EastGroup Properties, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited consolidated results. EastGroup is an industrial REIT focused on business-distribution properties, primarily in Sunbelt markets.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Real estate operating revenue | $113.0 million | $97.9 million; up 15.4% |
| Net income attributable to common stockholders | $63.6 million; $1.54 per diluted share | $27.3 million; $0.69 per diluted share |
| Funds from operations (FFO), attributable to common stockholders | $69.6 million; $1.68 per diluted share | $57.7 million; $1.45 per diluted share; per-share FFO up 15.9% |
| Property net operating income (PNOI) | $82.2 million | $70.3 million; up 16.9% |
| Same-property PNOI, excluding lease termination income | Up 7.4% | Comparable-period increase |
| Cash provided by operating activities | $82.3 million | $78.8 million |
| Cash used in investing activities | $114.1 million | $63.9 million |
| Cash and total debt, net of issuance costs | $5.7 million cash; $1.465 billion debt | Debt was $1.452 billion at December 31, 2021 |
| Quarterly common dividend declared | $1.10 per share | $0.79 per share |
Total assets were $3.345 billion and total equity was $1.674 billion at quarter-end. Interest expense was $8.1 million, compared with $8.3 million a year earlier. The filing does not provide a conventional operating margin or a current ratio.
Material changes and operating performance
- GAAP net income rose substantially, in part because the company recognized $30.4 million of gains on real estate sales; there were no property-sale gains in Q1 2021. FFO, which excludes those gains, increased to $1.68 per diluted share from $1.45.
- Same-property PNOI growth, excluding lease termination income, was 7.4%. PNOI growth also reflected contributions from newly developed and value-add properties and 2021 acquisitions.
- At March 31, the operating portfolio was 98.8% leased and 97.9% occupied, versus 98.3% leased and 97.2% occupied a year earlier. New and renewal leases signed in Q1 had average rental-rate increases of 33.5% over prior leases on the same space.
- Development and value-add properties totaled $549.6 million. The 26-project, 4.699-million-square-foot program was 55% leased as of April 26; projected total investment was $588.7 million, with $168.6 million remaining to invest at quarter-end.
- The company sold 245,000 square feet of operating properties for $38.1 million in net proceeds and recorded $30.4 million in gains. It acquired a 516,000-square-foot Houston value-add property for $54.5 million and 50.2 acres of Phoenix development land for $13.6 million.
Liquidity, debt and outlook
Operating cash flow was $82.3 million. Investing outflows included $127.1 million for development and value-add properties, $9.8 million for real estate improvements and $9.3 million for leasing commissions; net property-sale proceeds were $38.1 million. Financing included $74.2 million of net equity-offering proceeds. Management said current cash, operating cash flows, credit facilities and expected access to debt and equity markets should adequately fund operations, debt service, distributions, acquisitions and development in both the short and long term.
Debt was predominantly unsecured. The company had $1.270 billion of fixed-rate unsecured debt and $197.3 million outstanding on variable-rate bank facilities; the facilities had combined capacity of $475 million and mature in July 2025. Five interest-rate swaps were outstanding, and the company reported compliance with debt covenants. Moody’s issuer rating was Baa2 with a stable outlook.
- In February, EastGroup repaid a $75 million term loan at maturity. In March, it issued a $100 million, 6.5-year term loan effectively fixed at 3.06%, and refinanced another $100 million term loan at an effectively fixed rate of 1.80%.
- After quarter-end, the company issued $150 million of 10-year senior notes at a fixed 3.03% rate. It also acquired development land in Houston for about $7.8 million, a San Francisco-area property for $28.5 million, and a Phoenix property for $18.3 million.
- Management reported that COVID-19 had had minimal operating impact to date and did not expect tenant rent-relief requests to materially affect rental revenue, while noting future effects remain uncertain. No material litigation, material off-balance-sheet arrangements, or material changes to previously disclosed risk factors were reported.
Key risks include economic and tenant conditions, occupancy and rental rates, construction-cost inflation and development execution, interest rates and refinancing, covenant and credit-rating compliance, and the transition from LIBOR to alternative rates. Management expected the LIBOR transition to have no material financial-statement impact, but noted that accelerated or adverse transition effects remain possible. The company estimated that a 12-basis-point change in the variable-rate credit-facility rate would change annual interest expense and cash flow by approximately $231,000.
Important facts for investors to verify
- How much of the sharp increase in GAAP earnings is attributable to property-sale gains versus recurring property operations; compare GAAP net income with FFO.
- Whether strong leasing spreads and occupancy translate into sustained same-property PNOI growth, and how lease expirations and renewals develop.
- Development and value-add project leasing, cost-to-complete, timing and returns, particularly given $168.6 million of remaining investment at quarter-end.
- Debt maturities, variable-rate exposure, covenant headroom, refinancing costs and the completion of the LIBOR-to-SOFR transition.
- Funding needs and shareholder dilution from continued development, acquisitions, dividends and equity issuance; assess the post-quarter financing and acquisitions against management’s liquidity expectations.