EastGroup Properties, Inc. — Q3 2015 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2015. EastGroup is a REIT focused on industrial and business-distribution properties, primarily in Sunbelt markets. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $58.6 | $56.0 | $174.0 | $162.6 |
| Operating income | $20.3 | $18.9 | $58.8 | $54.0 |
| Net income attributable to common stockholders | $12.0 | $17.7 | $36.4 | $35.2 |
| Diluted EPS | $0.37 | $0.56 | $1.13 | $1.13 |
| FFO per diluted share | $0.94 | $0.89 | $2.73 | $2.55 |
| Property net operating income (PNOI) | $41.7 | $40.0 | $124.7 | $115.9 |
- Q3 revenue rose about 4.6%; nine-month revenue rose about 7.0%. PNOI grew 4.4% and 7.6%, respectively. Same-property PNOI increased 1.3% for the quarter and 2.5% year to date.
- Q3 net income attributable to common stockholders declined 32.5%, largely reflecting a $7.4 million real-estate sale gain in Q3 2014 and none in Q3 2015. For the nine months, current-period property-sale gains were $2.9 million versus $7.5 million a year earlier.
- Property operating expenses were 28.7% of real-estate operating revenue in Q3 and 28.3% year to date, compared with 28.4% and 28.6% in the respective 2014 periods.
- Operating cash flow was $103.6 million for the first nine months, versus $95.1 million in 2014. Investing activities used $94.5 million; financing activities used $8.8 million. Ending cash was $0.3 million.
- At September 30, total debt was $978.9 million, up from $933.2 million at year-end 2014. It comprised $380.7 million secured debt, $455.0 million unsecured debt and $143.1 million drawn on bank facilities. Total assets were $1,619.9 million and total equity was $561.9 million.
- Quarter-end credit facilities totaled $335 million, with $143.1 million drawn. The company reported compliance with debt covenants. The filing does not provide a single current ratio or other conventional liquidity ratio.
Material changes and operating trends
- Leased percentage was 96.6% at September 30, 2015, versus 96.8% a year earlier; physical occupancy was 95.8%, versus 96.2%. Same-property average occupancy was higher year over year for both the quarter and nine-month period.
- For the first nine months, 89% of 5.254 million square feet of expiring leases were renewed or re-leased, and 1.183 million square feet of other vacant space were leased. New and renewal rents averaged 11.5% above prior rents year to date; Q3 increases averaged 12.7% on leases covering 5.1% of portfolio space.
- Development investment was $205.0 million at quarter-end. The program comprised 21 projects totaling 2.077 million square feet; collectively, projects were 37% leased as of October 16. Projected total investment was $156.8 million, with $41.7 million remaining to invest at September 30. Nine projects totaling 1.024 million square feet began construction during the first nine months.
- Secured debt fell by $73.1 million, principally after repayment of a $57.5 million mortgage. Unsecured debt rose by $75 million following a March term loan. Bank-facility balances increased by $43.7 million from year-end.
Outlook, risks and notable items
- Management said operating cash flows and bank facilities, together with potential debt and equity financing, are expected to fund operations, debt service, distributions, capital improvements, acquisitions and development in both the short and long term. No specific earnings or FFO guidance was provided.
- In July, EastGroup amended its revolving facilities, increasing total commitments to $335 million, lowering current margins over LIBOR to 100 basis points and extending maturities to July 2019. A $300 million facility has an optional one-year extension and possible $150 million expansion subject to lender agreement.
- In October, after quarter-end, EastGroup issued $75 million of 10-year senior unsecured notes at a weighted-average 3.98%; proceeds were used to reduce variable-rate facility borrowings. It was also under contract to acquire 335,000 square feet in Austin for approximately $31.6 million, with closings expected in Q4 2015.
- Five interest-rate swaps hedged variable-rate unsecured loans. Swap liabilities were $7.0 million at September 30, and management estimated $3.8 million would be reclassified from accumulated other comprehensive loss into interest expense over the next 12 months. A 10% change in the facility rate (about 12 basis points) was estimated to change annual interest expense and cash flows by approximately $0.2 million.
- Management identified economic weakness, tenant defaults, vacancy and rent pressure, financing availability and interest rates, operating-cost inflation, and development or acquisition execution as risks. Most tenant leases pass through operating expenses, but general and administrative costs and interest-rate increases are not passed through. The company reported no material changes to previously disclosed risk factors, no impairment charges, and effective disclosure controls.
- The company declared $1.74 per share in common dividends during the first nine months, totaling $56.5 million, versus $36.4 million of net income attributable to common stockholders. Management expected to distribute all 2015 taxable income, consistent with REIT requirements.
Investor verification priorities
- Confirm leasing and rent-growth trends, including the gap between leased percentage and physical occupancy, and whether leasing gains support continued same-property PNOI growth.
- Review development-project leasing, completion schedules, remaining funding needs and costs, particularly for projects not yet stabilized.
- Assess debt maturity and refinancing exposure, undrawn facility availability, covenant headroom, and how the October note issuance affected variable-rate borrowings.
- Reconcile GAAP earnings, FFO and cash available for distributions; also monitor dividend coverage, swap-related losses and tenant receivable/bad-debt trends.
- Track the expected Q4 Austin acquisitions and other forward-looking plans against actual closings and operating results.