Amazon Sneezed, EastGroup Properties Caught A Cold

Aug. 18, 2022 5:03 PM ETEastGroup Properties, Inc. (EGP)AMZN, FR, PLD, REXR4 Comments

Summary

  • EastGroup Properties joined its industrial REIT peer set in reporting impressive 2Q earnings.
  • EGP’s tenant base is deep. AMZN, the largest tenant, represents only 2.8% of revenues.
  • Despite market reactions/perceptions, EGP operations have no correlation with AMZN.
  • Looking for more investing ideas like this one? Get them exclusively at Portfolio Income Solutions. Learn More »

Amazon Hub and Delivery in Henderson, Nevada

sanfel

On April 26th, EastGroup Properties, Inc. (NYSE:EGP) reported stellar 1Q22 operating results. The metrics were truly astounding:

  • Funds from Operations of $1.68 Per Share for First Quarter 2022 Compared to $1.45 Per Share for First Quarter 2021, an Increase of 15.9%
  • Same Property Net Operating Income for the Same Property Pool Excluding Income from Lease Terminations Increased 8.5% on a Cash Basis and 7.4% on a Straight-Line Basis for First Quarter 2022 Compared to the Same Period in 2021
  • Rental Rates on New and Renewal Leases Increased an Average of 33.5% on a Straight-Line Basis

Somehow, though, EGP’s celebration of success was cut short less than 48 hours later when Amazon (AMZN) reported an unexpected loss of $7.56/share and implied they had leased/bought/built too much industrial/logistics/distribution space.

The Amazon fallout didn’t just affect EGP but hit the whole industrial REIT sector. Like EastGroup, Prologis (PLD), Terreno Realty (TRNO), First Industrial (FR), Rexford Industrial (REXR) and other industrial REITs reported record earnings and double digit rent roll-ups, but AMZN’s report/comments quickly knocked 25% off their share prices.

Chart, histogram Description automatically generated

S&P Capital IQ

An Inappropriate Market Response

As it turns out, Amazon is EastGroup’s largest tenant, but even at 2.20% of EGP’s total rental revenues, an unlikely AMZN lease default would go unnoticed in EGP’s 98%+ leased, high demand portfolio. More to the point, Amazon’s revenues are growing, they are on the hook for all of their leases, and more than 90% of their leases with EGP expire after 2033!

A screenshot of a computer Description automatically generated

S&P Capital IQ

Even though Amazon’s prospects have no negative impact on EGP’s revenues, EastGroup management has been forced to address the AMZN fallout on many fronts. In negotiating a seller tax-advantaged OP Unit acquisition in the Bay Area, they successfully navigated their share price decline with a wary, but understanding, counterparty. Similarly, to capitalize their robust development pipeline, they pivoted from using their previously advantageous common share ATM and chose, instead, a series of fixed-rate debt offerings as opposed to issuing shares at dilutive prices.

EGP’s July 27 2Q22 earnings release was again impressive:

*Funds from Operations of $1.72 Per Share for Second Quarter 2022 Compared to $1.47 Per Share for Second Quarter 2021, an Increase of 17.0%.

*Same Property Net Operating Income for the Same Property Pool Excluding Income from Lease Terminations Increased 9.5% on a Cash Basis and 7.7% on a Straight-Line Basis for Second Quarter 2022 Compared to the Same Period in 2021.

*Rental Rates on New and Renewal Leases Increased an Average of 37.2% on a Straight-Line Basis.

In the report, EGP also revised their 2022 earnings guidance higher, and the impact of the Amazon fallout was conspicuous in their modeling.

OUTLOOK FOR 2022

Table Description automatically generated

EGP

Amazon’s mea culpa report in April didn’t affect EGP’s cash flows or projections, but it did crush their stock price. The guidance below demonstrates a considerable discipline in management’s decision to not issue shares at dilutive, discounted prices, but instead to suffer a more temporary harm in issuance of slightly more debt at higher rates.

Table Description automatically generated

EGP

When the share price recovers, which it has already begun to do, they can go back to the ATM and secure more favorable capital.

It’s the Markets, Not the Economy

Amazon is the dominant player in e-commerce, cloud computing, and a growing number of other business lines. AMZN is only 1 of hundreds of businesses who compete for space in EastGroup’s operations-essential properties in the nation’s most vibrant MSAs.

2022’s anxious investment environment can extrapolate fear like a pernicious microbe. Amazon is fine, it’s not contagious; but it sent a chill through the industrial REIT sector.

EGP remains the exceptional operator it has been for the last 20 years.

Chart, bar chart Description automatically generated

EGP

Its shares have just become opportunistically cheap.

For a full toolkit on building a growing stream of dividend income, please consider joining Portfolio Income Solutions. As a member you will get:

  • Access to a curated Real Money REIT Portfolio
  • Continuous market commentary
  • Data sets on every REIT

You will benefit from our team’s decades of collective experience in REIT investing. On Portfolio Income Solutions, we don’t only share our ideas, we also discuss best trading practices and help you become a better investor.

We welcome you to test it out with a free 14-day trial. Lock in our founding member rate of $33.25/month (paid annually) before it expires!

This article was written by

Ross Bowler profile picture
682 Followers
Access professional analysis and a curated high yield portfolio

2nd Market Capital Advisory specializes in the analysis and trading of real estate securities.  Through a selective process and consideration of market dynamics, we aim to construct portfolios for rising streams of dividend income and capital appreciation. I am an investment advisor representative of 2nd Market Capital Advisory Corporation, a Wisconsin registered investment advisor along with fellow SA contributors Simon Bowler and Dane Bowler.

Full Disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person. Please see our SA Disclosure Statement for our Full Disclaimer.

Disclosure: I/we have a beneficial long position in the shares of EGP, PLD, FR, REXR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All articles are published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.
The information offered is impersonal and not tailored to the investment needs of any specific person. Readers should verify all claims and do their own due diligence before investing in any securities, including those mentioned in the article. NEVER make an investment decision based solely on the information provided in our articles.
It should not be assumed that any of the securities transactions or holdings discussed were profitable or will prove to be profitable. Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions.
Commentary may contain forward-looking statements which are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article.
S&P Global Market Intelligence LLC. Contains copyrighted material distributed under license from S&P
2nd Market Capital Advisory Corporation (2MCAC) is a Wisconsin registered investment advisor. Ross Bowler is an investment advisor representative of 2nd Market Capital Advisory Corporation.

Recommended For You

Comments (4)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.