EastGroup Properties, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. EastGroup is an industrial-property REIT concentrated in Sunbelt markets, with a portfolio focused on distribution facilities. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $43.6 | $43.1 | $88.0 | $86.4 |
| Operating income | $13.3 | $15.0 | $26.9 | $30.1 |
| Net income attributable to common stockholders | $4.5 | $7.2 | $9.4 | $14.8 |
| Diluted EPS | $0.17 | $0.28 | $0.35 | $0.59 |
| Property net operating income (PNOI) | $30.5 | $30.4 | $61.4 | $61.1 |
| FFO per diluted share | $0.71 | $0.80 | $1.45 | $1.63 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $38.2 | $39.6 |
- For the quarter, revenue increased about 1.2%, while common-stockholder net income and diluted EPS each fell about 37%. Six-month revenue rose about 1.9%, while common-stockholder net income fell about 37% and FFO per share fell about 11%.
- PNOI increased modestly, but same-property PNOI declined 3.8% for the quarter and 3.9% for the six months. Acquisitions and recently developed properties offset weaker same-property results.
- Occupancy was 87.2% and leased space was 89.1% at June 30, 2010, versus 91.2% occupied and 92.6% leased a year earlier. New and renewal rental rates declined an average 16.1% in Q2 and 12.2% for the six-month period.
- Property expense as a share of revenue increased to 30.0% in Q2 and 30.2% for the six months, from 29.4% and 29.2%, respectively. Depreciation and amortization and interest expense also increased, contributing to lower operating income and earnings.
Balance sheet, debt and liquidity
- At June 30, total assets were $1,188.1 million, total liabilities $758.6 million and total equity $429.6 million. Cash was $0.1 million.
- Total debt was $723.8 million, up from $692.1 million at December 31, 2009. Fixed-rate mortgage debt was $593.2 million; floating-rate bank debt was $130.6 million. Debt was about 61% of total assets.
- Operating cash flow of $38.2 million was below the prior-year $39.6 million. Investing activities used $42.0 million; financing activities provided $2.9 million. The company paid $28.1 million in common-stock distributions during the six months.
- Two unsecured revolving facilities total $225 million and mature in January 2012. At quarter-end, borrowings were $126.0 million on the $200 million facility and $4.6 million on the $25 million facility; two letters of credit totaling $2.4 million reduce availability on the larger line. The company reported compliance with its debt covenants.
Operations, outlook and risks
- Leasing activity produced positive absorption of 530,000 square feet in the first half: 4.035 million square feet signed against 3.505 million expiring. EastGroup renewed or re-leased 69% of the expiring space and leased 1.621 million square feet of other vacant space.
- The company acquired three properties totaling 499,000 square feet for a total purchase cost of $23.6 million. Four developments totaling 338,000 square feet, with $24.2 million invested at transfer, moved to operating properties; they were 43.3% leased as of August 2.
- Management said the weak economy had reduced occupancy and rents and made financing more difficult. No new development starts were planned for the remainder of 2010. Management believed existing credit lines could fund operations through 2010 and 2011 and anticipated funding needs through operating cash flow, credit facilities, mortgage financing and/or equity issuance.
- Key risks include tenant defaults, lease renewals and re-leasing at lower rents, vacancies, financing availability and cost, interest-rate changes, operating costs, and development or acquisition execution. Management reported no material change to the risk factors in the 2009 Form 10-K. No real estate impairment charges were recorded, and no properties were held for sale at June 30.
- A fully effective interest-rate swap hedged a $9.0 million mortgage and matured December 31, 2010. The filing also disclosed conversion to a new enterprise management system effective July 1, 2010; third-quarter statements were to be generated from that system.
Important facts for investors to verify
- Whether occupancy, lease renewals and rental rates stabilize, and whether same-property PNOI and FFO recover.
- Debt maturities, refinancing plans and actual availability under credit facilities, including covenant headroom and borrowing costs.
- How much termination-fee income contributed to reported PNOI: $1.0 million in Q2 and $2.4 million in the first half, versus $0.2 million and $0.4 million in the comparable 2009 periods.
- Leasing progress and expected costs for recently transferred developments, along with management’s decision to defer new construction starts.
- Whether the July 2010 accounting-system transition affected the completeness or quality of subsequent financial reporting.