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A Conservative REIT

Recs

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July 25, 2011 – Comments (1) | RELATED TICKERS: EGP

Board: Real Estate Investment Trusts

Author: Reitnut

Due to the scarcity of REIT-specific posts recently, I thought I'd post one on one of my favorite industrial property REITs, EastGroup (EGP). I posted on EGP previously, so I won't spend much time on background. To summarize, EGP owns industrial properties in Sunbelt locations, especially Florida, Texas and California.

It owns less than 30MM sq. ft. of space, which makes it only a mid-size company in its sector. I really like the management team, which is quite conservative and has kept a solid balance sheet (it never cut its dividend during the Great Recession), and presently has a debt/market cap of just 39.4% and interest- and fixed-charge coverage ratios of 3.3x.

EGP's shares often trade at NAV and P/AFFO discounts relative to its peers, e.g., PLD, due to the higher cap rates applied to its properties (it doesn't own low cap properties in coastal markets) and its conservative external growth strategy (it develops and acquires, but does so very cautiously). The dividend yield is thus higher than that of many REITs (4.6%), yet it pays out only 71% of FFO (but, like all REITs, a somewhat higher percentage of AFFO). Over the past 10+ years, the stock has actually outperformed PLD. See http://finance.yahoo.com/q/bc?t=my&s=EGP&l=on&z=...

EGP's current quarter was encouraging. Occupancy rose 50 bps to 91%, and leased space increased to 92.1%. SS NOI has been weak due to rental rolldowns, but this appears to be bottoming. Excluding termination fees, SS NOI rose 3.5% (ex straight-line rent adjustments). Rents rolled down, of course, as leases made three and four years ago are being renewed at lower market rents, but the average decline was much more mild than expected (-9% vs. -24% in Q1). TI's were as low as they've been during the past two years. Most of EGP's markets had positive space absorption for the second quarter running. Leasing velocity is modest but positive.

The REIT is buying some land, and slowly increasing its development pipeline with modest-sized projects; it is now up to $31.7MM. It also announced the acquisition of three fully-leased buildings (2 in Charlotte, 1 in Tempe) for $24MM. So there is some modest external growth that will hopefully ramp up over time.

Most of the risks in this stock relate to the US economy and related space markets, and are not company-specific. A weakening economy will put more pressure on rental and occupancy rates, and deter FFO growth - and impact the shares' trading price.

I regard EGP as a core holding for those looking for a conservative REIT with an experienced and solid management team and an above-average yield. But those interested should try to buy the stock closer to the mid-$44 range where it traded as recently as Wednesday (it closed on Friday at $46.32).

Ralph

1 Comments – Post Your Own

#1) On July 26, 2011 at 12:58 AM, awallejr (76.63) wrote:

Might want to give MPW a look at too.  It pays a nice "dividend" and is concentrated in the healthcare facility field.  I own some in real life, bought it way back in March of 2009.

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