EastGroup Properties, Inc. — Q1 2017 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2017, with balance-sheet comparisons to December 31, 2016. EastGroup is an industrial-property REIT focused primarily on business-distribution facilities in Sunbelt markets.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Real estate operating revenue | $66.1 million | $61.6 million |
| Operating income | $21.4 million | $19.3 million |
| Net income attributable to common stockholders | $12.8 million; $0.38 per diluted share | $21.7 million; $0.67 per diluted share |
| FFO attributable to common stockholders | $33.0 million; $0.99 per diluted share | $29.5 million; $0.91 per diluted share |
| Operating cash flow | $23.8 million | $18.7 million |
| PNOI | $47.1 million | $43.8 million |
| Total assets | $1,856.4 million | $1,825.8 million at Dec. 31, 2016 |
| Total debt | $1,106.2 million | $1,101.3 million at Dec. 31, 2016 |
| Cash | $44,000 | $522,000 at Dec. 31, 2016 |
| Dividend declared | $0.62 per share | — |
Property expenses were 28.7% of real estate operating revenue, compared with 28.9% a year earlier. Interest expense was $8.7 million, down $0.4 million. Total liabilities were $1,181.4 million and total equity was $675.0 million at quarter-end.
Operating performance and material changes
- Revenue increased about 7.4% year over year; PNOI increased 7.7%, including 3.7% growth from same properties. FFO per diluted share rose 8.8%.
- GAAP net income and EPS fell substantially from Q1 2016, when the company recorded an $11.3 million gain on operating-property sales. No operating properties were sold in Q1 2017; the company sold five acres of Dallas land for $850,000 and recorded a $40,000 loss.
- Quarter-end occupancy was 95.6%; 97.0% of space was leased. The company renewed or re-leased 92% of 2.42 million square feet of leases expiring in the quarter. New and renewal lease rates increased 17.4% on average.
- EastGroup acquired the 238,000-square-foot, fully leased Shiloh 400 complex in Atlanta for $20.3 million and began three development projects totaling 376,000 square feet. Five developments totaling 1.052 million square feet were transferred to operating properties.
- The development program comprised 15 projects totaling 2.216 million square feet. It was 55% leased as of April 21; projected total investment was $187 million, with $53 million remaining to invest at March 31.
Liquidity, debt, and capital allocation
- Cash from operations was $23.8 million; investing activities used $44.4 million and financing activities provided $20.1 million. Cash declined by $478,000 during the quarter.
- Debt consisted of $199.3 million in unsecured bank facilities, $653.0 million in unsecured debt, and $254.0 million in secured debt. The company had $335 million of revolving credit facilities, with $200 million drawn at quarter-end; the principal facilities mature in July 2019.
- Seven interest-rate swaps hedged variable-rate unsecured borrowings. Management reported compliance with all debt covenants. Scheduled principal payments on long-term debt, excluding revolving facilities, totaled $54.7 million for the remainder of 2017.
- The company issued 544,144 common shares through its continuous equity program for $39.5 million net proceeds. It reported 7,227,653 shares remaining available under the program as of April 24, 2017.
Outlook, commentary, and risks
Management said operating cash flow, revolving credit facilities, potential debt issuance, and equity issuance should be adequate for operations, debt service, distributions, capital improvements, acquisitions, and development in both the short and long term. No specific earnings or operating guidance was provided. Subsequent to quarter-end, the company acquired 30 acres near Austin for $5.3 million, with plans for a phased, four-building project totaling approximately 340,000 square feet.
Key risks include economic weakness or local market changes affecting tenant payments, occupancy, rents, and re-leasing; availability and cost of financing; interest-rate increases; rising unrecoverable operating costs; and construction, leasing, or cost overruns in development. Management reported no material changes to the risks described in its 2016 Form 10-K. No impairment charges were identified. The company expects to maintain REIT status and distribute its 2017 taxable income.
Important facts for investors to verify
- Whether leasing momentum and rental-rate increases persist, and how leased occupancy converts to occupied space.
- Development leasing, completion timing, remaining investment needs, and returns on projects under construction or in lease-up.
- Funding needs and refinancing plans given low quarter-end cash, debt maturities, and continued development and acquisition spending.
- How much of the net-income decline reflects the absence of prior-year property-sale gains versus ongoing operating performance; compare GAAP earnings with FFO.
- Potential effects of upcoming revenue and lease accounting standards, which the company was still evaluating.