EastGroup Properties, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2015. EastGroup is an industrial-property REIT focused on distribution facilities in Sunbelt markets. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Real estate operating income | $57.8 | $53.8 | $115.4 | $106.6 |
| Net income attributable to common stockholders | $14.5 | $9.1 | $24.5 | $17.5 |
| Diluted GAAP earnings per share | $0.45 | $0.29 | $0.76 | $0.56 |
| FFO attributable to common stockholders | $29.6 | $26.3 | $57.6 | $51.7 |
| Diluted FFO per share | $0.92 | $0.84 | $1.79 | $1.66 |
| Property net operating income (PNOI) | $41.8 | $38.2 | $82.9 | $75.9 |
- Q2 operating income was $20.0 million versus $17.9 million. Interest expense was $8.5 million, down from $8.9 million.
- Q2 PNOI increased 9.5%; same-property PNOI rose 4.0%. For the six-month period, PNOI increased 9.3% and same-property PNOI rose 3.5%.
- Q2 GAAP net income included a $2.9 million gain on sale of an operating property. FFO excludes that gain; diluted FFO per share increased 9.5% in Q2 and 7.8% for the six months.
- Property expense as a percentage of real estate operating income was 27.8% for Q2 and 28.1% for the six months, compared with 29.0% and 28.7%, respectively, a year earlier.
- For the six months, operating cash flow was $59.7 million (up from $53.8 million). Investing used $60.5 million, including $48.2 million for development; financing provided $0.8 million. Cash at June 30 was only $13,000.
- At June 30, assets were $1.603 billion, total liabilities $1.037 billion, and equity $566.4 million. Total debt was $974.0 million, up from $933.2 million at year-end 2014; debt comprises $385.7 million secured, $455.0 million unsecured, and $133.3 million on bank facilities.
Material changes and operating trends
- Leased area was 97.1% at June 30, up from 95.7% a year earlier; occupancy was 96.2%, versus 95.0%. Average rental rates on new and renewal leases increased 10.8% over the first six months.
- Of 3.608 million square feet with leases expiring in the first half, EastGroup renewed or re-leased 90%; it also leased 850,000 square feet of other vacant space.
- Development investment rose to $198.1 million from $180.0 million at year-end. The portfolio included 22 projects totaling 2.197 million square feet; collectively, they were 38% leased as of July 17, with $48.9 million still to invest.
- The company sold one 185,000-square-foot operating property in Q2 for $5.25 million and recognized a $2.9 million gain. No operating properties were acquired in the first half.
- G&A expense increased, primarily due to accelerated restricted-stock vesting for the retiring CEO, CEO succession costs, and higher compensation expense.
Outlook, risks, and notable items
- Management said operating cash flows and available financing should be adequate for operating costs, debt service, distributions, capital improvements, acquisitions, and development. The filing provides no specific earnings or FFO guidance.
- After quarter-end, EastGroup expected to amend its revolving facilities, expanding them from $225 million and $25 million to $300 million and $35 million, lowering pricing and extending maturities; closing was subject to final documentation and due diligence.
- The company also reported an agreement in principle for $75 million of 10-year private-placement notes at a weighted average 3.98% rate, expected to close in October 2015, subject to final documentation and due diligence.
- A new $75 million term loan closed in March; an interest-rate swap fixed its effective rate at 3.031%. Five swaps hedged variable-rate unsecured borrowings. Management estimated a 10% change in the bank-facility variable rate would change annual interest expense by about $181,000.
- Debt covenants were met at June 30. Management cited tenant defaults, leasing and renewal conditions, rents, interest rates, operating costs, financing availability, and development execution as risks. It reported no material change to the risk factors in the 2014 Form 10-K and no real-estate impairment charges.
- Common dividends declared were $1.14 per share for the first half, totaling $37.0 million, exceeding first-half net income attributable to common stockholders of $24.5 million. EastGroup expects to distribute all 2015 taxable income to maintain REIT status.
Important facts for investors to verify
- Whether the amended credit facilities and proposed $75 million private placement closed on the stated terms and schedule.
- Development leasing, completion dates, remaining funding needs, and returns as projects move into operations.
- Whether occupancy, rental-rate growth, same-property PNOI, and lease renewal trends remain durable.
- How the property-sale gain affects comparisons of GAAP earnings with recurring operating performance; review FFO as a supplemental, non-GAAP measure.
- Debt maturities, interest-rate exposure, covenant headroom, dividend coverage, and the effect of the dividend exceeding reported first-half common earnings.