EastGroup Properties, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Dollar amounts below are in millions unless stated otherwise. EastGroup is an industrial-property REIT focused on distribution facilities in major U.S. Sunbelt markets.
Financial performance
- Revenue: Real estate operating income was $55.9 million in Q3, up 9.3% from $51.1 million; for the first nine months it was $162.5 million, up 9.6% from $148.3 million.
- Profit: Net income attributable to common stockholders was $17.7 million ($0.56 per diluted share) in Q3 versus $8.4 million ($0.28) a year earlier. Nine-month net income was $35.2 million ($1.13 per diluted share), compared with $23.2 million ($0.77).
- Material one-time contributor: Q3 included a $7.4 million gain on property sales; the nine-month gain was $7.5 million. The prior-year comparison had no such gain in continuing operations.
- Property operating results: Property net operating income (PNOI) rose 9.4% to $40.0 million in Q3 and 9.0% to $115.9 million for nine months. Same-property PNOI increased 3.7% and 2.1%, respectively. Q3 and nine-month property expense-to-revenue ratios were 28.4% and 28.6%, versus 28.5% and 28.2%.
- FFO: Funds from operations attributable to common stockholders increased 7.2% to $0.89 per diluted share in Q3 and 6.7% to $2.55 for nine months. FFO is a supplemental, non-GAAP measure.
- Cash flow: Nine-month operating cash flow was $94.9 million, compared with $88.6 million. Investing used $126.1 million and financing provided $31.5 million. Cash ended the period at $0.3 million.
- Balance sheet and debt: Total assets were $1,563.0 million and total debt was $921.0 million at September 30, versus $1,473.4 million and $893.7 million at year-end 2013. Debt comprised $456.5 million secured, $380.0 million unsecured and $84.5 million drawn on bank facilities. Total equity was $562.5 million.
- Distributions: The company declared $1.65 per common share in dividends for the first nine months and paid $52.2 million in common dividends.
Operating developments and changes versus prior period
- Leased space was 96.8% at quarter-end, up from 96.3% a year earlier; physical occupancy was 96.2%, versus 95.7%. New and renewal lease rates increased an average 6.9% in Q3 and 8.0% year to date.
- During the first nine months, leases expired on 3.778 million square feet; 84% was renewed or re-leased. The company also leased 1.441 million square feet of other vacant space.
- PNOI growth reflected newly developed properties, acquisitions and same-property improvement. EastGroup acquired 535,000 square feet in Charlotte and Austin for $41.8 million and transferred nine completed developments, totaling 849,000 square feet, into operating properties.
- At September 30, development comprised 19 projects totaling 1.594 million square feet. Projected investment was $115.9 million, with $34.5 million remaining to invest; the projects were 33% leased as of October 17.
- Comparability is affected by adoption of ASU 2014-08: 2014 property sale results and gains are reported in continuing operations unless the disposal represents a strategic shift with a major effect. Some 2013 property-sale results were reported as discontinued operations.
Liquidity, outlook and risks
- Management said operating cash flow and unsecured bank facilities, together with access to debt and equity markets, are expected to fund operations, debt service, dividends, acquisitions and development in the short and long term. No specific earnings or FFO guidance was provided.
- The company had $250 million in unsecured revolving facilities, with $84.5 million drawn at quarter-end; both facilities mature in January 2017. Management intends to rely primarily on unsecured fixed-rate debt in the future. Moody’s affirmed a Baa2 rating with stable outlook; Fitch affirmed BBB with stable outlook.
- A $75 million unsecured term loan closed in July 2014, effectively fixed at 2.846% through an interest-rate swap. Four swaps hedged $230 million of unsecured borrowings. The company estimated a 10% change in the facilities’ weighted average variable rate (about 13 basis points) would affect annual interest expense and cash flow by approximately $112,000.
- Debt covenants were met at September 30. A mortgage associated with the company’s 50% tenant-in-common investment was called by the lender for June 30, 2015; EastGroup’s share was $5.1 million at quarter-end.
- Key risks cited include economic weakness and tenant defaults, leasing and re-leasing demand and rents, development and acquisition execution, financing availability, interest rates, operating costs, and natural disasters or other events affecting properties. Management reported no real estate impairment charges and no material change to previously disclosed risk factors.
- The company expects to distribute all 2014 taxable income to preserve REIT status. It was evaluating the effect and transition method for the new revenue recognition standard, effective for it in 2017.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring rental operations versus the $7.4 million Q3 property-sale gain.
- Whether leasing, occupancy, rent increases and development lease-up sustain PNOI and FFO growth.
- Development spending still to be funded, project completion timing and leasing progress.
- Debt maturities, the June 2015 mortgage call, facility availability, covenant headroom and interest-rate exposure.
- Dividend coverage by recurring cash generation and the company’s continued access to debt and equity capital.