January 9, 2013 / 6:21 PM / 5 years ago

TEXT - Fitch affirms EastGroup Properties

Jan 9 - Fitch Ratings affirms the following credit ratings of EastGroup
Properties Inc. (NYSE: EGP) and assigns ratings to its operating partnership,
EastGroup Properties, LP (collectively EastGroup, or the company):

EastGroup Properties, Inc. 
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Unsecured revolving credit facility at 'BBB';
--Unsecured term loans at 'BBB'.

EastGroup Properties, LP (as co-borrower with EastGroup Properties, Inc.) 
--Long-term IDR at 'BBB';
--Unsecured revolving credit facility at 'BBB';
--Unsecured term loans at 'BBB'.
The Rating Outlook is Stable.

The rating affirmations reflect EastGroup's credit strengths, including its 
granular tenant base, modest business risk and appropriate fixed charge coverage
ratio. Offsetting these strengths are the company's relatively high leverage for
the rating, sizable near-term lease maturities and relatively small size. The 
Stable Outlook considers the strong unencumbered asset coverage of unsecured 
debt, adequate liquidity ratio and conservative business profile.

EastGroup is small relative to its industrial and REIT peers with undepreciated 
book assets of $1.8 billion as of Sept. 30, 2012. The company has historically 
been a property-level secured borrower but has begun transitioning to an 
unsecured funding structure. Currently, 78% of debt is secured; however, EGP's 
secured debt to undepreciated assets ratio is 34%, leaving a significant amount 
of unencumbered operating assets. 

EastGroup's portfolio is focused primarily in the Sunbelt region with over 86% 
of annual base rent derived from the states of Texas (30.9%), Florida (30.5%), 
California (17.1%), and Arizona (8.3%), as of Sept. 30, 2012. The largest 
individual market exposures by contribution to base rent are Houston (18.3%), 
Tampa (12.7%), Orlando (8.3%), San Antonio (7.5%) and Los Angeles (7.4%). Many 
of these markets have been negatively impacted by the recent recession and are 
prone to overdevelopment, which Fitch views negatively. However, this risk is 
partially offset by the relative strength of the Houston market through the most
recent economic cycle.

EGP's operating fundamentals continue to be mixed. Occupancy has improved to 
94.3% at Sept. 30, 2012 from 89.8% at Dec. 31, 2010. However, rent trends 
continue to be negative and Fitch expects this pattern to continue over the near
term, as expiring rents signed during the market peak continue to see negative 
mark-to-market re-leasing spreads in the current difficult leasing environment. 
That said, spreads have seen improvement during 2012, with negative rent spreads
of 6.1% year to date compared to negative 14.8% in 2011, negative 16.8% in 2010 
and negative 10.1% in 2009. Fitch expects the company will continue to 
experience negative, but improving leasing spreads well into 2013, given market 
forecasts for improved asking rents.

Fitch notes that a disproportionate amount of 2013 lease maturities are from 
weaker performing Florida markets, which is likely to pressure same-store 
performance. This will be offset somewhat by sizable expirations in stronger 
Texas markets, as well as a reduction in expiring rents that were signed during 
the market peak.

Same-store net operating income (SSNOI) growth for the third quarter 2012 was 
0.8%, excluding straight-line rent adjustments, compared with 2.2% in 2Q12 and 
4% in 1Q12. The slowing growth is attributed to the aforementioned weak leasing 
spreads and a reduction in the benefit from previous occupancy gains. Fitch 
expects that the difficult leasing environment and elevated lease expirations 
will pressure same-store growth in 2013 despite the recovery in occupancy 

EastGroup's portfolio benefits from tenant diversification with the top 10 
tenants representing less than 10% of annual base rent as of Sept. 30, 2012. The
company focuses on users of smaller industrial space sizes - typically in the 
range of 5,000 to 50,000 square feet - which enables the company to maintain its
extensive tenant roster with minimal exposure to any one tenant. EGP's tenants, 
whether national or local, tend to be location sensitive, and primarily 
distribute to the metro area in which the space is located rather than to a much
larger region or the entire country.

