EastGroup Properties, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; compared with the three months ended March 31, 2012 unless otherwise noted. EastGroup is an industrial-property REIT focused on major Sunbelt markets. Financial-statement amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
- Revenue: Real estate operating income was $48.228 million, up 4.0% from $46.383 million. Including other income, total revenue was $48.275 million, versus $46.397 million.
- Property operating results: Property net operating income (PNOI) was $34.666 million, up 3.8% from $33.386 million. Property expenses were 28.1% of real estate operating income, compared with 28.0%.
- Profit: Net income attributable to common stockholders was $7.154 million ($0.24 per basic and diluted share), versus $5.403 million ($0.20 basic; $0.19 diluted). Interest expense declined to $8.621 million from $9.441 million. Depreciation and amortization was $15.615 million, versus $15.734 million.
- FFO: Funds from operations attributable to common stockholders rose to $22.740 million from $21.321 million, while diluted FFO per share decreased to $0.76 from $0.77.
- Cash flow and distributions: Operating cash flow was $17.241 million, up from $12.420 million. Investing activities used $23.526 million; financing provided $5.051 million. Cash ended the quarter at $24,000, down from $1.258 million at year-end. Cash distributions to stockholders were $15.975 million; the declared dividend was $0.53 per share.
- Debt and liquidity: Total debt was $823.250 million at March 31, versus $813.926 million at December 31, 2012. It included $601.655 million of fixed-rate mortgage debt, $130.000 million of fixed-rate unsecured term loans, and $91.595 million of variable-rate bank debt. Total assets were $1,363.655 million and total equity was $497.439 million. The company reported compliance with debt covenants.
- Balance sheet: Total assets increased to $1,363.655 million from $1,354.102 million; real estate and development totaled $1,790.244 million before accumulated depreciation. Development investment was $143.985 million.
Material changes versus prior period
- PNOI growth came from $0.870 million in 2012 acquisitions and $0.571 million from newly developed properties, partly offset by a $0.120 million decline in same-property PNOI. Same-property PNOI fell 0.4%; average same-property occupancy was 93.2%, versus 93.9%.
- Quarter-end occupancy was 93.6%, compared with 94.0% a year earlier; leased percentage was 94.4%, versus 94.5%. Average rental rates on new and renewal leases decreased 1.1%.
- Interest expense fell by $0.820 million, principally reflecting lower mortgage interest costs. Variable-rate interest expense increased slightly as higher rates offset lower average bank borrowings.
- Q1 2012 included $0.261 million of discontinued-operations income, including a $0.167 million after-tax gain; Q1 2013 had no discontinued-operations income or real estate sales.
- EastGroup issued 245,010 shares through its continuous equity program for $13.798 million net proceeds. It replaced its prior credit facilities with $225 million and $25 million unsecured revolving facilities, both maturing in January 2017.
Outlook, risks and notable items
- Management stated that operating cash flow and credit lines should fund operations through the remainder of 2013 and that anticipated cash, operating cash flow and access to debt and equity are expected to cover operating needs, distributions, capital improvements, acquisitions and development in the short and long term. No numerical earnings or FFO guidance is provided.
- The development program comprised 16 projects totaling 1.108 million square feet; projected total cost was $84.8 million, with $35.5 million remaining to invest at quarter-end. The projects were 48% leased as of April 19, 2013. Five projects totaling 377,000 square feet began construction during Q1.
- After quarter-end, the company acquired 42.4 acres in southwest Charlotte for $5.7 million, with plans for a 465,000-square-foot industrial park. It expected to begin two buildings, with projected investment of $9.5 million; one was fully pre-leased.
- The company had an agreement in principle to issue $100 million of senior unsecured notes at a fixed 3.8% rate, expected to close August 30, 2013, subject to due diligence and final documentation. Principal repayments are scheduled for 2020, 2023 and 2025.
- Key risks include tenant defaults, lease renewals and re-leasing at expected rents, vacancy and rental-rate pressure, development cost or timing overruns, financing availability, interest-rate changes, operating-cost inflation, and adverse economic conditions. Management reported no real-estate impairment charges. It estimated that a 10% change in the variable-debt rate would change annual interest expense and cash flow by about $126,000.
- The company used an $80 million interest-rate swap to hedge variable-rate debt. The swap liability was $414,000 at quarter-end; an estimated $579,000 was expected to be reclassified from accumulated other comprehensive income as an increase to interest expense over the next 12 months.
Important facts for investors to verify
- Whether the proposed $100 million notes issuance closed on the expected terms and date.
- Whether leasing, same-property performance and occupancy improved after quarter-end, given lower renewal/new-lease rates and the 0.4% same-property PNOI decline.
- Development leasing, remaining funding needs and completion costs, including the Charlotte project.
- Debt maturities, revolving-credit availability, covenant headroom and exposure to variable rates; quarter-end cash was only $24,000.
- FFO per-share trends and dividend coverage: diluted FFO was $0.76 per share versus a $0.53 declared quarterly dividend, while cash distributions exceeded quarterly net income attributable to common stockholders.