Fitch Affirms EastGroup Properties, Inc. at 'BBB'; Outlook Stable

2008-10-01 02:26:02 -

- Fitch Ratings has affirmed the ratings for EastGroup Properties, Inc. (NYSE:EGP) as follows:

--Issuer Default Rating (IDR) at 'BBB';

--Unsecured lines of credit at 'BBB';

--Preferred stock (indicative) at 'BBB-';

The Rating Outlook is Stable.

Fitch's affirmations reflect the consistent performance of EGP's high quality portfolio of industrial assets located throughout major Sunbelt markets in the United States, primarily in the states of Texas, Florida, California, and Arizona, adequate risk-adjusted capitalization, and unencumbered asset coverage of unsecured debt, which at 5.7 times (x) as of June 30, 2008 provides ample protection to unsecured bondholders. The affirmation is also reflective of EGP's directly owned and managed portfolio which has exhibited solid occupancy rates, strong quality of tenants, and tenant diversity. Fitch views favorably EGP's manageable development portfolio and its relatively short construction time frame and stabilization periods, which provide Fitch with some comfort that EGP could either scale back or control the timing of development starts, especially during periods of considerable economic uncertainty.

The ratings are further supported by EGP's leverage and coverage ratios. EGP's debt plus preferred stock to undepreciated book capital was 48.0% as of June 30, 2008, down from 52.1% at March 31, 2008, and 49.7% at Dec. 31, 2007. The rating affirmations reflect the availability of $137.2 million under EGP's lines of credit, a debt-to-recurring EBITDA ratio of 5.6x as of June 30, 2008 compared to 5.9x as of Dec. 31, 2007, and a 2.1x fixed-charge coverage ratio (defined as recurring EBITDA less capital expenditures and straight-line rents, divided by interest expense, capitalized interest, and distributions on perpetual preferred shares) for the 12 months ending June 30, 2008. Each of these metrics is appropriate for the rating category. $137.2 million of availability on the company's unsecured lines of credit, coupled with a manageable debt maturity schedule provides EGP with adequate liquidity and limits refinance risk. EGP's risk-adjusted capital ratio was 1.5 times (x) at a 'BBB' stress level, slightly improved from Dec. 31, 2007.

The ratings also point to the strength of EGP's management team, including senior officers as well as property managers. In addition, the company's ratios under its unsecured credit facilities' financial covenants do not hinder the company's financial flexibility.

Fitch's credit concerns revolve around the slowing economy and the potential for weakened demand and tenant credit issues, which have already affected the pace of leasing activity and put additional pressure on EGP as it strives to maintain adequate occupancy levels. Another concern is EGP's fairly sizeable development pipeline, which has a total combined budget for projects under construction and prospective development of $262.7 million. While development activities contain risks not present in the ownership of stabilized product, these risks are somewhat offset by the fact that EGP has an established development track record. Another mitigant to development risk is that construction-related assets on EGP's balance sheet represented only $151.4 million or 10.8% of $1.4 billion of total undepreciated book assets as of June 30, 2008.

The Stable Outlook reflects Fitch's view that in spite of the current economic challenges, EGP continues to have positive same property results, although the pace of increase has declined over the past few quarters as evidenced by same property net operating income growth (SPNOI) of only 0.9% for the quarter ended June 30, 2008 compared to SPNOI growth of 2.6% and 1.4% for the quarters ended March 31, 2008 and Dec. 31, 2007, respectively. While certain EGP markets like Tampa, El Paso and San Diego continue to be affected by weakening economic and employment bases, fundamentals in EGP's stronger markets (Houston, San Antonio, Dallas, Los Angeles, and San Francisco) have had a stabilizing effect on the portfolio. Furthermore, the portfolio is 95.0% occupied as of June 30, 2008 compared to 95.6% as of June 30, 2007 giving further credence to the fact that EGP's portfolio is well-positioned to withstand market challenges. Finally, EGP's unencumbered asset coverage, fixed charge coverage and leverage ratios are expected to remain stable throughout 2008.

Fitch's existing ratings and Outlook for EGP could come under pressure if EGP increases its ratio of secured debt to total undepreciated capital or engages in transactions that increase its ratio of total leverage to total undepreciated capital. Although secured debt is favorable from a cost and availability standpoint, increases in secured debt will limit financial flexibility as the size of the unencumbered real estate asset pool decreases. Conversely, the current ratings or Outlook may improve if EGP were to utilize the unsecured senior notes market to demonstrate access to a new source of capital, increase the relative size and geographic diversification of its portfolio via the acquisition or development of assets in markets outside of the Sunbelt region, while maintaining a fixed charge coverage of 2.0x and a maximum total debt plus preferred stock to undepreciated book capital of 50%.

EastGroup Properties, Inc. is a $1.4 billion (total undepreciated book capital) industrial REIT headquartered in Jackson, Mississippi. The company owns assets primarily in the Sunbelt markets in the U.S. in 16 core markets from California to Florida encompassing 25.0 million square feet. More information about EastGroup Properties, Inc. can be found on the Fitch Ratings web site at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
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