EastGroup Properties, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Dollar amounts below are in millions unless stated otherwise. EastGroup is an industrial-property REIT focused on business-distribution facilities, primarily in Sunbelt markets.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $53.8 | $49.1 | $106.6 | $97.3 |
| Operating income | $17.9 | $16.2 | $35.1 | $31.9 |
| Net income attributable to common stockholders | $9.1 | $7.6 | $17.5 | $14.8 |
| Diluted EPS | $0.29 | $0.25 | $0.56 | $0.49 |
| FFO per diluted share | $0.84 | $0.80 | $1.66 | $1.56 |
| Property net operating income (PNOI) | $38.2 | $35.3 | $75.9 | $69.8 |
Revenue rose about 9.6% in both periods; common-stockholder net income rose about 19.3% in Q2 and 18.2% year to date. FFO per share increased 5.0% in Q2 and 6.4% for the six months. PNOI increased 8.3% and 8.7%, respectively. Same-property PNOI grew 1.8% in Q2 and 1.5% year to date.
- Operating-property expense as a share of real-estate revenue increased to 29.0% in Q2 from 27.9%; for six months it was 28.7% versus 28.0%.
- Same-property average occupancy improved to 95.2% in Q2 from 94.0%; the six-month figures were 95.0% and 93.8%. Portfolio occupancy at quarter-end was 95.0%; leased space was 95.7%.
- New and renewal lease rates increased an average 12.9% in Q2 and 8.9% for the first half. The company renewed or re-leased 80% of 2.367 million square feet of leases expiring during the first half.
Cash flow, balance sheet and financing
- Six-month operating cash flow was $53.7 million, compared with $52.8 million in 2013. Investing activities used $96.7 million, principally for development, acquisitions and improvements; financing provided $43.0 million.
- At June 30, total assets were $1,548.6 million, total liabilities $1,007.8 million, and equity $540.8 million. Cash was $19,000.
- Total debt was $936.0 million, up from $893.7 million at December 31, 2013: $488.6 million secured, $305.0 million unsecured debt, and $142.4 million on bank credit facilities. The company reported compliance with debt covenants.
- Bank-facility borrowings carried a weighted average rate of 1.33%; the company estimated a 10% change in that rate (about 13 basis points) would change annual interest expense and cash flows by approximately $189,000. Three swaps hedged $155 million of unsecured borrowings.
- Dividends declared were $1.08 per share for the first half; cash distributions paid were $34.2 million. The continuous equity program generated $39.4 million net proceeds from 634,138 shares issued.
Material changes, outlook and notable items
- Growth in PNOI reflected new developments (+$1.5 million in Q2; +$3.1 million year to date), acquisitions (+$0.9 million; +$2.1 million), and same-property operations (+$0.6 million; +$1.0 million).
- The company acquired 535,000 square feet in Charlotte and Austin for $41.8 million, began 11 development projects totaling 897,000 square feet in the first half, and had 21 development projects totaling 1.839 million square feet at June 30. Those projects were 49% leased as of July 18; $40.8 million remained to be invested against projected total costs of $135.2 million.
- Management said operating cash flow and available financing were expected to fund operations, debt service, distributions, acquisitions, capital improvements and development in the short and long term. No specific earnings or FFO guidance was provided.
- After quarter-end, the company repaid a $26.6 million mortgage, entered a term sheet for a $75 million five-year unsecured loan (expected effective fixed rate 2.846%), sold a held-for-sale property for $743,000, and started two Houston and San Antonio development projects with projected costs totaling $10.1 million.
- One property sold in Q1 for $3.6 million, with a $95,000 gain. A separate property sold in July; its gain was to be recognized in Q3. The company adopted the revised discontinued-operations presentation standard prospectively in Q1.
- Key risks cited include economic weakness, tenant defaults, occupancy and rent pressure, interest-rate changes, financing availability, and development or acquisition delays and cost overruns. Management reported no material change to previously disclosed risk factors and no impairment charges at June 30.
Important facts for investors to verify
- Whether occupancy, renewals and rental-rate increases sustain same-property PNOI growth, particularly as lease expirations continue.
- Leasing progress, remaining investment needs and completion costs for the development pipeline.
- Debt maturities, variable-rate exposure, the planned $75 million loan, and continued covenant compliance and access to capital.
- Dividend coverage and the effect of ongoing equity issuance on per-share results and FFO.
- Comparability of reported periods following the discontinued-operations accounting change, and realization of the July property-sale gain.