EastGroup's fixed charge coverage levels have improved in recent years, driven 
by growth in same-store NOI, ramp up of acquisitions and development 
completions, and moderating capex. Fixed charge coverage troughed in 2010 at 
2.0x from 2.4x the prior two years. For the 12 months ended Sept. 30, 2012, 
fixed charge coverage was 2.4x and Fitch expects this metric to remain around 
this level through 2014. Fitch defines fixed charge coverage as recurring 
operating EBITDA less recurring capital expenditures (tenant improvements and 
leasing commissions) less straight line rent adjustments, divided by total 
interest incurred. In a downside case not expected by Fitch in which same-store 
NOI declines are consistent with EastGroup's performance in 2009 and 2010, fixed
charge coverage would approach 2.1x, which would be weak for the current rating.

EastGroup has been cautious with development projects and is prudently 
developing build to suit projects or buildings co-located to other properties 
that have solid demand and growth prospects. The company has managed its 
development activities such that the total estimated cost of its wholly owned 
development pipeline represented only 3.7% of total undepreciated assets, while 
the cost-to-complete was only 1.5% as of Sept. 30, 2012. Fitch would view 
negatively a material increase in speculative development, particularly if it 
were focused on geographic regions outside of management's area of expertise, 
although this is not currently a rating concern.

Leverage (net debt to recurring operating EBITDA) was 6.5x as of Sept. 30, 2012,
compared with 7.3x and 6.6x at Dec. 31, 2011 and 2010, respectively. Leverage is
high for the 'BBB' rating due to recent acquisitions and developments funded 
with limited equity raises. Sustained leverage at this level could have negative
rating implications. Fitch forecasts leverage to remain relatively stable 
through 2014 due to improving fundamentals, a normalized run rate on NOI from 
recent acquisitions, and stabilization of development projects, offset by 
incremental unsecured debt borrowings to finance investments and development. In
a downside case not expected by Fitch in which same-store NOI declines are 
consistent with EastGroup's performance in 2009 and 2010, leverage would trend 
over 7.5x, which would be more consistent with a 'BBB-' rating.

Although the company is small, it maintains 45% of its square footage 
unencumbered as of Sept. 30, 2012. As such, the company maintains strong 
contingent liquidity measured by unencumbered assets to unsecured debt. 
Unencumbered assets (calculated as unencumbered NOI divided by a stressed 
capitalization rate of 9%) covered unsecured debt by 3.6x, which is strong for a
'BBB' rating. 

The company has a base case liquidity coverage ratio of 1.1x as measured by 
sources of liquidity (unrestricted cash, availability from the company's 
unsecured revolving credit facility, projected retained cash flows from 
operating activities after dividends) divided by uses of liquidity (debt 
maturities and projected recurring capital expenditures) for the period from 
Oct. 1, 2012 to Dec. 31, 2014. If EastGroup refinanced 80% of its secured debt 
maturing through Dec.31, 2014, liquidity coverage would be 2.3x.

The Stable Outlook reflects Fitch's view that EGP will maintain strong coverage 
of unsecured debt by unencumbered assets and an adequate liquidity ratio and 
conservative business profile that will result in credit metrics remaining 
appropriate for the 'BBB' rating.

Fitch expects the company to maintain appropriate fixed charge coverage near 
2.4x, and for leverage to remain around 6.5x. In addition, EastGroup has 
exhibited good access to the secured debt market and Fitch expects that the 
company will continue to access more unsecured debt and further establish itself
in that market, which will provide additional financial flexibility. 

While Fitch does not expect near-term positive rating momentum, the following 
factors may result in positive momentum in the ratings and/or Rating Outlook:

Fitch's expectation of net debt to recurring operating EBITDA sustaining below 
5.5x for several quarters (leverage was 6.5x as of Sept. 30, 2012);

Fitch's expectation of fixed-charge coverage sustaining above 2.8x for several 
quarters (coverage was 2.4x for the 12 months ended Sept. 30, 2012); 

Demonstrated access to the unsecured bond market

The following factors may result in negative momentum on the ratings and/or 
Rating Outlook: 

Fitch's expectation of leverage sustaining above 6.5x for several quarters;

Fitch's expectation of fixed-charge coverage sustaining below 2.0x for several 

Fitch's expectation of unencumbered asset to unsecured debt ratio sustaining 
below 3.0x (this ratio was 3.6x as of Sept. 30, 2012);

An AFFO payout ratio in excess of 100% (payout was 89% for the 12 months ended 
Sept. 30, 2012)
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