EastGroup Properties, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. EastGroup is an industrial-property REIT focused primarily on Sunbelt markets. Amounts below are in U.S. dollars; financial-statement figures are in millions unless stated otherwise.
Financial performance and position
- Quarter revenue: $61.9 million, up 7.0% from $57.8 million a year earlier. Real estate operating expenses were $17.8 million; operating income was $21.9 million.
- Quarter net income attributable to common stockholders: $43.9 million, or $1.35 diluted per share, versus $14.5 million, or $0.45, in Q2 2015. The increase was largely driven by $31.0 million of property-sale gains, compared with $2.9 million a year earlier.
- Quarter operating trends: Property net operating income (PNOI) was $44.1 million, up 5.6%; same-property PNOI rose 2.7%. FFO was $32.1 million, or $0.99 per diluted share, up 7.6% per share. FFO is a supplemental, non-GAAP REIT measure.
- Six-month results: Revenue was $123.5 million, up 7.0%; net income attributable to common stockholders was $65.6 million, or $2.03 per diluted share. PNOI rose 6.0% to $87.9 million, same-property PNOI increased 2.3%, and FFO rose 6.1% per share to $1.90.
- Cash flow: Six-month operating cash flow was $64.4 million, versus $59.0 million in 2015. Investing activities provided $13.8 million, mainly reflecting $73.5 million of property-sale proceeds, partly offset by development and improvement spending. Financing activities used $78.3 million. Cash ended at $10,000; common dividends paid were $40.1 million.
- Debt and liquidity: Total debt carrying value was $968.5 million at June 30, down from $1,027.9 million at year-end. Secured debt was $340.7 million, unsecured debt $592.7 million, and credit-facility borrowings $35.1 million. The company had $335 million in revolving facilities, with $36.3 million drawn; management said cash flow and financing access were adequate for expected needs. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $1,654.8 million, liabilities $1,047.4 million, and total equity $607.5 million. Development assets were $166.8 million.
Material changes and operating activity
- EastGroup sold 1.164 million square feet of operating properties and five acres of land during the first half for gross proceeds of approximately $75.4 million. It recognized $42.3 million of gains on operating-property sales and $0.1 million on land sales. Management said these dispositions were not a strategic shift requiring discontinued-operations presentation.
- Leasing remained strong: 97.2% of space was leased at quarter-end, compared with 97.1% a year earlier; occupancy was 95.7%. The company renewed or re-leased 87% of the 3.648 million square feet expiring in the first half. New and renewal lease rates increased an average 12.0% over the six months.
- The company started six development projects totaling 700,000 square feet and transferred six completed properties totaling 495,000 square feet into operating real estate. Its 14-project development program totaled 1.869 million square feet, was 33% leased as of July 21, and had an estimated total investment of $134 million, with $52 million remaining to invest at June 30.
- EastGroup issued 447,665 common shares under its continuous equity program, generating $29.6 million net proceeds, and closed a $65 million seven-year term loan at an effectively fixed 2.863% rate. Total dividends declared for the first half were $1.20 per share.
Outlook, risks, and unusual items
- No specific full-year earnings or FFO guidance is provided in the supplied filing text. Management expects available operating cash flow, credit facilities, debt financing, and equity issuance to fund operations, distributions, investment, and development in the short and long term.
- After quarter-end, the company closed on a $32 million acquisition of Parc North in Fort Worth: four buildings totaling 446,000 square feet that were 37% leased and in lease-up. It also expected to close a $40 million five-year term loan in late July, swapped to an effective fixed rate of 2.335%.
- After quarter-end, it sold 15 acres of Houston and Dallas land for $2.6 million and expected gains in Q3; another four acres of Houston land was under contract. The filing does not quantify the expected gains.
- Interest expense increased $0.7 million in Q2 and $0.9 million in the first half year over year. Swap liabilities were $12.4 million, up from $4.0 million at year-end; six-month other comprehensive loss from cash-flow hedges was $8.9 million. Management said swaps effectively fix rates on the associated loans.
- Key risks include tenant defaults, lease renewals and re-leasing at expected rents, local or broader economic weakness, interest rates, operating-cost increases, access to capital, and development or acquisition execution. Management reported no material change to previously disclosed risk factors and no impairment charges at June 30.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring property operations versus the $42.3 million first-half property-sale gains; review FFO alongside GAAP income.
- Whether occupancy, renewal spreads, and same-property PNOI remain resilient as leases expire and concessions, bad debt, and property expenses evolve.
- Lease-up progress and remaining capital needs for the development pipeline and Parc North, including returns on invested capital.
- Debt maturities, facility availability, covenant headroom, and the effect of interest-rate swaps and their fair-value liability.
- Whether post-quarter land-sale gains and the expected $40 million loan closed on the anticipated terms and timing.