases.
- Nine-month investing cash outflow was $385.6 million, mainly reflecting $395.3 million of development and value-add spending. Financing provided $109.5 million. Cash at quarter-end was $4.8 million.
Financial position, debt and liquidity
- At September 30, total assets were $3.96 billion, total liabilities $1.97 billion, and total equity $1.99 billion. Net-of-issuance-costs debt was $1.70 billion, up from $1.45 billion at December 31, 2021.
- Debt comprised $155.9 million of variable-rate bank-facility borrowings, $1.545 billion of fixed or effectively fixed unsecured debt, and $2.1 million of secured debt. The company reported $475 million of total bank-facility capacity; $155.9 million was drawn. It was in compliance with debt covenants at quarter-end.
- Management said cash, operating cash flow, credit facilities, and potential debt and equity issuance should be adequate for expected operating needs, debt service, distributions, acquisitions, and development in both the short and long term.
- Interest expense was $9.8 million in Q3 and $26.9 million for nine months, compared with $8.4 million and $24.9 million. The Q3 increase reflected higher variable-rate costs and increased debt; most unsecured debt was fixed-rate or swapped to effectively fixed rates.
Material changes and notable activity
- Revenue and PNOI growth reflected development and value-add projects, acquisitions, and stronger same-property operations. The company acquired 14 operating properties in California through the Tulloch transaction, issuing 1,868,809 shares and assuming a $60 million loan that it repaid in June.
- During the first nine months, the company acquired four value-add projects for $122.9 million and 286 acres of development land for $77.6 million; it began 13 development projects and transferred 11 projects into the operating portfolio.
- Development and value-add projects totaled 4.934 million square feet with projected investment of $600.8 million; 48% were leased as of October 25, with $191.8 million still to invest at September 30.
- Three property sales generated $51.0 million of net proceeds and $41.0 million of recognized gain. No properties were classified as held for sale at quarter-end.
- The company declared a $1.25-per-share Q3 dividend, up from $1.10 per share in each of the first two 2022 quarters. Nine-month dividends declared of $148.5 million slightly exceeded common-stockholder net income of $147.5 million.
- After quarter-end, EastGroup issued $150 million of senior notes at fixed rates of 4.90% and 4.95%. It also acquired development land in Atlanta and Austin for approximately $5.6 million and $30.1 million, respectively.
Outlook, commentary and risks
- No quantified earnings or FFO guidance is provided in the supplied filing text. Management highlighted strong occupancy and rent increases, while noting that economic uncertainty, inflation, supply-chain disruption, and rising interest rates could adversely affect costs, financing, tenant performance, and leasing.
- Most leases include scheduled rent increases and reimbursements for property operating costs, which management said mitigate some inflation exposure. General and administrative costs and interest costs may not be passed through to tenants.
- LIBOR-based facilities and certain loans and swaps require transition to a replacement rate after June 30, 2023. Management expected no material financial-statement impact based on contractual replacement provisions, but noted transition and valuation risks.
- Other cited risks include development and acquisition execution, construction-cost inflation, refinancing and covenant compliance, tenant defaults or non-renewals, local economic conditions, natural disasters, insurance, environmental matters, and swap-counterparty credit risk. No material litigation or material risk-factor changes were reported; no impairment charges were recorded in the period.
Important facts for investors to verify
- Reconcile GAAP earnings growth with the $41.0 million property-sale gain; assess recurring performance using FFO and same-property PNOI, both supplemental non-GAAP measures.
- Review the company’s debt maturities, variable-rate exposure, borrowing capacity, covenant headroom, and the October note issuance against the rise in total debt and interest expense.
- Track leasing and occupancy in the development pipeline, remaining project investment, construction costs, and delivery timing.
- Assess whether recent rent increases and high occupancy are sustainable, and monitor tenant credit, lease expirations, inflation, and interest-rate sensitivity.
- Confirm dividend coverage using recurring cash flow and development and capital-spending requirements; the filing reports nine-month dividends declared above common-stockholder net income.