EastGroup Properties, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. EastGroup is an industrial-property REIT focused primarily on distribution facilities in Sunbelt markets. Financial amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $68.7 | $63.2 | $202.8 | $186.7 |
| Operating income | $24.4 | $22.8 | $69.7 | $64.0 |
| Net income attributable to common stockholders | $15.9 | $14.7 | $65.6 | $80.3 |
| Diluted EPS | $0.46 | $0.45 | $1.93 | $2.47 |
| PNOI | $48.7 | $44.7 | $143.5 | $132.6 |
| FFO per diluted share | $1.08 | $1.04 | $3.12 | $2.94 |
- Revenue rose 8.8% in Q3 and 8.6% for the nine-month period. PNOI grew 9.0% and 8.3%, respectively; same-property PNOI increased 3.1% in Q3 and 2.5% year to date.
- Quarterly diluted EPS increased from $0.45 to $0.46, while nine-month diluted EPS fell from $2.47 to $1.93. The comparison is affected by lower property-sale gains: $21.9 million in 2017 versus $42.3 million in 2016 for the nine-month periods.
- Property expense as a share of real estate operating revenue was 29.3% in Q3 and year to date, versus 29.4% and 29.0% in the comparable 2016 periods. Q3 operating margin was approximately 35.5% of total revenue.
- Operating cash flow was $122.7 million for the first nine months, versus $107.0 million in 2016. Investing used $104.8 million and financing used $18.5 million. Cash at September 30 was only $10,000.
- Total debt was $1.072 billion, down from $1.101 billion at year-end 2016; total liabilities were $1.168 billion and equity $726.2 million. Debt comprised $216.6 million of unsecured bank facilities, $653.2 million of unsecured debt, and $202.2 million of secured debt. Debt maturities include $130.6 million in 2019 and $114.1 million in 2020.
- Unsecured facilities totaled $335 million, with approximately $217.4 million drawn at quarter-end. Debt covenants were reported in compliance. The company repaid a $45.1 million mortgage in August and had a $60 million, seven-year note commitment at a fixed 3.46% rate, expected to close in mid-December 2017.
Operating changes and management commentary
- Portfolio leased percentage was 97.4%, versus 97.3% a year earlier; physical occupancy was 95.6%, versus 96.3%. Same-property average occupancy improved to 96.4% for Q3 and 96.6% for the first nine months.
- For the first nine months, leases expired on 5.565 million square feet; 84% was renewed or re-leased, and another 1.831 million square feet of vacant space was leased. Rental rates on new and renewal leases increased 17.1% on average; Q3 increases averaged 20.9%.
- EastGroup began eight development projects totaling 987,000 square feet and transferred 12 projects totaling 2.197 million square feet into operating properties. At September 30, development investment was $204.2 million; 13 projects totaling 1.682 million square feet remained in the program, collectively 43% leased as of October 20. Estimated remaining investment was $51 million.
- The company acquired three operating properties totaling 421,000 square feet for $36.5 million. It sold two properties totaling 514,000 square feet for $38.0 million, recognizing $21.9 million in gains. It also sold five acres of land for $850,000 and recorded a $40,000 loss.
- Management said operating cash flow and bank facilities, supplemented by debt or equity financing, should support operations, dividends, capital improvements, acquisitions, and development. It issued 1.038 million shares through its equity program for $79.0 million net proceeds. Moody’s affirmed its Baa2 rating with a stable outlook.
Outlook, risks, and unusual items
- The filing provides no specific earnings or FFO guidance. Management expects liquidity and financing sources to be adequate for planned business needs, but this depends partly on access to debt and equity markets.
- Key risks include tenant defaults, leasing or renewal at expected rents, industrial-property supply and demand, interest rates, operating costs, financing availability, and development timing or cost overruns. Economic weakness could increase vacancy, reduce rents, and impair cash flows.
- Most leases provide scheduled rent increases and tenant recovery of operating costs, although inflation-related increases in general and administrative costs or interest rates may not be recoverable from tenants.
- Seven interest-rate swaps hedged variable cash flows on unsecured borrowings; management considered the hedges highly effective. A 10% change in the stated variable borrowing rate would change annual interest expense and cash flow by approximately $306,000, excluding debt effectively fixed by swaps.
- No real-estate impairment charges were recorded, and no properties were classified as held for sale. The company said there were no material changes to previously disclosed risk factors. Adoption of the new revenue standard was expected to have no material impact; lease accounting effects were still under evaluation.
Important facts for investors to verify
- Whether 97.4% leased space translates into higher physical occupancy and continued same-property NOI growth.
- Lease-up progress, completion costs, and returns on the development pipeline, including the $51 million remaining investment estimate.
- Whether the $60 million private placement closed on expected terms and how near-term facility maturities and refinancing needs are funded.
- How much reported earnings and year-over-year EPS changes depend on real-estate sale gains, compared with recurring property operations and FFO.
- Future leasing spreads, tenant credit quality, interest-rate exposure, and compliance with debt covenants.