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

October 26, 2009 11:04 AM EDT

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed EastGroup Properties, Inc.'s (NYSE: EGP) ratings as follows:

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

--Unsecured lines of credit at 'BBB';

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

The Rating Outlook is Stable.

The affirmations center on the strength of EGP's credit metrics as illustrated by solid debt service coverage, adequate liquidity, moderate leverage, and its high quality portfolio of properties and investments throughout the major Sunbelt markets within the states of Florida, Texas, Arizona and California. The ratings also reflect EastGroup's solid risk-adjusted capitalization at 1.1 times (x), and strong unencumbered asset coverage of unsecured debt, which is strong at 5.8x on an undepreciated book value basis at June 30, 2009.

EGP continues to exhibit coverage metrics that are commensurate with its 'BBB' rating. EGP's net debt-to-recurring operating EBITDA ratio for the 12 months ended June 30, 2009, was 6.2x, unchanged from Dec. 31, 2008. The ratings affirmation also reflects EGP's solid fixed-charge coverage ratio (defined as recurring EBITDA less capital expenditures and straight-line rents, divided by interest expense, capitalized interest, and distributions on preferred stock) of 2.3x for the 12 months ended June 30, 2009, unchanged from 2.3x for full year 2008.

Further support for the ratings is provided by EGP's liquidity position and manageable debt maturity schedule. EGP's $138 million of availability under its credit facilities is the main driver of EGP's Fitch estimated liquidity surplus through Dec. 31, 2011. In addition, EGP's manageable debt maturity schedule and strong unencumbered asset to unsecured debt coverage provides additional financial flexibility and limits refinance risk over the next two years. Fitch also acknowledges EGP's limited development exposure, although lease-up risk remains.

The ratings also point to the strength of EGP's management team, including senior officers as well as property managers.

In addition, the financial covenants in the company's unsecured debt agreements do not limit EGP's financial flexibility.

Fitch's credit concerns revolve around EGP's relatively small size, the geographic concentration of its portfolio, moderate lease rollover, and the recessionary economy and its impact on property fundamentals within the industrial sector. EGP's decline in same-property NOI was -2.6% for the quarter ended June 30, 2009 when compared to the same quarter in the prior year. Additionally, portfolio occupancy has declined to 91.2% in the second quarter of 2009 (2Q'09) compared to 92.8% in 1Q'09, and 95% in 2Q'08, respectively.

A one notch difference between EGP's IDR and its indicative preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB'. Based on Fitch's criteria report, 'Equity Credit for Hybrids & Other Capital Securities', the company's preferred stock would likely be 75% equity-like and 25% debt-like since the preferred stock would likely be perpetual and have no covenants, but may have a cumulative deferral option.

The Stable Outlook centers on Fitch's expectation that EGP's credit metrics will remain in line with its rating category despite some pressure on operating fundamentals over the next two years. Pressure on operating fundamentals is expected to be offset, in part, from incremental income from new developments and acquisitions. The Outlook also takes into account adequate liquidity, the diversity of EGP's tenant base, and its manageable lease expiration and debt maturity schedule.

The following factors may have a positive impact on EGP's ratings:

--Fitch-defined fixed charge coverage were to sustain above 2.75x (fixed charge coverage was 2.3x for the 12 months ended June 30, 2009);

--Total debt to annualized recurring EBITDA were to sustain below 5.75x (leverage was 6.2x as of June 30, 2009);

--Fitch's estimation of EGP's unencumbered asset to unsecured debt coverage ratio were to sustain above 5.0x (coverage was 6.0x as of June 30, 2009).

The following factors may have a negative impact on EGP's ratings:

--Fitch-defined fixed charge coverage were to fall below 2.0x for several consecutive quarters;

--Total debt to annualized recurring EBITDA were to sustain above 6.5x;

--EGP's Fitch-estimated unencumbered asset to unsecured debt coverage ratio were to sustain below 3.5x;

--A liquidity deficit;

--Material declines in occupancy.

EastGroup Properties, Inc. is a $1.5 billion (total undepreciated book capital) industrial REIT headquartered in Jackson, Mississippi. The portfolio is focused on the Sunbelt markets in the U.S. and is comprised of 16 core markets from California to Florida. The portfolio consists of 230 buildings encompassing 26.4 million square feet. More information about EastGroup Properties can be found on the Fitch Ratings web site at 'www.fitchratings.com'.

Additional information is available at www.fitchratings.com.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.

    Source: Fitch Ratings

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