EastGroup Properties, Inc. — Q3 2016 Form 10-Q
Business and period: EastGroup is an industrial-property REIT focused on business-distribution facilities in Sunbelt markets. This unaudited report covers the quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods unless otherwise noted. Dollar amounts below are in millions except per-share data.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $63.2 | $58.6 | $186.7 | $174.0 |
| Net income attributable to common stockholders | $14.7 | $12.0 | $80.3 | $36.4 |
| Diluted earnings per share | $0.45 | $0.37 | $2.47 | $1.13 |
| FFO per diluted share | $1.04 | $0.94 | $2.94 | $2.73 |
| Property net operating income (PNOI) | $44.7 | $41.7 | $132.6 | $124.7 |
- Q3 revenue rose 7.9%; PNOI increased 7.0% and FFO per diluted share increased 10.6%. Same-property PNOI grew 3.8% in Q3 and 2.7% year to date.
- Nine-month reported net income rose sharply, principally reflecting $42.3 million of gains on operating-property sales and $0.7 million of gains on land sales, compared with $2.9 million of operating-property gains and $0.1 million of land-sale gains in 2015. FFO, which excludes operating-property sale gains, increased 7.7% per diluted share year over year.
- Quarter-end leased percentage was 97.3% (96.6% a year earlier); occupancy was 96.3% (95.8% a year earlier). New and renewal lease rates increased an average 10.6% in Q3 and 11.6% for the first nine months.
- Real estate operating expenses rose faster than revenue: the expense-to-revenue ratio was 29.4% in Q3 versus 28.7% in 2015, and 29.0% year to date versus 28.3%.
- Operating cash flow was $107.0 million for the first nine months, versus $102.6 million. Investing cash outflow was $64.1 million and financing cash outflow $42.9 million; ending cash was only $33,000.
- Total debt was $1.019 billion at September 30, versus $1.028 billion at year-end 2015. Secured debt was $260.9 million, unsecured debt $553.0 million, and bank-facility borrowings $205.5 million. Total liabilities were $1.113 billion and equity $605.0 million.
- The company reported approximately $128.4 million of gross unused capacity on its $335 million revolving credit facilities, based on period-end borrowings. It was in compliance with debt covenants. Management said cash, operating cash flow, credit facilities, and access to debt and equity markets should meet anticipated operating, debt-service, distribution, acquisition, and development needs.
Material changes, outlook and risks
- EastGroup sold 1.164 million square feet of operating properties and 25 acres of land during the first nine months, for $79.5 million of gross proceeds. No operating properties were sold in Q3. The sales were not treated as discontinued operations or as a strategic shift.
- Acquisitions included Parc North in the Dallas/Fort Worth area and Flagler Center in Jacksonville. The company began seven development projects and transferred eight completed properties, totaling 728,000 square feet, into operating real estate. Its development program comprised 14 projects and 2.176 million square feet; projected investment was $162 million, with $41 million remaining to invest at quarter-end. The projects were 45% leased as of October 20.
- EastGroup issued $105 million of new unsecured term loans, repaid an $80 million term loan, and repaid two mortgages totaling about $75.7 million. The new $65 million and $40 million term loans were swapped to effective fixed rates of 2.863% and 2.335%, respectively. It also raised $29.6 million net through its continuous common-stock offering.
- Interest expense increased $0.3 million in Q3 and $1.3 million year to date. Seven interest-rate swaps were outstanding; their fair-value liability was $9.7 million. Management estimated a 10% change in the variable-rate facility interest rate would change annual interest expense and cash flows by about $194,000, excluding swapped debt.
- No numerical earnings or FFO guidance was provided. Management described development as a source of long-term growth and said it adjusts project starts to leasing activity. Principal risks cited include economic weakness, tenant defaults, difficulty leasing or re-leasing space, rent and occupancy declines, higher rates and operating costs, financing availability, and development or acquisition delays and cost overruns. The filing reported no material change to previously disclosed risk factors; disclosure controls were deemed effective.
Important facts for investors to verify
- How much of the $80.3 million nine-month common-stockholder income is attributable to property-sale gains, and whether operating growth is better reflected by FFO and same-property PNOI.
- Leasing progress and eventual stabilization of Parc North, which was 42% leased when acquired, and of the broader development pipeline, reported 45% leased as of October 20.
- Development spending, remaining commitments, project delivery timing, and the company’s ability to fund them while maintaining distributions and covenant compliance.
- Debt maturities, refinancing plans, revolving-credit availability, and the effect of interest-rate movements and swap valuations.
- Tenant-credit trends, rent concessions, occupancy, operating-expense recovery, and the sustainability of the reported rental-rate increases.