EastGroup Properties, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Industrial-property REIT focused on distribution facilities, primarily in Sunbelt markets. This unaudited filing covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $139.9 | $118.6 | $274.9 | $231.5 |
| Net income attributable to common stockholders | $43.5 | $46.1 | $88.1 | $109.7 |
| Diluted GAAP EPS | $0.97 | $1.09 | $1.99 | $2.62 |
| FFO per diluted share | $1.91 | $1.72 | $3.75 | $3.41 |
| Operating cash flow | Not separately reported | Not separately reported | $178.8 | $176.2 |
- Revenue increased 18.0% in Q2 and 18.7% year to date. Real estate operating expenses were $37.8 million in Q2 and $74.0 million for six months. PNOI was $101.3 million and $199.4 million, respectively; PNOI as a share of real estate operating revenue was approximately 73% in both periods.
- Same-property PNOI excluding lease-termination income grew 5.9% in Q2 and 6.8% year to date. Overall PNOI increased 17.5% and 18.4%, respectively, helped by development completions and acquisitions.
- Interest expense rose to $12.6 million in Q2 from $9.0 million, and to $25.6 million for six months from $17.1 million. Depreciation and amortization also increased, reflecting acquired and newly completed properties.
- GAAP net income declined despite higher property revenue, principally because 2022 included larger property-sale gains: $10.6 million in Q2 and $41.0 million for the first six months, versus none in Q2 2023 and $4.8 million year to date. FFO increased, reflecting higher PNOI, partly offset by higher interest expense.
Financial position, debt and liquidity
- At June 30, total assets were $4.20 billion, total liabilities $1.99 billion, and total equity $2.21 billion. Cash and cash equivalents were $1.1 million.
- Total debt principal was approximately $1.732 billion, substantially fixed-rate or effectively fixed through swaps. The company had no outstanding borrowings on its $675 million unsecured credit facility or its separate $50 million facility; both mature July 2025, subject to extension options. Debt net of issuance costs was reported at $1.726 billion; the credit-facility balance-sheet line was negative $2.0 million due to unamortized issuance costs, not a borrowing.
- In January, EastGroup issued a $100 million seven-year term loan with an effectively fixed rate of 5.27%; it repaid a $65 million term loan in March. It amended its credit facilities, increasing aggregate capacity from $475 million to $675 million and replacing LIBOR with SOFR. Moody’s issuer rating was Baa2 with a stable outlook.
- Six-month cash flows included $208.8 million used in investing and $31.1 million provided by financing. The company paid $110.4 million in common-stock distributions. It raised $295.9 million net through its continuous equity offering program during the six months, including shares settled in July.
- The declared quarterly dividend was $1.25 per share. Management said existing operating cash flow, credit facilities and access to debt and equity markets should provide adequate liquidity for expected operating, debt-service, distribution, acquisition and development needs.
Operating developments, outlook and risks
- The portfolio was 98.5% leased and 98.2% occupied at quarter-end, versus 99.1% and 98.5% a year earlier. New and renewal leases signed in the first half averaged a 51.0% rental-rate increase over prior leases on the same space. As of July 25, occupancy was 97.8% and 2023 remaining expirations represented 3.5% of portfolio area.
- Development and value-add pipeline: 21 projects totaling 4.272 million square feet; projected total investment of $536.6 million, with $190.8 million remaining to invest at June 30. Projects were 37.7% leased as of July 25. The company began seven projects and transferred six projects to its operating portfolio during the first half.
- Management noted inflation, rising interest rates, supply-chain disruption and economic uncertainty. Most leases pass through a substantial share of property operating costs, but higher corporate expenses and borrowing costs may not be recoverable from tenants. Risks also include tenant defaults or nonrenewals, lower occupancy or rents, development and acquisition execution, access to capital, refinancing, covenant compliance, natural disasters and insurance adequacy.
- There is no specific numerical earnings or FFO guidance in the provided filing text. Management expects liquidity sources and uses over the coming year to be consistent in nature with the first half. The company reported no material litigation, no material change in risk factors from its 2022 Form 10-K, and no material off-balance-sheet arrangements.
- Unusual items included $2.1 million of casualty and involuntary-conversion gains for the first half, and $4.8 million of operating-property sale gains. No real estate impairment charges were recorded in the first half.
Most important facts for investors to verify
- Whether leasing spreads, high occupancy and same-property PNOI growth persist as leases roll and economic conditions change.
- Whether development projects lease up on schedule and within projected costs, including the remaining $190.8 million investment requirement.
- How higher interest costs, debt maturities and refinancing conditions affect FFO, liquidity and distribution coverage.
- The effects of ongoing equity issuance on per-share results and the company’s ability to fund growth without excessive leverage or dilution.
- Confirm the distinction between GAAP earnings, which were reduced year over year partly by lower property-sale gains, and growing FFO, a supplemental non-GAAP measure.