Fitch Affirms EastGroup Properties' IDR at 'BBB'; Outlook Stable

  Fitch Affirms EastGroup Properties' IDR at 'BBB'; Outlook Stable

Business Wire

NEW YORK -- January 9, 2013

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 levels.

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
quarters;

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)

Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug 8, 2012);

--'Recovery Ratings and Notching Criteria for Equity REITs' (May 3, 2012);

--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=671869

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Contact:

Fitch Ratings
Primary Analyst
Reinor Bazarewski, +1-212-908-0291
Associate Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
George Hoglund, CFA, +1-212-908-0149
Associate Director
or
Committee Chairperson
Eileen Fahey, +1-312-368-5468
Managing Director
or
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com
 
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