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Summary

  • EastGroup Properties is an industrial REIT that owns approximately 295 industrial and distribution buildings containing 32.6 million sq. ft. of space, primarily in Sunbelt markets.
  • EastGroup Properties is rated BBB by Fitch and has a market capitalization of approximately $1.97 billion.
  • We are recommending the sale of the stock due to its high valuation, low dividend yield and low operating cash flow.

This REIT Focus from our monthly commercial real estate newsletter, View of the Market, is on EastGroup Properties, Inc. (NYSE:EGP), a publicly traded REIT engaged in the development, acquisition and operation of industrial properties in major Sunbelt markets throughout the United States with an emphasis in the States of Florida, Texas, Arizona, California and North Carolina. EGP's goal is to maximize shareholder value by being a leading provider of functional, flexible and quality business distribution space for location sensitive tenants primarily in the 5,000 to 50,000 sq, ft. range. EGP's strategy for growth is based on the ownership of premier distribution facilities generally clustered near major transportation features in supply constrained submarkets.

As of 12/31/13, EGP owned 295 industrial properties and one office building. The 12/31/13 average occupancy, rent per sq. ft. and 1Q14 average rent increase were 96%, $5.16 and 6.2%, respectively. EGP has a development pipeline of 1.8 million sq. ft. in the lease-up or development stage.

EGP is incorporated in Maryland, went public in 1971 and is listed on the NYSE. EGP is based in Jackson, MS and its debt is rated BBB by Fitch and Baa2 by Moody's. EGP completed a secondary offering of 321,645 shares of common stock in the first quarter of 2014 at $62.18/sh., for gross proceeds of $20 million. EGP has 31.3 million common shares outstanding and a market capitalization of approximately $1.97 billion.

Management

David H. Hoster II, 68, has been an officer of EGP since 1983, President and Director since 1993 and was appointed Chief Executive Officer in September 1997. Prior to joining EGP, from 1975 to 1983, Mr. Hoster was President of Riviere Realty Trust in Washington, D.C. Mr. Hoster received his M.B.A from Stanford University and his B.A. in History with honors from Princeton University.

N. Keith McKey, 63, has been an officer of EGP since 1983, Chief Financial Officer and Secretary since 1992, Executive Vice President since 1993 and Treasurer since 1997. Prior to joining EGP, Mr. McKey was in public accounting with Ernst & Young LLP and KPMG Peat Marwick LLP. Mr. McKey is a Certified Public Accountant and received his B.B.A. with a major in Accounting from the University of Mississippi

Financial Data

Select financial data for EGP as of the 3/31/14 10Q and supplemental data for the period 1/1-12/31/13 is as follows (in millions where applicable):

Real Estate Assets, Gross$1,948
Total Assets$1,481
Property Debt$898
Common Stockholders' Equity$524
Revenue$53
Net Income$8
Net Income Per Share$.27
Cash Flow from Operations$18
Unsecured Revolving Credit Facility ($250 with $99 used)$151
Market Capitalization$1,970
Property Debt to:
Gross Real Estate Assets46%
Market Capitalization46%
Enterprise Value31%
Dividend and Yield ($2.16/sh.)3.4%
Valuation Methodology:
1Q14 Revenue Per Above Annualized$212
Less: 1Q14 Operating Expenses Annualized (excluding depreciation, amortization & interest expense and plus G&A expenses)72
Annualized Net Operating Income 2014$140
Projected Inflation Rate at 3.5%x103.5%
Projected Forward NOI for Next Year$145
Projected Cap Rate7%
Projected Value of Real Estate Assets$2,071
Add: Development Projects and Land (at book value)151
Net Operating Working Capital39
Total Projected Asset Value$2,261
Less: Total Debt Per Above(898)
Noncontrolling Interests(4)
Projected Net Asset Value$1,358
Common Shares Outstanding 31.6M (31.3M common stock shares and .3M equity compensation restricted shares)
Projected NAV Per Share$43.00
Market Price Per Share on 5/15/14$62.00

Financial Metrics

The gross real estate assets, property debt, revenues, net income, funds from operations, return on invested capital and dividends per share for the years 2009 through 1Q14 are shown in the table below:

(millions except per share amounts)200920102011201220131Q14
Gross Real Estate Assets$1,468$1,521$1,662$1,768$1,927$1,948
Property Debt$692$735$833$814$894$898
Revenues$171$172$173$186$202$53
Net Income$27$18$22$32$33$8
Funds From Operations$81$77$80$88$98$25
Return on Invested Capital (1)5.2%4.6%4.6%4.7%4.7%NA
Dividends Per Share$2.08$2.08$2.08$2.10$2.14$.54 (Q1)

(1) This is the ratio of NOPAT divided by stockholders equity plus property debt, less cash, and measures the return the REIT is earning on its invested capital.

As shown above, our net asset value per share for EGP is $43/sh. versus a market price of $62/sh. Current average cap rates for industrial properties per our industry experience and CBRE's Cap Rate Survey are in the 6% to 9% range, depending on the location, tenancy and quality of the property. We have used an average cap rate of 7% due to EGP's portfolio being primarily well located Class A industrial properties.

Valuation Analysis

EGP's strengths, concerns and recommendations are as follows.

Strengths:

  • High occupancy of 96%.
  • Diversified portfolio of industrial assets.
  • Low leverage at 31% of enterprise value.
  • 1Q rent growth of 6.2%.

Concerns:

  • High stock price at $62/sh.
  • Low dividend yield of 3.4%.
  • EGP is currently trading at a rich, 19 times 2014 FFO.
  • Only $2 million of cash on the balance sheet.
  • 1Q AFFO of $21 million does not cover debt principal payments of $5 million and 1Q dividends of $17 million.

Recommendations:

EGP has a solid and well located portfolio of industrial assets, however, we believe that the stock price is too high and trading at a cap rate of 5.4%. EGP is also not generating enough operating cash flow to fund comfortably the common stock dividend and recurring principal payments on its debt. Therefore, we are recommending to our clients to sell EGP and reinvest the proceeds in higher yielding and more attractive priced REITs like Brandywine Realty Trust (NYSE:BDN) and Home Properties (NYSE:HME).

A five year price chart of EGP is shown below:

Source: REIT Focus: EastGroup Properties, Inc.