EASTGROUP PROPERTIES, INC.
Moat: 2.5/5
Understandability: 2/5
Balance Sheet Health: 3.5/5
EastGroup Properties (EGP) is a self-administered REIT focused on the ownership, acquisition, development, and management of industrial properties, mainly in Sunbelt locations in the US.
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
EGP operates in the real estate industry, specifically focusing on industrial properties. The company’s operations are in a highly competitive industry with few barriers to entry.
Business Overview
EGP is a real estate investment trust (REIT) specializing in the development, acquisition, and management of industrial properties. The company primarily targets distribution facilities in major Sunbelt markets throughout the U.S.
- Revenues Distribution:
- EGP’s revenue comes primarily from rental income generated by its diverse portfolio of industrial properties. This includes:
- Distribution facilities, which form the core of EGP’s portfolio.
- Light manufacturing, flex, and office spaces.
- The company’s occupancy rates and ability to adjust lease rates directly impact its top line.
- Industry Trends:
- Demand for industrial space is largely driven by e-commerce growth, leading to increased requirements for distribution and logistics facilities.
- The industry is increasingly competitive, with new entrants and existing players actively developing and acquiring new properties.
- Technological advancements are impacting logistics, requiring properties to be upgraded with the latest technologies and sustainability features.
- The rise in interest rates has impacted the industry, leading to increased cost of capital.
- Competitive Landscape:
- EGP competes with other REITs, private equity firms, and individual investors, especially in the highly attractive Sunbelt market.
- The barriers to entry in acquiring and developing industrial properties aren’t too high, leading to an increasingly competitive environment.
- Competition is mostly based on location, property quality, cost of capital, and operational efficiency.
- Large private real estate owners are becoming more sophisticated and offer strong competition in the company’s regions.
- What makes the company different?
- EGP focuses exclusively on the acquisition, development and management of industrial properties in the Sunbelt region. This focus may allow the company to be a specialist in that region. However, this can also increase its risks as this specialization exposes the company to specific risks and downturns of one region.
- Financials
- The company’s financials show strength in top-line revenue, with a good growth trajectory, but operating profitability is inconsistent. The company is growing fast, and has a good level of liquidity.
- EGP has a current asset level of $379 million and total liability amount of $1,418 million, according to its latest report from November 15, 2022. This indicates a high amount of leverage.
- The company has cash of $250 thousand and marketable securities of $48 million, which gives it ample liquid assets to cover short-term obligations.
- The company has a 10% long-term debt to total assets ratio, and a debt to EBITDA ratio of around 7x, both indicating that it is a highly leveraged company.
- The company’s leverage could be due to its REIT structure which requires it to pay a very large portion of its earnings as dividends. The company must borrow more to fund acquisitions, capital expenditures and other growth initiatives.
- The company’s financials show strength in top-line revenue, with a good growth trajectory, but operating profitability is inconsistent. The company is growing fast, and has a good level of liquidity.
- Recent concerns and problems
- As the company’s Q3 2022 earnings call mentions: There has been an increase in delinquencies, but the company is following the normal process of addressing them.
- Management has expressed optimism on the company’s long-term strategy, even with current challenges in the economy.
- The most recent 10-Q highlights an increase in interest expenses due to rising rates, also affecting the interest coverage ratio.
- In the latest report, management recognizes that the real estate market has become increasingly saturated.
- Despite management’s positive outlook, the share prices of EGP have dropped almost 30% YTD.
Moat: 2.5 / 5
- Intangible Assets: EGP does have intangible assets such as long-term client contracts and strong relationships. But these aren’t unique to the company and their defensibility is still relatively weak, giving them a low moat score on intangibles.
- Switching Costs: Although switching costs for customers could be high (as it involves a complex process), this is probably not enough to create a wide moat. Because industrial firms can find other similar quality warehouses without massive problems, and most will not experience a change in the costs of their own business because of switching to a different real estate manager. This gives them low pricing power and a relatively low moat.
- Network Effect: EGP’s business doesn’t benefit from any network effect. The value of its real estate doesn’t change with the number of tenants it serves.
- Cost Advantages: EGP does not have any specific, low-cost or unique operational advantages. While they have high occupancy rates, this is likely a result of management expertise, rather than any structural competitive advantage. They may be able to leverage their vast network of warehouses in each region to deliver better service, but any company can build out a similar network given enough time, capital and will.
- All in all, the company can generate revenue from different types of buildings and in different regions, but it has a high competition, low barrier to entry, and can’t achieve strong pricing power to retain customers, it gets an average score in cost advantages.
Therefore, EGP has a weak moat but does have some elements of a moat. It deserves a score of 2.5 out of 5.
Risks to the Moat
- Economic Downturns: Industrial real estate is sensitive to broader economic changes. A recession can lead to lower occupancy rates and lower rental rates, directly impacting EGP’s revenues and profits. Also, with rising inflation, EGP is likely to have a higher cost of capital and might have trouble retaining existing customers.
- Interest Rate Risk: As a REIT, EGP is highly sensitive to interest rate changes, an important consideration going forward due to a rate hike environment. Rising interest rates could increase the cost of debt, potentially making the company’s financing less attractive and also lowering property values.
- Concentration Risk: A significant portion of EGP’s operations and investment is in the Sun Belt region. Any adverse changes in the local economy or property market, whether caused by a natural disaster or any other event, will affect the company.
- Technology Disruption: Any technological change that disrupts logistics or manufacturing will force the company to invest heavily into new assets to meet its customers’ demand, which will impact profitability.
Business Resilience
EGP shows decent resilience, as its core market is in high-demand industrial properties. However, given its high debt levels and susceptibility to interest rate increases, I would give it a rating of “moderate”. While they can weather the storm, their returns in the future will likely not be as high as historical.
Understandability: 2 / 5
EGP has a clear structure, as its operations involve a REIT that leases properties, and their financials are clear enough. However, there are many factors and complex business operations that go into analyzing real estate companies, such as debt maturities, lease rates, occupancy rates, occupancy costs, and capital expenditures. In addition, the effects of new acquisitions are hard to see through, as they have very limited historical data. Also, their financial statement is very hard to understand because of the sheer size of their portfolio. For all these reasons, their understandability receives a 2 out of 5 rating.
Balance Sheet Health: 3.5 / 5
- Although the company has good levels of cash, and marketable securities, it is highly leveraged, due to being a REIT, which impacts its balance sheet health and flexibility, leading to a rating of 3.5 / 5. However, the debt is not necessarily too risky as it is based on hard assets. The company has enough flexibility in case it needs to sell assets in an emergency.