EastGroup Properties, Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. EastGroup is an industrial REIT focused on distribution properties, primarily in Sunbelt markets. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise stated.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Real estate and other revenue | $78.8 | $72.2; up 9.1% |
| Net income attributable to common stockholders | $22.5; $0.62 per diluted share | $28.7; $0.83 per diluted share |
| FFO attributable to common stockholders (non-GAAP) | $43.9; $1.20 per diluted share | $39.7; $1.14 per diluted share; per-share increase 5.3% |
| Property net operating income (PNOI, non-GAAP) | $56.5; approximately 71.9% of real estate revenue | $51.6; approximately 71.5% |
| Same-property PNOI, excluding lease termination income | $52.3; up 3.7% | $50.4 |
| Net cash provided by operating activities | $41.5 | $21.7 |
| Cash and total debt at March 31, 2019 | $1.8 cash; $1,120.2 debt | Debt was $1,105.8 at December 31, 2018 |
| Common dividends declared | $0.72 per share | $0.64 per share in Q1 2018 |
At March 31, total assets were $2,171.6 and total liabilities were $1,250.2. Cash was limited, while the company reported $395 million of unsecured bank facility capacity, with approximately $132.9 million drawn. Management said operating cash flow and available financing sources were expected to cover operating needs, debt service, distributions, capital improvements, acquisitions and development.
Material changes and operating activity
- GAAP net income and diluted EPS fell year over year, mainly because gains on real estate sales declined to $2.3 million from $10.2 million. In contrast, FFO per diluted share increased 5.3%.
- PNOI rose 9.6%, supported by development and value-add properties, same-property growth and 2018 acquisitions; dispositions partly offset the increase. Same-property average occupancy was 96.8%, versus 96.4% a year earlier.
- The portfolio was 97.7% leased at quarter-end, compared with 97.0% a year earlier; occupancy was 96.9%. New and renewal lease rates increased an average 14.2% on 1.639 million square feet leased.
- EastGroup started five development projects totaling 650,000 square feet. Its 19-project development program covered 2.493 million square feet, was 50% leased as of April 23, and had projected total investment of $232 million, with $65 million remaining to invest at quarter-end.
- Development spending drove investing cash use of $48.9 million. Financing cash provided $8.9 million, including $24.4 million net proceeds from issuing 232,205 shares and $80 million of new senior unsecured notes.
- Total debt increased $14.4 million from year-end. The new notes carry a fixed 4.27% rate and a 10-year term. Variable-rate facility borrowings had a 3.49% weighted-average rate at quarter-end; the company reported compliance with its debt covenants.
Outlook, risks and unusual items
- No specific full-year earnings or FFO guidance is stated in the provided filing text. Management described expected funding sources as adequate for both short- and long-term business needs.
- After quarter-end, the company repaid a $46 million mortgage bearing 7.5% interest. It also acquired a Dallas value-add property for $13 million, with estimated total investment of about $15 million, and planned additional Phoenix and San Diego acquisitions/development, subject to closing.
- Key stated risks include economic weakness, interest-rate and financing conditions, tenant defaults or non-renewals, occupancy and rent changes, development and acquisition execution, property expenses and taxes, REIT qualification, litigation, environmental exposure and natural disasters. Management also noted that the planned LIBOR transition could affect contracts indexed to LIBOR.
- A lawsuit concerning a 2016 land purchase remains pending. The company believes the claims lack merit and reserved $497,000 for a settlement offer. No material impairment charges were recorded in the reported periods.
- ASC 842 lease accounting was adopted prospectively on January 1, 2019. It added operating lease right-of-use assets and liabilities for office and ground leases; management said their combined value was less than 1% of total assets. The filing also recorded $93,000 of indirect leasing costs under the new guidance.
Important facts for investors to verify
- Whether strong leasing spreads and high leased occupancy translate into sustained same-property NOI growth and cash collections.
- Development lease-up, remaining capital requirements, project costs and returns, including the pipeline’s 50% leased level as of April 23.
- Debt maturities, variable-rate exposure, refinancing access and the impact of interest-rate movements; management estimated a 35-basis-point rate change would affect annual interest expense and cash flow by about $464,000.
- The reasons operating cash flow rose materially year over year, including working-capital movements, and the company’s capacity to fund investment and dividends with limited cash on hand.
- Progress and financial impact of post-quarter transactions, the reserved litigation matter and the transition away from LIBOR.