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

Fitch also has withdrawn its 'BB+' preferred stock rating for EastGroup. The company has redeemed its outstanding preferred stock and has no intention of issuing preferred stock in the foreseeable future. Fitch no longer considers the rating of the preferred stock to be relevant to its coverage.

The rating affirmations evidence EastGroup's moderate leverage, consistent coverage of fixed charges, and strong unencumbered asset coverage.

Leverage remains appropriate for EastGroup's IDR and is up slightly when compared with Dec. 31, 2009 levels. As of Sept. 30, 2010, net debt to recurring operating EBITDA was 6.4 times (x), compared with 6.1x as of Dec. 31, 2009. The company's risk-adjusted capital ratio was 1.2x as of Sept. 30, 2010 at a 'BBB' rating category stress level, slightly improved from Dec. 31, 2009.

Coverage metrics also remain appropriate for the rating category although slightly weaker than previous periods. For the 12 months ended Sept. 30, 2010, fixed charge coverage (defined as recurring operating EBITDA less recurring capital expenditures and straight-line rents, divided by total interest incurred) was 2.1x, compared with 2.3x for the years ended Dec. 31, 2009 and 2008, respectively.

EastGroup manages its balance sheet by using its unsecured revolving credit facility to finance acquisitions and developments until approximately $100 million is accumulated on its line. The company then seeks to encumber properties with mortgage financing, using the proceeds to pay down its credit facility. In the fourth quarter of 2010, the company executed a $74 million mortgage on 14 properties and also repaid a maturing $8.8 million mortgage on a single property. The ratio of unencumbered assets, valued using a stressed 9% capitalization rate, to net unsecured debt was 3.8x as of Sept. 30, 2010. This ratio improved to 6.6x after consideration of the above mentioned financing activity. This ratio is strong for the 'BBB' rating category for industrial assets.

EastGroup has significantly curtailed its development activities through the economic downturn due to limited build-to-suit opportunities and the high risk of speculative development in the current economic environment. Capital committed to construction-in-place and properties in lease-up has decreased to 0.1% of undepreciated book value of real estate at Sept. 30, 2010, representing a single $1.9 million expansion project. This compares to 10.1% and 3.2% for the years ending 2008 and 2009, respectively.

Further supporting the ratings is EastGroup's manageable debt maturity schedule. The company has no more than 16% of its secured debt maturing in any given year between 2011 and 2014. With its 2012 credit facility maturity in January 2012, however, 27.4% of the company's total debt will come due in that year. In addition, the company's current ratios under its unsecured credit facility covenants do not hinder its financial flexibility.

The ratings also point to the strength of the company's management team, including senior officers and property and leasing managers.

Offsetting these rating strengths are expectations of declining fundamentals, as measured by same-store net operating income (NOI). EastGroup experienced a same-store cash NOI decline of 6.5% for the quarter ended Sept. 30, 2010 relative to the same quarter in 2009, the seventh consecutive quarter of year-over-year same store NOI declines. Fitch expects that same-store NOI will decline further in both 2011 and 2012 as above-market rents continue to roll down to market. While manageable, the company's lease expiration schedule is front-loaded to 2011 with 20.1% of base rental revenue expiring in this year, decreasing to 18.7% in 2012 and 16.2% in 2013. The relative high rollover is in part due shorter term lease renewals in 2009 and early 2010.

EastGroup's portfolio is spread across the southern United States, and several of the company's largest market exposures, particularly Orlando, Tampa, and Los Angeles, have been hit particularly hard throughout the economic downturn. Fitch expects that these markets and others will continue to stabilize in regard to asking rent and occupancy throughout 2011 and 2012; however, it may be long until they recover to peak demand. Further, Fitch expects that expiring rents will continue to roll down to lower asking rents despite the stabilization. While this will be a continued pressure on the company's rental revenues, particularly given the high percentage of base rents expiring over the next year, EastGroup's long-term presence in, and local knowledge of, its markets mitigate these concerns to some degree. For the third quarter of 2010, the company's NOI growth, though negative, outperformed its respective market averages by 230 basis points as calculated by Property & Portfolio research (PPR).

EastGroup's cash flows after deducting recurring capital expenditures and straight line rents, defined as adjusted funds from operations (AFFO), have been exceeded by common dividend distributions during 2010, placing pressure on the company's ability to internally generate liquidity. This is in part driven by the company's increased spending on capital expenditures in order to maintain occupancy and investments in first generation improvements in order to improve the appeal of vacant space. Fitch expects that the AFFO payout ratio will likely remain high well into 2012. Absent other mitigating circumstances, a prolonged AFFO payout ratio in excess of 100% could have negative rating implications.

The Stable Outlook is based on Fitch's expectation that, despite softening property fundamentals, the company will maintain leverage and coverage metrics within levels appropriate for the 'BBB' rating cautiously manage its exposure to speculative development. The company currently has a deep bench of projects that it could tap for growth if engaged by a build-to-suit tenant; however, EastGroup has limited risk appetite to pursue developments speculatively, reflecting prudent balance sheet management.

In addition, the Stable Outlook is driven by EastGroup's liquidity profile. For the period Oct. 1, 2010 to Dec. 31, 2012, the company's sources of liquidity (cash, availability under the company's unsecured revolving credit facility and Fitch's expectation of retained cash flows from operating activities after dividends and distributions) covered uses of liquidity (pro rata debt maturities and Fitch's expectation of recurring capital expenditures) by 1.0x in consideration of the financing activity in the fourth quarter. Given the company's preference for secured mortgage financing, this ratio improves to 2.3x assuming 80% of secured debt is refinanced with new mortgages. Fitch believes that the company will be able to refinance upcoming secured indebtedness given the company's demonstrated ability to access various forms of capital over the past two years.

Further, Fitch projects that the company's fixed charge coverage ratio will be in the low 2.0x's for both 2011 and 2012, given continuing roll downs in same-store NOI over the next two years. This ratio is consistent with a 'BBB' IDR.

The following factors may have a positive impact on the company's ratings and/or Outlook:

--Total net debt to recurring operating EBITDA sustaining below 5.8x for several quarters (leverage was 6.4x as of Sept. 30, 2010);

--Fixed charge coverage sustaining above 2.8x for several quarters (coverage was 2.1x for the 12 months ended Sept. 30, 2010).

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

--Leverage sustaining above 6.5x for several quarters;

--Fixed charge coverage sustaining below 2.0x for several quarters;

--Unencumbered asset to unsecured debt ratio, presuming a fully-drawn unsecured revolving credit facility, sustaining below 3.0x.

Headquartered in Jackson, MS, EastGroup is a $1.5 billion (total undepreciated book capital as of Sept. 30, 2010) owner, manager, and developer of industrial properties located predominantly throughout the southern United States. EastGroup's 28.1 million square foot portfolio includes more than 210 properties.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Research:

--Corporate Rating Methodology, Aug. 16, 2010;

--Criteria for Rating U.S. Equity REITs and REOCs, April 16, 2010;

--Recovery Rating and Notching Criteria for REITs, Dec. 23, 2009.

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]

Recovery Rating and Notching Criteria for REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

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Contributing Sources

Market Wire

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